Professional, Practical, Proven

Academy 2019/20

Law and EthicsLecture 19

Corporate Offences and Corporate Governance

1) Fraudulent Trading and Reckless Trading2) Insider Trading and Money Laundering3) Corporate Governance Defined4) Sources of Corporate Governance in Ireland

Contents

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Corporate Offences and Corporate Governance

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Fraudulent Trading

• Any person knowingly a party to carrying on the business of a company– With intent to defraud creditors of the company, or– For any other fraudulent purpose

CATEGORY 1 OFFENCE Summary conviction = a fine and/or 12 monthsOn indictment = €500,000 and/or 10 years

Fraudulent Trading Sanctions

Criminal Civil

Summary conviction = a fine and/or 12 months

On indictment = €500,000 and/or 10 years

Personal liability (without limit) for all or part of the debts of the company

Fraudulent Trading Case Law

Re Aluminium Fabricators Ltd (1984)Director siphoned off assets of the company for themselvesKept two sets of accounts to hide their fraud from the auditors, creditors and Revenue

Held: Personally liable for debts of the company

Re Hunting Lodges Ltd (1985)“Durty Nellies Pub” valued £750,000Pub sold for £480,000 and an additional £200,000 was paid secretly

Held: One isolated transaction constituted fraudulent trading

Reckless Trading

Any company officers who knowingly conduct the affairs of the company in a reckless manner.

More like negligence or carelessness Officer include directors, secretaries, shadow directors, auditors, liquidators, receivers.

•With regard to his/her general knowledge, skill and experience it was reasonable to expect s/he ought to have known it would cause a loss to creditors•The officer was a party to the contracting of a debt and did not honestly believe on reasonable grounds that the company could repay it

Reckless Trading Sanctions

Civil Liability ONLYPersonal liability without limit for the debts of the company

Disqualification

Onus is on the director to prove that s/he acted honestly and reasonably in relation to the conducting of the affairs of the company

Reckless Trading Case Law• Re Hefferon Kearns Ltd (No. 2) (1993)

• Not necessary to prove fraud• Separate case for each director (not collective responsibility)• Knowledge or imputed knowledge that actions would cause

loss to creditors (worry or uncertainty not enough)• Know of the risk and ignore it or be careless/indifferent

• Re Eastland Warehousing Ltd (2003)• Directors misappropriated large sums• Held personally liable for a shortfall of €1.5million

• Re Doherty Advertising Ltd (2006)• Collapse of an advertising agency arising out of reckless

trading• Receiver sued two former directors • Damages of €2.2million awarded plus disqualification

Money Laundering Any attempt to make money from criminal activity appear legitimate

A person engages in any of the following acts in relation to property that is the proceeds of crime

Concealing /disguising the true nature, source, location, disposition movement or ownership/rights attaching to property

Converting, transferring, handling, acquiring, possessing, usingproperty

Removing property from or bringing property into the State

The person knows/believes (or is reckless as to whether or not) the property is the proceeds of crime

The Process of Money Laundering

Placement – into an apparently legitimate business property or activity

Layering – transfer from place to place

Integration – takes on the appearance of being legitimate

Money Laundering Sanctions

Summary Indictment

€5000 and/or up to 12 months An unlimited fine and/or up to 14 years

Obligations on others to counteract Money Laundering

Designated Persons:•Financial Institutions – banks, building societies

•Credit Institutions and Providers of Services – An Post, credit unions

•Firms of Professionals – accountants, legal advisers

•Any other person of a prescribed class

Due Diligence Requirement

Identification and verification of customers and beneficial owners of property, prior to

Establishing a business relationship with the customers

Carrying out occasional transactions in excess of €15,000

Providing a service for the customer

Due Diligence Requirement

•Establish identity of customers based on reliable documents or information

•Identify the beneficial owner connected with the customer or service concerned

•Obtain information in relation to the purpose and nature of the business relationship

•Monitor dealings with the customer on an on-going basis, scrutinising transactions and source of funds to determine if they are consistent with1. The person's knowledge of the customer and the customer’s

business and pattern of transactions2. Any knowledge that the person may have that the customer may

be involved in money laundering

Due Diligence RequirementObliged to report suspicious transactions to the Gardaí and Revenue Commissioners. Auditors also report to DOCE

Central Bank also requires designated persons to implement procedures to prevent and detect money laundering and terrorist financing activities

Proper Internal Policies• Assessing and managing risk of money laundering• Identifying and scrutinising complex, large, unusual transactions• Preventing transaction which favour anonymity• Compliance procedures and internal communication of anti-money

laundering policiesRelevant Training for directors, officers and employeesMaintaining Proper Records for five years

Failure to Report

Failure to report knowledge or suspicion of money laundering to the relevant authorities is an offence

Tipping OffMaking a disclosure that is likely to prejudice a money laundering investigation is an offence. E.g. Reporting a client to the authorities and telling them that they have been reported.

