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1. 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

2. Agenda
 Singapore’s Legal System
 Overview of Recent Cases
 Case Study: China Aviation Oil
 Proposed Reforms
 Q&A

3. Singapore’s Legal
System

4. Singapore’s Legal System
 Common Law System
 Law based on decisions made in earlier cases
 Statutes introduced to codify some of these laws
 Singapore Penal Code
 Other specific acts
 Companies Act (CA)
 Securities and Futures Act (SFA)
 Prevention of Corruption Act (PCA)
Singapore’s
Legal System
Overview of
Recent Cases
Case Study:
CAO
Proposed
Reforms

5. 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

6. 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
Singapore’s
Legal System
Overview of
Recent Cases
Case Study:
CAO
Proposed
Reforms

7. Securities and Futures Act
 S199 – bars persons from making false or
misleading statements
 S218 & S219 – insider trading
 Bars persons who possess insider information from
trading, regardless of reason
 Changes made to overcome obstacles in the past
 S232 – Civil Penalty
 Lower burden of proof
 No criminal sanctions for offenders
Singapore’s
Legal System
Overview of
Recent Cases
Case Study:
CAO
Proposed
Reforms

8. Regulatory Bodies
 Singapore Exchange (SGX)
 Manages day-to-day regulation of listed companies
 Commercial Affairs Department (CAD)
 Investigates white collar crime
 Monetary Authority of Singapore (MAS)
 Regulates and supervises financial market
 Corrupt Practices Investigation Bureau (CPIB)
 Investigates corruption in private and public sectors
 Attorney-General’s Chambers (AGC)
 Deputy Public Prosecutors conduct prosecutions
and guide investigations
Singapore’s
Legal System
Overview of
Recent Cases
Case Study:
CAO
Proposed
Reforms

9. Overview of Recent
Cases

10. 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
Singapore’s
Legal System
Overview of
Recent Cases
Case Study:
CAO
Proposed
Reforms

11. 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

12. Criminal Actions
 Punishment
 Jail of 18 weeks to 8 years
 Fines of $10,000 to $1.6 million
 Time taken:
 From first sign of scandal to filing of
charges: 5 months to 19 months
 From filing of charges to conviction and
sentencing: 1 day to 10 months
 Most defendants pleaded guilty
Singapore’s
Legal System
Overview of
Recent Cases
Case Study:
CAO
Proposed
Reforms

13. Statutory Civil Penalty
 Increased frequency in use
 Majority of cases involved insider trading
 China Aviation Holding Corporation paid
S$8 million penalty
 Exceptions:
 Breaching continuous disclosure
requirement
 Market rigging to manipulate share price
Singapore’s
Legal System
Overview of
Recent Cases
Case Study:
CAO
Proposed
Reforms

14. Civil Action (Derivative Action)
 Not common in Singapore
 National Kidney Foundation: The only high profile
case recently
 China Aviation Oil: Civil action in USA rejected over
jurisdiction
 Other cases
 Vita Health: Director liable for misstating accounts,
abusing position as executive director
 Vita Health and ECRC land: Directors not liable for
bona fide commercial decisions which made losses
Singapore’s
Legal System
Overview of
Recent Cases
Case Study:
CAO
Proposed
Reforms

15. Case Study:
China Aviation Oil

16. Overview
 Jet fuel procurement, international oil
trading and oil-related investment
 Handled virtually 100% of China's total
jet fuel imports
 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
Singapore’s
Legal System
Overview of
Recent Cases
Case Study:
CAO
Proposed
Reforms

17. Overview
 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

18. Board of Directors
Chief Executive Officer
Risk Management
Committee
Audit Committee
Internal Audit
Department Heads
Traders
Delegated Daily
Risk
Management
Managed Internal Controls
and Business Risk
Failed to
detect losses
Received reports of
risk exposure
Risk Management Structure
Singapore’s
Legal System
Overview of
Recent Cases
Case Study:
CAO
Proposed
Reforms

19. 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

20. 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
Singapore’s
Legal System
Overview of
Recent Cases
Case Study:
CAO
Proposed
Reforms

21. Proposed Reforms

22. Proposed Reforms
 Criminal action for breach of duties?
 Improving access to civil action
 Disqualification of directors
 Greater transparency in investigations
and enforcement actions
 Addressing jurisdictional issues
Singapore’s
Legal System
Overview of
Recent Cases
Case Study:
CAO
Proposed
Reforms

23. Q & A
Thank you!