Fraudulent Behaviour of Insider Dealing Flashcards

1 Insider dealing The value of a share reflects the profitability and future prospects of a company. This type of information is usually only available to a prospective purchaser after it has been made available publicly. However, if a prospective purchaser could gain access to such information before it was made public, he could anticipate which way the price was likely to move and thereby make a profit. This is known as ‘insider dealing’. Insider dealing has been made a criminal offence as it is perceived to undermine the integrity of the stock market.

1 Insider dealing Insider dealing is a crime under part V of the Criminal Justice Act 1993.

1 Insider dealing An individual will be guilty of insider dealing if they have information as an insider and: 1) they deal in price-affected securities on the basis of that information 2) they encourage another person to deal in price-affected securities in relation to that information 3) they disclose the information to anyone other than in the proper performance of their employment, office or profession.

1 Insider dealing Dealing is defined in s55 as acquiring or disposing of securities, whether as a principal or agent, or agreeing to acquire securities.

1 Insider dealing 1) relates to particular securities or to a particular issuer of securities 2) is specific or precise 3) has not been made public 4) if made public would be likely to have a significant effect on the price.

1 Insider dealing 1) S57 states that a person has information as an insider only if they know that it is inside information and they have it from an inside source. 2) He has it through being a director, employee or shareholder of an issuer of securities or he has it through having access to information by virtue of his employment, office or profession.

1 Insider dealing On summary conviction an individual found guilty of insider dealing is liable to a fine not exceeding the statutory maximum and/or a maximum of six months imprisonment. On indictment the penalty is an unlimited fine and/or a maximum of seven years imprisonment If the individual concerned is a director, he is in breach of his fiduciary duty and may be liable to account to the company for any profit made.

2 Money laundering Money laundering is the process by which the proceeds of crime are converted into assets which appear to have a legal rather than an illegal source. The aim of disguising the source of the property is to allow the holder to enjoy it free from suspicion as to its source.

2 Money laundering Money laundering is primarily regulated by the Proceeds of Crime Act 2002. The legislation imposes some important obligations upon professionals, such as accountants, auditors and legal advisers. These obligations require such professionals to report money laundering to the authorities and to have systems in place to train staff and keep records.

2 Money laundering 1) Placement – the initial disposal of the proceeds of criminal activity into an apparently legitimate business activity or property 2) Layering – the transfer of money from business to business, or place to place, in order to conceal its initial source 3) Integration – the culmination of the previous procedures through which the money takes on the appearance of coming from a legitimate source.

2 Money laundering 1) It is an offence to conceal, disguise, convert, transfer, or remove criminal property from England, Wales, Scotland or Northern Ireland: s327 Proceeds of Crime Act 2002. 2) Concealing or disguising criminal property includes concealing or disguising its nature, source, location, disposition, movement or ownership, or any rights connected with it. 3) ‘Criminal property’ is defined as property which the alleged offender knows (or suspects) constitutes or represents benefit from any criminal conduct. 4) ‘Criminal conduct’ is defined as conduct that constitutes an offence in any part of the UK would constitute an offence in any part of the UK if it occurred there.

2 Money laundering Under s330 individuals carrying on a ‘relevant business’ may be guilty of an offence of failing to disclose knowledge or suspicion of money laundering where they know or suspect, or have reasonable grounds for knowing or suspecting, that another person is engaged in laundering the proceeds of crime. This offence only relates to individuals, such as accountants, who are acting in the course of business in the regulated sector. Any individual who is covered by s330 is required to make disclosure to a nominated money laundering reporting officer within their organisation, or directly to the Serious Organised Crime Agency (SOCA), as soon as is practicable.

2 Money laundering Section 333 states that it is an offence to make a disclosure likely to prejudice a money laundering investigation. It therefore covers the situation where an accountant informs a client that a report has been submitted to SOCA.

2 Money laundering 1) The maximum penalty for the s327 offence of money laundering is 14 years’ imprisonment. 2) Failure to report and tipping off are punishable on conviction by a maximum of five years’ imprisonment and/or a fine.

3 Potential criminal activity in the operation, management and winding up of companies Failure to deliver accounts or annual returns on time is a criminal offence. All the directors of a company in default could be prosecuted. If convicted, a director could end up with a criminal record and a fine of up to £5,000 for each offence.