Exp Notes

Thank you for downloading this extract from our
ExPedite notes to accompany your free online “Course

in a Coffee Break”.
To download a free complete set of our ExPress notes
please visit www.theexpgroup.com.
Good luck with your F4 studies.
ACCA Paper F4
Corporate and Business Law
For exams in 2010
theexpgroup.com
ExPedite Notes
ACCA F4 Corporate and Business Law
Chapter 16
Criminal Activity in Company

Management
The examiner has stated that in the exam, you may be required to (all at the
application level):
 Recognise the nature and legal control over insider dealing.
 Recognise the nature and legal control over money laundering.
 Discuss potential criminal activity in the operation, management and winding

up of companies.
 Distinguish between fraudulent and wrongful trading.
Insider Dealing
Insider dealing is the illegal activity of using non-public (ie privileged) information to make a
personal gain or avoid a personal loss.
Page |16.1 © 2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own
private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this
material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of
reproduction. All examples presented in these course materials are for information and educational purposes only and
should not be applied to a specific real life situation without prior advice. Given the nature of information presented in
theexpgroup.com
these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any
information presented in these materials as to its application to any specific cases.
ExPedite Notes
It causes a loss to other shareholders, since other shareholders will have bought shares at
an unfairly high price, or will sell at an unfairly low price, when compared with what the
insider knew.
There are lots of rules about insider dealing in different jurisdictions in the World. In the
exemplar of the UK, insider dealing is defined and regulated by Part V of the Criminal Justice
Act (1993).
The UK Criminal Justice Act (Section 52) provides a succinct definition of how insider dealing
can happen and it is probably the best tool to remember it for exam and practical purposes.
The Offence of Insider Dealing
An individual is guilty of insider dealing if they have information as an insider and deal in
price-affected securities on the basis of that information. Dealing also includes refraining
from a planned deal or discouraging another to hold off before buying or selling the
securities in question.
An individual who has information as an insider will also be guilty of insider dealing if they
encourage another person to deal in price-affected securities in relation to that
information.
An individual who has information as an insider will also be guilty of insider dealing if they
disclose it to anyone other than in the proper performance of their employment, office or
profession.
Dealing
Dealing is defined in s.55 CJA, amongst other things, as acquiring or disposing of securities,
whether as a principal or agent, or agreeing to acquire securities. Section 52 makes it clear
that only such activity in a regulated market is covered by the Act.
theexpgroup.com
ExPedite Notes
Inside Information
Inside information is information that:
 relates to particular securities, and

 is specific or precise, and
 has not been made public, and
 is likely to have a significant effect on the price of the securities.
This means that general impressions about the future prospects of a company cannot be
insider information.
Insiders
Section 57 states that a person has information as an insider only if they know it is
inside information and they have it from an inside source. The section then goes on to
consider what might be described as primary and secondary insiders.
The first category of primary insiders covers those who get the inside information directly
through either:
 being a director, employee or shareholder of an issuer of securities, OR

 having access to the information by virtue of their employment, office or profession.
The second category of insiders includes those whose source, either directly or indirectly, as
a primary insider, as defined above.
This means that directors, senior management and auditors are at considerable risk of being
insiders. They must therefore be very careful not to accidentally commit the offences of
insider dealing.
theexpgroup.com
ExPedite Notes
EXAMPLE
Discussion Point
How do you think that directors of publicly listed companies might defend
themselves from accusations of insider dealing when they buy or sell shares in their
company?
A Victimless Crime?
Some people have suggested that insider dealing is a victimless crime and possibly even a
perk of being a director. This is an unsustainable argument!
Whilst some would argue that insider dealing is a victimless crime, in that no one is forced,
or tricked, into buying or selling shares: the shares in question are, after all, bought „at arms
length‟ on the stock exchange. Nonetheless such activity is treated as criminal. The
underlying justification for this would appear to be that those who engage in the activity
gain an unjustified return based in their access to price sensitive information that is not
available to the general public. In addition it is recognised that the existence of insider
dealing tends to undermine the integrity of the share market generally as the public may
exhibit reluctance to participate in a market that is being, at least in part, run to the benefit
of a few individuals with privileged access to such information.
Stock Exchanges with the strongest rules against insider dealing, the best mechanisms for
detecting it and a record of prosecuting those suspected of indulging in insider dealing will
be more successful than those with those with a reputation for tolerating unfair returns from
those with inside information.
Defences
Somebody accused of insider dealing may defend themselves only by proving that the
offence has not been proven beyond reasonable doubt. These defences may therefore be
possible:
 They were not an insider

