Welcome to the series notes of corporate and business law ACCA F4 paper, In this article, we will discuss the topic of corporate and fraudulent behavior.

What Is Fraudulent Behavior

Any activity which is intended to do fraud is said to be “Fraudulent Behavior“. It is the proceeding or starting an action with dishonesty. We can say Fraudulent Behavior is intended to deceive for something.

What Is Trading In a Company

Here trading is not mean buying or selling goods or services but also means exchanging or buying companies’ shares.

What Is Insider Dealing In A Company

When a company or a person within a company buys shares in bulk before final books or accounts for the purpose of increasing demand or share price value, this is known as “Insider Dealing”, It is a criminal offense as it is not an honest activity with the stock market. People may lose their trust in the stock market. It is a criminal offense under “Criminal Justice Act 1993” Part 5.

Criminal Justice Act 1993” s52, a person will be liable or guilty of insider dealing if he has information as being an insider,

  • They deal which cause changes in security price from that information
  • Ask another person to deal with that information which can cause a change in the share price
  • Disclose information outside of the organization

Dealing: two parties agree to exchange shares under s55

Inside Information: It is defined under s56

  • Relates to a particular security
  • Not disclose publicly
  • If that information affects the price of a security

Insider: Under s57 defines a person inside of the company.

Insiders such as:

  • Director, Employees, and shareholders.
  • Not an employee, director, or shareholder but a person who has a lot of information about the company.
  • Direct or indirect information source for an outsider

Consequences of Inside Dealing

  • If a person is found guilty of insider dealing in a small offense (summary conviction) he may be imprisoned for 6 months.
  • If a person is found guilty of insider dealing in a big or serious offense (Indictment) he may be imprisoned for 7 years or fined unlimited.
  • In the event that a director involves in inside dealing, he has to pay the profit which is made from the deal.

Market Abuse In Business Law

Under s118 market abuse is defined as,

  • Altering the share price or value
  • Giving wrong information to regular users
  • Give users information about the market which is not available for generally

Seven types of behavior that cause market abuse.

1 Inside Dealing: Discuss above

2 Improper Disclosure: Disclose the inside information but not complete or proper

3 Misuse of Information: Information given to the public that is generally not available, means a director spread the news that a company’s share price is going to be too low then the customers will sell their shares and the director will buy shares from those customers. And suddenly share price increases instead of decreasing.

4 Manipulating Transactions: It means placing the order for a share transaction in a large amount which misleads the customers to think that there may be something wrong in the company or buyers will think that the company is maybe going to close or something else.

5 Manipulating Devices: Placing orders with devices that are not real or they are fake.

6 Dissemination: A person knows that the information about investment or impressions is wrong or misleading but he conveys it to the customers.

7 Distortion or Misleading Behavior: The false or misleading impressions or behavior for supply, demand, or about an investment.

What Is Money Laundering In Business Law

It is the process of making money legal from illegal means changing black money into white money. In other simple words “black money” is the money about which a state or a government does not have any kind of knowledge.

It is regulated by the proceeding of the Crime Act 2002.

Auditors, Accountants, and legal advisers are liable to inform the government if the company involves in money laundering.

Money Laundering phases

Placement: Buy legal property from black money

Layering: Transfer the black money from different sources so no one can know from where it is generated.

Integration: Re-invest black money” and show legal money.

Note: Convert black money into white money by following these three steps.

Money Laundering phases

  1. Laundering: Hiding the initial source of money means changing the location, Ownership, nature, and source of a property. Any property which you get from criminal activity or conduct is referred to as “Criminal Property“.
  2. Failure to Report: Unable to disclose the information or knowledge for a property, usually done by a single or an individual under the s330, Proceeds of Criminal Act 2002. If a person knows about money laundering and does not disclose the information such as the auditor hides the actual audit report.
  3. Tipping Off: A person already inform owners that he has disclosed the information to the National Criminal Agency” and now cares for your money and matters related to money laundering, This is also an offense under s333, Proceeds of Criminal Act 2002.

