Implementation and Enforcement of Rules in Singapore and the Case of China Aviation Oil

Implementation and Enforcement of Rules in Singapore and the Case of China Aviation OilMak Yuen Teen Director Corporate Governance and Financial Reporting Centre National University of S

Implementation and Enforcement of Rules in Singapore and the Case of China Aviation Oil

Mak Yuen Teen

Director Corporate Governance and Financial Reporting Centre

National University of Singapore

Singapore

The 2006 Asian Roundtable on Corporate Governance

Session 1 – Part II September 14-15 2006

 Singapore’s Legal System

 Overview of Recent Cases

 Case Study: China Aviation Oil

 Proposed Reforms

 Q&A

Singapore’s Legal

System

Singapore’s Legal System

 Common Law System

 Singapore Penal Code

 Other specific acts

Duty of Director (CA S157)

 Made mandatory duties of director

 Act honestly and use reasonable diligence

in duties

 Expected standard depends on position, company, business

 No breach if decision made losses

 If made honestly and with reasonable belief it was in the best interest of the company

Singapore’s

Legal System

Overview of Recent Cases

Case Study:

CAO

Proposed Reforms

Derivation Action (CA S216A)

 Shareholder can sue on behalf of company

 Not as costly and more access to evidence

 Does not apply to companies listed on exchange

 Shareholders’ only recourse is derivative action under common law

 Cannot claim legal cost from company or have access to company documents

Securities and Futures Act

 S199 – bars persons from making false or misleading statements

 S218 & S219 – insider trading

trading, regardless of reason

 S232 – Civil Penalty

Singapore’s

Legal System

Overview of Recent Cases

Case Study:

CAO

Proposed Reforms

Regulatory Bodies

 Singapore Exchange (SGX)

 Commercial Affairs Department (CAD)

 Monetary Authority of Singapore (MAS)

 Corrupt Practices Investigation Bureau (CPIB)

 Attorney-General’s Chambers (AGC)

and guide investigations

Overview of Recent

Cases

Criminal Actions

 Diversified Type of Companies

 Market Cap of S$1 billion to non-profit organizations in oil trading, education, waste metal recycling, charity

 Prosecution focused on top management

 CEO and CFO most common

 Little action against directors, none against independent directors

Criminal Actions

 Wide range of offences

 Making false statements, falsifying documents, insider trading, corruption, cheating

 Few directors faced breach of duties offences

Singapore’s

Legal System

Overview of Recent Cases

Case Study:

CAO

Proposed Reforms

Statutory Civil Penalty

 Increased frequency in use

 Majority of cases involved insider trading

 China Aviation Holding Corporation paid S$8 million penalty

Case Study:

CAO

Proposed Reforms

Civil Action (Derivative Action)

 Not common in Singapore

case recently

jurisdiction

 Other cases

abusing position as executive director

bona fide commercial decisions which made losses

Case Study:

China Aviation Oil

 Began derivative speculation in 2003

 In late 2003, bet oil price would fall

 Oil prices rose from US$35 to US$55 by Nov 2004

 General failure in corporate governance

 CEO and Head of Finance jailed 4 years

3 months and 2 years respectively and fined

 Other directors fined for making false and misleading statement

Singapore’s

Legal System

Overview of Recent Cases

Case Study:

CAO

Proposed Reforms

Board of Directors

Chief Executive Officer

Risk Management Committee

Managed Internal Controls and Business Risk

Failed to detect losses

Received reports of risk exposure

Risk Management Structure

Possible Breach of Duty

 Directors aware CAO was speculating in options

 No effective risk management guidelines

in practice on options trading

 Board of Directors allegedly not aware of losses incurred

 Audit Committee and internal audit did not detect losses

Singapore’s

Legal System

Overview of Recent Cases

Case Study:

CAO

Proposed Reforms

Delegation or Abdication?

 Delegation of duty is not a breach

 Allowed under common law and Companies Act Section 157(c)

 Trusting another director or employee who lied is not a breach

 Director needs to supervise the delegated function

 A breach if suspected a problem and did nothing

Proposed Reforms

Proposed Reforms

 Criminal action for breach of duties?

 Improving access to civil action

Q & A Thank you!