Insider Dealing

• Where confidential price sensitive information acquired by way of an inside connection is then used to make a profit or avoid a loss

Any person in possession of the informationa) Membership of admin./managementb) Holding capitalc) Access to info through employment dutiesd) Criminal activities

Any natural person who takes part in transaction of financial instruments

Anyone in possession of information that they knew/should have known was inside information

Who is an Insider?

Meaning of Inside Information

• Information of a precise nature relating directly/indirectly to financial instruments

• Has not been made public• Relates to issuer of securities or the securities themselves• Price sensitive and would have a significant effect on the price if it

were made public• Information that a reasonable investor would likely use as part of

their investment decision• Specific enough to enable conclusions as to it likely effect on

prices

Meaning of Financial Instrument

Transferable securities such as shares, bonds, securitised debts

Meaning of Prohibited Actions

1. Use of insider information

2. Disclosure of insider information

3. Inducing another person to use or disclose insider information

Insider Dealing Sanctions

Criminal Civil

Summary- €5000, and/or max 12 months

Pay compensation to a party involved in the transaction who was not in possession of the information for loss suffered as a result

Indictment - €10million and/ or max 10 years

DOCE may also seek a disqualification order if the offence is committed by a company officer

Corporate Governance

Refers to the manner in which companies are controlled and directed

i.e. How they govern themselves in light of outside factors such as laws, ethical and business codes and so on

Sources of Corporate Governance

1. The UK Corporate Governance Code and Irish Stock Exchange Annex thereto (Combined Code on Corporate Governance)

2. Irish Company Legislation

3. Irish Criminal Legislation

4. Common Law Rules

5. A Company’s Own Constitutional Documents

6. The Listing Rules of the Irish Stock Exchange

Contents of the Code

Section A Section B Section C Section D Section E

Leadership Effectiveness Accountability Remuneration Relations with Shareholders

•Should have an effective board acting in the best interests of the company

•Sufficiently regular board meetings

•The board sets the values and standards that are espoused by the company and should ensure that it meets its obligations to shareholders and others

•Clear division of responsibilities between the running of the board and the running of the business

Leadership

Effectiveness

• Composition of the board– Balance of skills experience, independence and knowledge

• Appointments to the Board– Formal, rigorous, and transparent

• Commitment – devote sufficient time• Development – update and refresh skills and knowledge• Information and Support – timely provision• Evaluation – formal and rigorous review• Re-election – planned and progressive refreshing of the boards

Accountability

• Financial and Business Reporting– Present a balanced and understandable assessment meeting

statutory requirements • Risk Management and Internal Control

– Sound system of risk management, to include, financial, operational and compliance controls

• Audit Committee and Auditors – Establish an audit committee of independent non-executive

directors to monitor the integrity of the financial statements

Remuneration

• Sufficient to attract, retain, and motivate directors of the required quality

• Link rewards to corporate and individual performance

• Formal and transparent procedure

Relations with Shareholders

• Chairman must ensure that the views of shareholders are communicated to the board

• Board should use AGM to communicate with investors.

Practice QuestionsCOMPULSORY TOPICS

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Cameron is an accountant operating as a sole practitioner. Eight months ago a client approached Cameron asking him to arrange a mortgage for him to purchase an investment property. The client gave. Cameron €250,000 in cash and asked him to arrange a mortgage for €250,000,instructing him to pay a deposit of €25,000 now and to repay a further €225,000 to themortgage company after the mortgage had been operative for six months. Cameron acted inaccordance with the client’s instructions. However, the mortgage company became suspiciouswhen they received the cash payment of €225,000 and reported the client and Cameron to theGardaí on suspicion of money laundering.a) Define the term money laundering. (1.5 Marks )b) Discuss the THREE elements of the offence of money laundering as established by the