Penalties for Money Laundering

  • For the “Money Laundering” Offence 14 years imprisonment under s327, Proceeds of Criminal Act 2002.
  • For “Failure to Report” or “Tipping Off” conviction offense 5 years maximum imprisonment or fine.

What Is Bribery In Business Law

Giving money or gift to government officials for doing illegal work.

Four offenses, or bribery

  1. Giving money to an official for doing improper work (Under s1, Bribery Act 2010 but came into force in 2011)
  2. Requesting, accepting money for doing work improperly ((Under s2, Bribery Act 2010)
  3. Gaining business or project advantages or benefits by influencing foreign officials (Under s6, Bribery Act 2010)
  4. Decreasing liability for income tax (or other reasons) by giving a bribe (Company to company or business to business),( (Under s7, Bribery Act 2010)

Penalties for Bribery Offence

  • 10 years imprisonment in case of an individual
  • Unlimited find in case of an organization

What Is a Deferred Prosecution Agreement (DPA)

If an organization has done wrong then they can make an agreement between the prosecution and a commercial organization and states that “we will pay and promise to not involve in any offense”. The prosecution will agree if these conditions are filled,

  • Paying financial penalties
  • Or promise not to be involved in other or such offenses again

Criminal activity in Operations, Management, And Companies Winding up

Failure to file accounts and returns (Annually)

Unable to submit the annual accounts or return to relevant authorities, is a criminal offense and can cause 5000 pounds as a fine on directors.

Misleading Information to the Auditor

An auditor needs exact and true information for his or better performance from the company and its employee (under s499, Companies Act 2002).

Officer criminal offense

  • Provide misleading information
  • Or unable to provide the required explanation by an auditor

An individual can defend himself by explaining the information which he can not give the auditor because he was not responsible for it or he has no authority for giving that information.

Company Director Disqualification Act 1986 (CDDA 1986)

If a person is not a director but plays a role of a director or he is discharged already because of bankruptcy then he is liable for a penalty of up to 2 years in an indictment for 6 months in a summary conviction. (both are explained above in Consequences of Inside Dealing).

Disqualified Management is liable to pay the debts in which he acted (under s15, CDDA 1986).

What Is Phoenix Companies In Business Law

Any person who was a director and buy that company before 12 months of liquidation of the company (The company is said to be “Phoenix Company“) Under s216 and 217, Insolvency Act 1986.

If a director takes debts from people and uses that fund in a different company but the name is very similar then he is personally liable for paying that debt.

The Theft Act 1978

This law was based on,

  • Obtaining property by cheating or deception
  • Obtain transfer money by cheating
  • Taking money advantage by cheating

The Fraud Act 2006

The Fraud Act 2006 swept the old laws and defines fraud as,

  • The defendant must be dishonest or have the intention to make a loss for others
  • Do fraud by making misleading information (Under s3)
  • Fraud by disclosing incomplete information to a person, and that person is not able to disclose the exact information to any third party
  • Fraud by misuse of personal power or position

Undervalue and preference

Undervalue: Value of an asset decrease or reduce by the original value at the time of liquidation.

preference: It is a kind of fraud example, there is a director who has to pay $5000 to each creditor (5 creditors) one of them was his cousin, and the director has only $10000 to pay them all now the director first pay his cousin with full amount $5000 and remaining $5000 distribute among them 4 creditors.

Fraudulent Trading

Take place for the purpose or intention of doing fraud to customers or creditors. It is both a civil and criminal case.

What Is Wrongful Trading

When directors know that the company is going for liquidation and they will not be able to pay its creditors after some time but still they operate and do so many transactions.

Consequences of wrongful trading

  • The liquidator can appeal in the court for pay contributions from the directors
  • Directors may be disqualified for 15 years under CDDA 1986.

Hopefully, you like the topic of corporate and fraudulent behavior. Must read it with proper concentration because the corporate and fraudulent behavior topic is a little complicated because there are lots of sections that you have to learn for passing the business law ACCA F4 paper.