 The information was too general to be inside information (eg personal opinion)
theexpgroup.com
ExPedite Notes
 The information was publicly available, or the accused had good grounds to believe it
was publicly available (eg had been announced to the Stock Exchange)
 There was no expectation that the person receiving the information would deal in
securities
 Etc.
EXAMPLE
Discussion Point
In groups, spend five minutes thinking of situations in which directors or members of

an audit team may come across the risk of accidental insider dealing and how they
can defend themselves against this. Note that ignorance of the law or carelessness
are not defences!
Past Real Exam Question

Paper 2.2 GLO, June 2004
Question 12
Ken lives with Lena. Lena is on the Board of Directors of Megatelevision plc, which
has been considering a take-over from Night TV plc. One Friday, Lena tells Ken that
she has to attend a very important board meeting of Megatelevision plc, the outcome
of which could have a crucial impact on the future of the company. At the Board
meeting it is agreed that, subject to some final negotiations to be carried out by the
Managing Director of Megatelevision, the take-over bid should be accepted. That
evening the Managing Director phones Lena and leaves a message on the answering
machine confirming that the negotiations have been successful and that the take-
over bid will therefore be accepted. When Ken comes home, before Lena, he hears
the message.
The following events subsequently take place:
(i) Ken buys shares in Megatelevision plc;

(ii) Ken tells his friend Nat about the likelihood of the take-over and Nat buys
shares in Megatelevision plc;
(iii) Nat in turn passes on the information to his friend Owen who also buys
theexpgroup.com
ExPedite Notes
shares in Megatelevision plc;

(iv) At a dinner party Ken, without actually telling him about the take-over
proposal, advises his brother Pete to buy shares in Megatelevision, and Pete
does so.
Required:
Consider the position of the various parties under the legislation

regulating insider trading.
(10 marks)
Money Laundering
Definition
Money laundering is the process by which the proceeds of crime, either money or other
property, are converted into assets, which appear to have a legitimate rather than an illegal
origin. The aim of the process is to disguise the source of the property, in order to allow the
holder to enjoy it free from suspicion as to its source.
The process usually involves three distance phases:
 Placement is the initial disposal of the proceeds of criminal activity into apparently
legitimate business activity or property.
 Layering involves the transfer of money from business to business, or place to place
in order to conceal its initial source.
 Integration is the culmination of the previous procedures through which the money
takes on the appearance of coming from a legitimate source. This stage is the goal
of the money launderer.
Note that money laundering includes tax evasion (ie disguising funds or income that have
already crystallised a liability to tax, as distinct from tax avoidance, which is planning one‟s
affairs to avoid crystallising a liability to tax). This places accountants and tax advisors at
considerable risk of observing money laundering.
theexpgroup.com
ExPedite Notes
Money laundering was first made a criminal offence in the United Kingdom under the Drug
Trafficking Offences Act 1986 and is now regulated by the Proceeds of Crime Act 2002
together with the specifically anti-terrorist legislation, the Terrorism Act 2000 and the Anti-
terrorism Crime and Security Act 2001.
The European Commission has issued a number of rules on money laundering, which all
member states must enact. This includes the third directive on money laundering, which
contains the core offences.
Offences Relating to Money Laundering
The Proceeds of Crime Act 2002 seeks to control money laundering by creating three
categories of criminal offences in relation to the activity.
Offence 1: Laundering
The first category of principal money laundering offences relates to laundering the process
of crime, or assisting in that process and is contained in ss.327–329. Under s.327, it is an
offence to conceal, disguise, convert, transfer or remove criminal property from England and
Wales, Scotland or Northern Ireland. Concealing or disguising criminal property is widely
defined to include concealing or disguising its nature, source, location, disposition,
movement or ownership or any rights connected with it. These offences are punishable on
conviction by a maximum of 14 years imprisonment and/or a fine.
theexpgroup.com
ExPedite Notes
Offence 2: Failure to report suspicion
The second category of offence relates to failing to report a knowledge or suspicion of

