The Star Online > Business
Saturday July 3, 2010
Getting away with white collar crime
Stories by RISEN JAYASEELAN, TEE LIN SAY and YVONNE TAN
THOUGH much has been done to improve the awareness of corporate governance in Malaysia, the reality is that the lax enforcement of laws on directors and officials of listed companies in Malaysia remains a major setback. The most oft-cited observation is that hardly any director of a listed company has been put behind bars. In the words of one observer: “White collar crime still seems to pay in Malaysia.”
Not all parties overseeing regulation are to be blamed though.
In many instances, directors have been taken to task, with one regulator building up its case and fighting it until the highest courts. But while the conviction rates of the Securities Commission (SC) is impressive, company officials who have been found guilty of their capers have had only to pay fines which were small in comparison to the havoc wreaked, or worse, in comparison to the huge amounts of money they had possibly amassed from their misdeeds.
Without custodial sentencing, there is hardly any deterrent effect on financial crime.
Lee Leok Soon … ‘Fines on directors are not a deterrent. It is like having to pay a fine for a traffic offence.’
Lee Leok Soon of the Minority Shareholder Watchdog Group (MSWG) says: “Fines on directors are not a deterrent. It is like having to pay a fine for a traffic offence. If one has to go to jail, then it is an entirely different story. The deterrent effect that would have on directors and company officials is massive.”
As a result of this state of affairs, many transgressions and questionable deals that have taken place in the capital market involving companies such as Idris Hydraulic (M) Bhd, Repco Holdings Bhd, Aokam Perdana Bhd, Ekran Bhd and Renong Corp Bhd, have not resulted in any individual being put behind bars.
A key reason for this state of affairs, it seems, is the fragmented state of the regulatory regime in Malaysia. While the two primary regulators of Malaysia’s capital markets – the SC and Bursa Malaysia – have been actively seeking to bring perpetrators to task, their powers have limitations.
Firstly, the SC’s powers are largely over offences related to the issuance of securities or financial instruments, while Bursa only has its listing requirements to rely on, which are mainly about disclosure issues.
Aside from the SC, there are other bodies that play a role in the regulation of financial crime, namely the Companies Commission of Malaysia (better known as SSM, its Bahasa Malaysia abbreviation) which has the sole jurisdiction over the Companies Act, and the police, who oversee cases involving criminal breach of trust and fraud.
As far as the SC is concerned, it has had a high degree of success with taking to task white-collar criminals.
Muhammad Redzuan Abdullah … ‘SSM is now investigating four to five cases involving breaches of provisions under Section 132 of the Companies Act.’
“We have a good conviction rate, whether after a full trial or through a plea of guilt. We have 87% success rate overall out of a total 85 concluded cases since 2000.
This reflects that our investigations have been thorough. Once conviction is secured, sentencing is the purview of the courts,” SC chairman Tan Sri Zarinah Anwar tells StarBizWeek.
Zarinah admits that many cases of securities breaches, given their serious implications on the capital market, warrant custodial sentences. “Sentencing is out of our hands. Where we feel the sentencing is inadequate, we appeal. We are also appealing against nine acquittals,” she says.
No action on directors for breach of fiduciary duties
However, the SC has not had much power to deal with issues related to directors’ fiduciary duties. The main provisions related to this are contained in Section 132 of the Companies Act. In that section, a multitude of instances are mentioned as to what constitutes a breach of such duties (see table).
However, it is puzzling that there has hardly been any prosecutions of directors of listed companies based on this provision. As one observer puts it, “In all the shenanigans that has taken place in listed companies in Malaysia, it seems odd that not a single director has been found guilty of breach of his or her fiduciary duty under Section 132 of the Companies Act.”
Adds Rita Benoy Bushon, who heads the MSWG: “There has been improvement seen in enforcement actions taken by the SC and Bursa but we don’t see much action taken by SSM. Regulation is evolving for the better but bodies like SSM have to be more proactive in their enforcement role.”
When contacted, SSM’s senior director of the enforcement division, Muhammad Redzuan Abdullah, says the SSM is now investigating four to five cases involving breaches of provisions under Section 132 of the Companies Act.
“We have also enforced the section on private and listed companies before but never on directors,” he adds.
Muhammad Redzuan says in the past, the SSM only pursued cases involving listed companies that were referred to them by the SC so as “to avoid overlapping of jurisdictions”. However, he adds, many of the cases the SC referred to SSM were “old ones”.
“The evidence was old and we could not get anything conclusive,” says Muhammad Redzuan.
It is understood that the SC maintains that it has handed over fresh cases to the SSM in the past.
In any case, things could improve. In March, the Government set up a special task force to intensify the enforcement of economic crime.
Mak Yuen Teen … ‘Pursuing company directors for failure of discharging their fiduciary duties sends out the right deterrent message to directors
The SSM, SC and the police are supposed to be working together in this group. Muhammad Redzuan feels that this will allow for better cooperation between the different regulators and enable “faster decision-making on corporate misconduct cases”.