Criminal Justice Act 1994, as amended. (4.5 Marks )c) Explain the THREE processes by which money laundering can take place. (3 Marks)d) Outline any THREE necessary measures that an accountant and other designed bodies are

required to undertake to counteract money laundering. (4.5 Marks)e) Discuss the sanctions/penalties that can be imposed where a person is found guilty of

money laundering and of failing to report a suspicion of money laundering. (2.5 Marks)f) Discuss any other reporting obligations imposed upon auditors and accountants under

company law. (2 Marks) Assess whether Cameron is guilty of a money laundering offence. Give reasons to support

your answer. (2 Marks)Total 20 Marks

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Last year Bryson was doing his Christmas shopping at the Dingle Outlet Village. In one store he saw a piece of jewellery that he thought his girlfriend might like. When he went to the cash desk to pay for the item the store assistant told him that they were having a draw for a €1,000 gift voucher for the store that weekend, and that all he had to do was to put his name, phone number and email address onto a blank card and drop it into the box at the entrance of the store to be included in the draw. Bryson decided to enter the draw and filled in his details.

The next month Bryson received an email from the jewellery store informing him that he had not won the prize, but stating that they would keep him informed of any upcoming offers in the store. Since then he has received weekly emails and text messages from this store with details of offers and promotions, despite the fact that he has emailed them twice and asked them to cease communications. More worryingly in the last couple of months he has also started receiving emails from other stores in the Dingle Outlet Village aimed at marketing their goods to him. When he contacted one such store, where he has never purchased an item, to ask them where they got his personal details from, they informed him that the stores in the centre share customer details, and that they obtained his details from the jewellery store.

Following this he wrote to the jewellery store to make a formal complaint and asked them to delete his data, and not to disclose it to anyone – but it has now been three months since he made this complaint and he has never received a reply from this company, and is still receiving marketing emails and texts from all the outlets in the centre, in addition to new emails and text messages from stores in another outlet village in Leitrim.

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He has now contacted you for advice in relation to this matter. Required:

A. Define the meaning of a Data Controller and advise Bryson as to whether the jewellery store would be classified as a Data Controller in this situation. (3 marks)

B. Two of the rules of data processing are that: (1) data should only be kept for one or more specified, lawful and explicit purposes, and (2) that data should not be used or disclosed for purposes incompatible for which it was obtained. Explain both of these rules, citing examples of what amounts to a breach of these obligations. In light of this explanation assess whether the actions of the jewellery store in relation to Bryson’s data are in contravention of these rules. (7 marks)

C. Discuss any THREE other principles of data protection or rights of a data subject that have been breached in this scenario. (6 marks)

D. Outline the criminal sanctions that the jewellery store may be exposed to if they arefound guilty of breaches of the Data Protection Acts 1988-2003. (2 marks)

E. Describe the sanction of forfeiture, than can be imposed where a breach of the legislation arises, commenting also on the rationale behind the imposition of this sanction.(2 marks)

Total 20 Marks

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Aubrey and Miller Telecommunications Ltd has recently been the subject of a takeover by a UK multinational company Cranford Global Communications Plc. As this company is listed on the UK stock market, the directors of Aubrey and Miller Telecommunications Ltd have been informed that they will need to comply with the Combined Code on Corporate Governance. Although the directors have heard this term, they are unsure as to what it means from a practical perspective. To date Aubrey and Miller Telecommunications Ltd has been runquite informally by its two directors/owners. They have never had a formal Annual General Meeting and they have been the sole directors of the company since its incorporation. Since the takeover, Cranford Global Communications Plc has informed them that the company will now be required to elect non-executive directors to its Board. They have contacted you seeking advice in this regard.

(a) Define the meaning of the term corporate governance. (2 marks)(b) From the perspective of corporate governance explain the distinction between the role of

an Executive Director and a Non-Executive Director. (6 marks)(c) Explain the main principles of the Combined Code on Corporate Governance under the

following headings:(i) Effectiveness (7 marks)(ii) Accountability (3 marks)(iii) Relations with Shareholders (2 marks)