money laundering.
Under s.330 it is an offence for a person who knows, or suspects, that another person is
engaged in money laundering not to report the fact to the appropriate authority.
However, the offence only relates to individuals, such as accountants who are acting in the
course of business in the regulated sector. The offences set out in these sections are
punishable on conviction by a maximum of five years imprisonment and/or a fine.
Offence 3: Tipping off
The third category of offence relates to tipping off and is contained in s.333, which makes it
an offence to make a disclosure, which is likely to prejudice any investigation under the Act.
The offences set out in these sections are punishable on conviction by a maximum of five
years imprisonment and/or a fine.
Wrongful and Fraudulent Trading
The criminal offence of fraudulent trading
Section 993 of the Companies Act 2006 establishes the criminal offence of fraudulent
trading, which applies whether or not the company has been or is in the course of being
wound up. A party found guilty of fraudulent trading is liable on indictment to seven years‟
imprisonment and/or an unlimited fine, or on summary conviction to six months‟
imprisonment and/or a fine of up to the statutory maximum. This does not just apply to
fraudulent trading in relation to creditors, and as was held in R v Kemp (1988) if a company
is used for any kind of fraud, those liable may be liable to be convicted under this law. In R
v Grantham (1984) the Court of Appeal held that a jury had not been misdirected that
dishonesty and an intention to defraud might be present if they determined that a defendant
charged under what is now s.993 obtained or helped to obtain credit or further credit,
knowing that there was no good reason for thinking funds would be available to pay the
debt when it fell due or shortly afterwards. It was not necessary for the prosecution to prove
theexpgroup.com
ExPedite Notes
that the defendant knew that there was no reasonable prospect that the creditor would ever
be paid. In R v Lockwood (1986) the Court of Appeal required the same standard of
dishonesty applied in other criminal cases to be applied to fraudulent trading – there was
not to be one standard for criminal cases in general and a separate, more restricted, one for
cases involving commercial fraud.
Civil liability for fraudulent trading
Under s.213 of the Insolvency Act 1986, if in the course of a winding up it appears that any
business of the company has been carried on with intent to defraud creditors or for any
fraudulent purpose, the court may on the application of the liquidator order any persons
who were knowingly parties to the carrying on of the business to make such contributions, if
any, to the company‟s assets as the court thinks proper.
This is one of the examples of “lifting the veil of incorporation”, since the barrier between
directors and the company itself has been deliberately lifted in order to make the directors
personally liable.
In Re William C Leitch Brothers Ltd (1932) the controlling director of a company ordered
goods at a time when he knew that the company could not pay its debts. The court held
that if a company continued to carry on business and to incur debts at a time when there
was to the directors‟ knowledge no reasonable prospect of the creditors receiving payment
of debts it may be inferred that the company is carrying on business with intent to defraud,
and the director may be held liable for fraudulent trading.
However, fraudulent trading under s.213 of the Insolvency Act 1986, and its predecessors,
has been notoriously difficult to establish because of the high burden of proof involved in
demonstrating dishonesty. In order to establish liability for fraudulent trading under s.213
the prosecution must actually demonstrate an intention to defraud which must be proved by
showing that the person had the requisite knowledge. The difficulty in establishing such an
intention led to the introduction of s.214 if the Insolvency Act 1986, which relates to the
lesser category of wrongful trading.
theexpgroup.com
ExPedite Notes
Wrongful Trading
Section 214 of the Insolvency Act 1986 states that a person is guilty of wrongful trading if:
 the company has gone into insolvent liquidation, and

