Fraudulent and criminal behaviour

Introduction to Fraudulent and Criminal Behaviour

Welcome! In this section of your Corporate and Business Law (LW) studies, we explore the legal frameworks designed to deter, detect, and punish fraudulent and criminal conduct within companies and financial markets. As finance professionals, understanding these offences, risk management duties, and compliance controls is vital for protecting organisations and maintaining public trust.

1. Insider Dealing

Insider dealing occurs when someone uses non-public, price-sensitive information to trade in qualifying securities (or encourages another person to trade), aiming to secure an unfair financial advantage.

What Counts as Inside Information?

To qualify as inside information, the knowledge must be:
- Specific or precise: It goes beyond vague rumors or general market speculation.
- Not publicly available: It has not been published or released through approved regulatory information channels.
- Price-sensitive: If made public, it would be likely to have a significant effect on the price or value of the relevant securities.

Core Offences and Defences

Under company and securities regulation, there are three primary forms of insider dealing:
- Dealing: Acquiring or disposing of price-affected securities using inside information.
- Encouraging: Encouraging or advising another person to deal in price-affected securities while possessing inside information.
- Disclosure: Disclosing inside information to another person otherwise than in the proper performance of one's employment, office, or profession.

Common defences include showing that the individual did not expect the dealing to result in a profit or avoidance of a loss, genuinely believed the information was widely known, or would have entered into the transaction anyway (such as under a pre-existing contractual obligation).

2. Market Abuse

Market abuse is a broader civil or regulatory wrong that undermines market integrity, transparency, and investor confidence. While insider dealing involves trading on secret information, market abuse also captures manipulative behaviour and distortion across financial markets.

Key Forms of Market Abuse

- Improper disclosure: Disclosing inside information outside regular professional duties.
- Manipulating transactions: Placing orders or executing trades that give false or misleading impressions regarding the supply of, demand for, or price of financial instruments.
- Manipulating devices: Employing fictitious devices or deceptive schemes to trade in securities.
- Dissemination of false or misleading information: Spreading rumours or false data through media or online channels to distort market prices.
- Market distortion: Engaging in conduct that disrupts the normal operation of trading mechanisms or sets prices at an artificial level.

3. Money Laundering and Compliance Controls

Money laundering is the process of concealing the origin of illegal funds to make them appear legitimate.

The Three Stages of Money Laundering

1. Placement: Introducing proceeds of crime into the financial system (e.g., depositing cash into bank accounts).
2. Layering: Moving funds through complex transactions and transfers across different jurisdictions to disguise their origin.
3. Integration: Re-entering laundered funds into the economy as apparently legitimate business capital or personal assets.

Key Offences

- Concealing, transferring, or converting: Assisting in hiding or moving criminal property.
- Failure to disclose: Failing to report known or suspected money laundering to the organisation's Money Laundering Reporting Officer (MLRO) or the relevant financial intelligence authority.
- Tipping off: Informing someone that a suspicion has been reported or that an investigation is underway, prejudicing the inquiry.

Policies, Procedures, and Internal Controls

Businesses subject to anti-money laundering regulation must maintain robust compliance frameworks, including:
- Risk management practices: Assessing customer and jurisdictional risk before and during business relationships.
- Customer due diligence (CDD): Verifying customer identity and identifying beneficial owners before establishing a business relationship.
- Reliance: Relying on third parties for CDD only under strict conditions, while retaining ultimate responsibility for compliance.
- Record keeping: Maintaining transaction records and identity verification evidence for required statutory periods.
- Monitoring and internal communication: Regularly evaluating the effectiveness of controls, managing compliance reporting lines, and training employees on anti-money laundering obligations.

4. Bribery

Bribery involves offering, giving, receiving, or soliciting an improper advantage to influence an individual's commercial or public behaviour.

Commonly Regulated Bribery Offences

1. Offering, promising, or giving a bribe: Seeking to induce improper performance of a relevant function.
2. Requesting, agreeing to receive, or accepting a bribe: Performing a function improperly in exchange for an advantage.
3. Bribery of foreign public officials: Providing an advantage to an official in another country to obtain or retain business.
4. Corporate failure to prevent bribery: Imposing corporate liability on a commercial organisation when an associated person bribes another on its behalf. The primary statutory defence is proving that the organisation had in place adequate prevention procedures.

5. Corporate Criminal Liability: Tax Evasion and Fraud

Modern law imposes strict standards on commercial organisations to ensure their representatives do not facilitate economic crime.

Failure to Prevent the Facilitation of Tax Evasion

A corporate entity (termed a relevant body, encompassing companies and partnerships) can be held criminally liable if an associated person (such as an employee or agent) criminally facilitates tax evasion by a third party. The organisation avoids liability only if it can demonstrate it had reasonable prevention procedures in place to prevent such facilitation.

Failure to Prevent Fraud

Similarly, legal regimes hold relevant organisations criminally accountable when an associated person commits a specified fraud offence intending to benefit the organisation or its clients. Organisations must implement reasonable, risk-based anti-fraud controls to establish a valid defence.

6. Fraudulent and Wrongful Trading

During the operation, management, or winding up of an insolvent company, directors and managers must act lawfully toward creditors.

Fraudulent Trading

- Definition: Carrying on business with the intent to defraud creditors or for any other fraudulent purpose.
- Standard of proof: High, as actual dishonesty and intent must be established.
- Nature of liability: Both a civil liability (making a personal contribution to the assets of the company) and a criminal offence.
- Who is liable: Any person who was knowingly a party to the carrying on of business in that manner.

Wrongful Trading

- Definition: Continuing to trade when a director knew, or ought to have concluded, that there was no reasonable prospect of the company avoiding insolvent liquidation.
- Standard of proof: Objective and subjective test of competence: what a reasonably diligent director would have known and done.
- Nature of liability: Civil only (court order to contribute personally to company debts).
- Who is liable: Directors and shadow directors only.
- Defence: Demonstrating that after realizing the company's hopeless position, the director took every step possible to minimize potential loss to creditors.

Summary Comparison: Fraudulent vs. Wrongful Trading

Fraudulent Trading:
- Mental element: Actual dishonest intent required.
- Nature: Criminal offence and civil liability.
- Scope: Any person knowingly involved.

Wrongful Trading:
- Mental element: Negligence/failure to exercise reasonable skill and care; no dishonesty required.
- Nature: Civil remedy only.
- Scope: Directors and shadow directors only.