Total 20 Marks

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Gibson is a trainee accounting technician and is currently employed as a clerical officer with the Competition Authority. Gibson recently saw a confidential memo highlighting the fact that a US multinational company, Hallmart Plc, had made a takeover bid for an Irish chain of supermarkets. The memo stated that the Competition Authority had reviewed the potential impact of the takeover on the Irish retail market and had no objection to the takeover. Gibson, realised that this information was not yet public, and he contacted an old school friend, Asher, and told him about the impending takeover and asked him to buy shares on his behalf in the Irish company, knowing that the price of shares in this company would increase significantly when the takeover was announced to the public. Asher bought shares for Gibson, and also bought a considerable shareholding for himself. He also told at least twenty members of his family and friends to buy shares in the Irish supermarket chain, although he didn’t tell them why, commenting only that he had heard that it was a goodinvestment and ripe for a takeover. Because of the usual amount of activity before the announcement of the takeover the Irish Stock Exchange launched an investigation into the matter. When Asher was arrested on suspicion of insider dealing, he told the authorities that the source of his information was Gibson.A. In the context of the law on insider dealing explain the meaning of each of the following terms:(1) An insider (4 marks)(2) Inside information (3 marks)(3) The actions that amount to insider trading (3 marks)

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B. Review the likelihood of Gibson, Asher, and his family and friends being successfully prosecuted for insider dealing, commenting also on the criminal sanctions that apply to this offence. (6 marks)

C. If a complaint against Gibson is brought before the Complaints Committee of Accounting Technicians Ireland, and following a hearing a prima facie case is established, discuss any FOUR sanctions that could be imposed upon a member or a student member by this Committee. (4 marks)

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Coleman Investments Ltd is a private investment company, selling personal pensions. Over the last number of years the company has made modest profits on behalf of its clients, but has lost a number of clients to some other speculative investment companies, who have generated significant gains for clients by taking bigger risks.

Because the profits of Coleman Investments Ltd have been modest in nature, no bonuses have been paid to the company’s directors, Maxwell, Bentley and Preston since 2009, and they have only received pay increases in line with inflation. Six months ago at the Annual General Meeting of the company the shareholders expressed satisfaction with the investment strategy of the company, and the majority of shareholders agreed that they would rather their pensions were invested in low to medium risk options as opposed to high risk options. The general consensus appeared to be that a modest return with little risk was better than taking a greater risk thatcould result in a significant loss.

Maxwell, Bentley and Preston discussed the company’s investment strategies after this meeting, and agreed to comply with the instructions of the shareholders. However, Bentley was really unhappy about this as he was concerned about his own personal financial position. He has recently divorced his wife and his son is about to start college and therefore a bonus would help to ease these financial worries. Last month Bentley was attending a breakfast meeting on new corporate governance rules when he overheard a business analyst who worked for a large pharmaceutical company talking on the phone.

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The analyst commented that there was big news on the way from this company and that the stock market would go wild when they heard this news. Bentley was aware that this company was involved in the research of an anti-cancer vaccine and assumed that this is what the analyst was referring to. He immediately sold €5 million in government bonds held by Coleman Investments Ltd and used the money to purchase shares in the pharmaceutical company. Unfortunately, the pharmaceutical company made a public announcement last week that the testing of the anti-cancer vaccine had proved unsuccessful and that they were now abandoning this research. As a consequence the share price in this company dropped by almost 50% in six hours and has not improved since.

Bentley was devastated when he heard this news, and immediately requisitioned a directors meeting with Maxwell and Preston to explain that he had lost €2.5 million client investment capital because of his speculation. Maxwell and Preston then called an extraordinary general meeting of the shareholder’s to explain what had occurred. A resolution was passed at this meeting removing Bentley as a director and requesting that Maxwell and Preston initiate legal action against Bentley for either fraudulent or reckless trading.

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A. Discuss the law in relation to BOTH fraudulent and reckless trading, commenting specifically on:(i) The definitions of both offences; (3 marks)(ii) Liability for both offences; (2 marks)(iii) The tests for both offences, including relevant case law or examples of both offences;

and (8 marks)(iv) The sanctions for both offences. (3 marks)

B. In light of this discussion determine whether Bentley is likely to be successfully prosecuted for either fraudulent or reckless trading, providing reasons for your answer. (4 marks)

DisclaimerCare has been taken to ensure that all data and information in Academy lectures is factual and that numerical values are accurate. To the best of our knowledge, all information in the Academy lectures is accurate at the time of publication. Accounting Technicians Ireland and its lecturers assume no responsibility for errors or misinterpretation of the information contained in these lectures or in its use.