 at some time before the commencement of the winding up of the company, that person
knew or ought to have concluded that there was no reasonable prospect that the
company would avoid going into insolvent liquidation, and
 that person was a director of the company at that time.
Wrongful trading has the same civil liability attached to it as fraudulent trading, though the
criminal penalties are lesser.
There have been considerably more successful prosecutions for wrongful trading than for
fraudulent trading. Where fraudulent trading can only be proven if a jury is satisfied that
the accused wilfully intended to defraud others, wrongful trading can be proven if the jury is
satisfied that loss was unreasonably suffered by others as a result of the negligence or
recklessness of a director who continued to trade when there was no realistic expectation
that the company would be able to meet its debts.
Wrongful trading is therefore a greater risk to honest directors than fraudulent trading.
Both wrongful trading and fraudulent trading are immediate grounds for disqualification
from holding a UK directorship under the Company Directors Disqualification Act 1996.
theexpgroup.com
ExPedite Notes
Want to Know More?
You can read the full text of the Insolvency Act 1986 by following this link:
http://www.statutelaw.gov.uk
You can download a free full copy of the Companies Act 2006 at
www.opsi.gov.uk/acts/acts2006/pdf/ukpga_20060046_en.pdf
Past Real Exam Questions
Done Revised
Insider dealing Q12 June 2004  
Q12b June 2005  
Q12 June 2006  
Q10 F4 GLO pilot  
Q10 June 2008  
Money laundering Q5 June 2004  
Q12 December 2004  
Fraudulent/ wrongful trading Q12 June 2005  
theexpgroup.com
ExPedite Notes
Solutions to real past exam questions
Examiner’s solution to Question 12, June 2004 Paper 2.2 GLO
(i) Ken is an „insider‟ as he receives inside information from a primary insider, i.e. the MD of
Megatelevision plc. The information fulfils the requirements for „inside information‟ as it
relates to: particular securities, the shares in Megatelevision; is specific, in that it relates to
the take-over; has not been made public; and is likely to have a significant effect on the
price of the securities. On that basis Ken is clearly guilty of an offence under s.52 when he
buys the shares in Megatelevision plc.
(ii) When Ken tells his friend Nat about the likelihood of the take-over he commits the
second offence of disclosing information he has as an insider. Nat then becomes an insider
himself and is guilty of dealing when he buys shares in Megatelevision plc.
(iii) This situation is similar to that in (ii) in that when Nat passes on the information to his
friend Owen he is also guilty of disclosing information he has as an insider and equally Owen
becomes an insider himself and is guilty of dealing when he buys shares in Megatelevision
plc.
(iv) When Ken advises his brother Pete to buy shares in Megatelevision plc, he commits the
third offence under s.52 of encouraging another person to deal in price-affected securities in
relation to inside information. Pete on the other hand has committed no offence for the
reason that, although he has bought shares in Megatelevision plc, he has not received any
specific information and therefore cannot be guilty of dealing on the basis of such
information.
theexpgroup.com

Exp Notes

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Exp Notes

Uploaded by

Copyright:

Available Formats

Thank you for downloading this extract from our

ExPedite notes to accompany your free online “Course

Criminal Activity in Company

 Recognise the nature and legal control over insider dealing.

 Recognise the nature and legal control over money laundering.

 Discuss potential criminal activity in the operation, management and winding

 Distinguish between fraudulent and wrongful trading.

The Offence of Insider Dealing

Inside information is information that:

 relates to particular securities, and

 being a director, employee or shareholder of an issuer of securities, OR

 They were not an insider

In groups, spend five minutes thinking of situations in which directors or members of

Past Real Exam Question

The following events subsequently take place:

(i) Ken buys shares in Megatelevision plc;

shares in Megatelevision plc;

Consider the position of the various parties under the legislation

The process usually involves three distance phases:

Offences Relating to Money Laundering

Offence 2: Failure to report suspicion

The second category of offence relates to failing to report a knowledge or suspicion of

Offence 3: Tipping off

Wrongful and Fraudulent Trading

The criminal offence of fraudulent trading

Civil liability for fraudulent trading

 the company has gone into insolvent liquidation, and

Want to Know More?

Past Real Exam Questions

Insider dealing Q12 June 2004  

Q12b June 2005  

Q12 June 2006  

Q10 F4 GLO pilot  

Q10 June 2008  

Money laundering Q5 June 2004  

Q12 December 2004  

Q12 December 2006  

Fraudulent/ wrongful trading Q12 June 2005  

Solutions to real past exam questions

Examiner’s solution to Question 12, June 2004 Paper 2.2 GLO

You might also like