Burden of proof
Meanwhile, Assoc-Prof Mak Yuen Teen, an outspoken commentator on corporate governance issues in Singapore, notes that there is sometimes the concern that it is difficult to prove such cases in court. “In charging a company director for breach of fiduciary duties, one will be up against some very experienced lawyers defending them. You have to be prepared to fight a good battle.”
Mak, who is with the National University of Singapore’s accounting department, adds however that it is the duty of the regulator to still try to prosecute directors who have done wrong.
“Losing a case should not be a reason for not initiating one. Pursuing company directors for failure of discharging their fiduciary duties sends out the right deterrent message to directors,” he says, adding that while the Australian regulator has lost some high-profile cases in recent times, it should be applauded for having the chutzpah to pursue directors for breach of their duties.
In 2004, the Australian Securities & Investments Commission (ASIC) alleged that Fortescue Metals Group Ltd and its CEO Andrew Forrest had engaged in misleading and deceptive conduct by overstating agreements with three Chinese companies in the context of the development of an iron ore project. The regulator claimed that as a result of this, Forrest had breached his duties as a director.
After a lengthy court battle, the Federal Court in Australia decided last December in favour of Forrest and Fortescue, and ordered ASIC to pay costs.
The court ruled that Forrest had discharged his duties with a degree of care and diligence that a reasonable person would exercise in those circumstances.
ASIC had also lost two other cases last year, leading some to criticise the regulator’s strategy of putting a lot of resources into pursuing high-profile targets in cases that have taken years to complete and which have cost a significant amount of taxpayers’ money.
Still, Australia remains one of the markets that corporate governance experts say is a guiding example of effective regulation. In 1998, the government had decided to merge a hodgepodge of capital market regulators into one body, ASIC, which now not only oversees securities laws, but also deals with the enforcement of company laws, known in Australia as the Corporations Act.
The Australian government had also come down hard on white collar and corporate-type criminals since the 1990s after a number of high-profile corporate failures had tainted their market in the 1980s.
Similarly, in Malaysia, there had been a proposal to merge the SSM and the SC in the Malaysian Budget 2007 but the matter had died down for reasons unknown.
SC’s Zarinah says Malaysia’s regulatory framework is not dissimilar to those of many other countries and adds that there has been cooperation between the various regulators.
“Whenever we find evidence of other offences committed by directors or company officials, we send the necessary information to the other regulators,” she points out.
It is yet unknown as to how much of this information is actually used by the other regulatory agencies in their attempts at nabbing the corporate perpetrators.
Despite the ineffective level of enforcement, especially in relation to directors’ fiduciary duties, a significant change has taken place. On April 1, a new section of the Capital Markets and Services Act (CMSA) came into force, giving the SC powers to go after directors (and other company officials) for failing to discharge their fiduciary duties.
A sea change
Section 317A states that the SC can prosecute a director or an officer of a listed company that has done something with the intention of causing wrongful loss to his company.
Zarinah says that while no charge had been made yet under this new section, investigations were ongoing and it would “depend very much on the outcome of the investigations”.
“In the past, we only had power to deal with offences that were related to securities, now we can deal with offences related to dishonest conduct of directors,” Zarinah says.
She adds that as an example, cases involving questionable related-party transactions, where assets were injected into the company at inflated prices or sold to directors at depressed prices, will fall under Section 317A.
Sadly though, the section does not have a retrospective effect, which means transgressions by directors before April 1, cannot be acted on by the SC. “We don’t pass retrospective laws for the capital market,” says Zarinah.
The section carries a punishment of a fine of up to RM10mil and imprisonment of up to 10 years.
According to a corporate lawyer, Section 317A of the CMSA covers instances that are similar to directors’ fiduciary duties that come under Section 132 of the Companies Act.
Zarinah reckons that the new powers are very significant, as in the past, the SC could only deal with offences related to securities fraud and disclosure offences.
“Now we can deal with offences relating to wrongful loss caused by directors,” Zarinah says, adding that this section is not shifting the powers from the SSM to the SC to prosecute directors who do not discharge their duties but rather gives the SC “authority to investigate and prosecute directors or other persons who cause wrongful loss to the company”.
In 2007, Malaysia was ranked sixth by the Asian Corporate Governance Association (ACGA), after being assessed on corporate governance rules and practices, enforcement, political and regulatory environment, accounting and auditing standards, as well as the overall corporate governance culture.
Hong Kong took the lead in the country rankings over Singapore, followed by India in third place, Taiwan fourth and Japan fifth.
In that report, it was highlighted that for Malaysia, while public enforcement efforts had improved, regulators did not have a reputation for treating all companies and individuals equally.
It also said the consensus was that politics hampered the ability of regulators to do their job properly.
The ACGA will be coming up with a new report soon, and it is left to be seen if Malaysia’s ranking will improve.