The 6th Asian Roundtable on Corporate Governance Implementation and Enforcement in Corporate Governance Nik Ramlah Mahmo

1. The 6th Asian Roundtable on Corporate Governance Implementation and Enforcement in Corporate Governance Nik Ramlah Mahmood Securities Commission Malaysia Theme II – Session 1 Agency Enforcement Seoul, Korea 2-3 November 2004 The views expressed in this paper are those of the author and do not necessarily represent the opinions of the OECD or its Member countries or the World Bank

2. Agenda • Enforcementof Corporate Governance: Introduction • Public Enforcement: Malaysia’s Experience • Issues and Challenges I II III

3. Agenda I • Enforcementof Corporate Governance: Introduction

4. Legal and institutional reforms in corporate governance must be backed by enforcement • Post crisis, many Asian jurisdictions including Malaysia had introduced significant legal reforms to the corporate governance environment • Awareness of corporate governance is now significantly greater • But developmental efforts would be stunted if not backed by a focus on strengthening enforcement

5. Public monitoring & enforcement by regulatory agencies Timely and consistent enforcement of rule violations Enforcement powers must include ability to take action against reputational intermediaries Private monitoring & enforcement by the market Board monitoring Shareholder monitoring Reputational intermediaries (auditors, corporate advisers) Other parties (investmentanalysts, financial press) Enforcement of corporate governance must be viewed holistically • Unlike developed markets, most developing markets do not enjoy strong private (“bottom-up”) enforcement • This makes strong public (“top-down”) enforcement crucial

6. Core pre-requisites for public and private enforcement • Market maturity & level of sophistication • The level of awareness of directors of their duties, shareholders of their rights and the presence of reputational intermediaries core pre-requisites • Transparency and disclosure • Market discipline is premised on the reliability of disclosures • The presence of enforcing institutions • The integrity and efficacy of regulatory agencies and the court system • The supporting legal framework • The whole range of laws in the corporate and financialsystem must be firmly in place

7. Agenda • Public Enforcement: Malaysia’s Experience II

8. Public enforcement: Malaysia’s experience • As with most developing countries private monitoring and enforcement are at a relatively nascent stage of development • Responsibility for corporate governance enforcement is shared by several agencies • Regulatory agencies are endowed with strong investigative powers and a wide range of sanctioning options • Criminal sanctions are increasingly being complemented by civil and administrative sanctions

9. Public enforcement of corporate governance is shared by several agencies Agency Jurisdiction Powers Securities Commission (supported by exchange front-line regulation) Securities Legislation and Listing Standards • Disclosure violations and false submissions • - False/misleading statements in corporate submissions • - Breach of conditions of approval on corporate proposals • - False/misleading statements in prospectuses • Market offences • - Market manipulation • - Insider trading • - Other market offences (1) Criminal sanctions (2) Civil sanctions (certain cases) (3) Administrative sanctions (1) Criminal sanctions (2) Civil sanctions • Breach of exchange listing rules • - periodic and continuous disclosure obligations • - Independent directors, audit committees • - related party transactions (1) Criminal sanctions (2) Civil sanctions (3) Administrative sanctions Company legislation and common law Companies Commission (1) Criminal sanctions • Breach of directors’ fiduciary duties • Other company law offences Penal Code Police, Anti-Corruption Agency • Criminal breach of trust (1) Criminal sanctions

10. Regulatory agencies endowed with comprehensive investigative and enforcement powers Consistent with IOSCO’s principles of securities regulation powers of Securities Commission include: • Power to seek various orders from the court • Power to impose administrative sanctions • Power to require surrender of travel documents • Power to disqualify Directors and CEOs of PLCs • Power to require production of books and records • Protection of informers and information • Power to prosecute (with consent of Attorney General)

11. Increasingly criminal sanctions are being complemented by civil and administrative sanctions • Securities law – The law reform towards greater civil and administrative sanctioning options began in securities law, and now cover, inter alia, • insider trading and market offences • false and misleading submissions to regulators • false and misleading prospectus disclosures • breach of listing standards • Company law - Under the Corporate Law Reform Programme, company legislation in Malaysia is currently being reviewed with a view towards modernisation. Reforms will likely incorporate a greater reliance on civil and administrative enforcement options Caveat - In empowering regulators with administrative enforcement options, checks and balances in the exercise of power are crucial as enforcement is taken outside the court system. In Malaysia as with other common law countries, challenge is typically provided for under the administrative law framework

12. The relative merits of different sanctioning options • Strong deterrent value • Subject to procedural delays of the court system • High burden of proof (‘beyond a reasonable doubt’) Criminal sanctions • Deterrent value lower than criminal sanctions • Subject to procedural delays of the court system • Burden of proof lower than criminal standard (on a balance of probabilities) Civil sanctions • Deterrent value lower than criminal or civil sanctions • Allows for speedy action (not subject to procedural delays of the court system) • Regulatory agencies determine standard of proof • Need for checks and balances in exercise of power Administrative sanctions • Requires/allows for a market-based enforcement response • Subject to procedural delays of the court system • Burden of proof lower than criminal standard (on a balance of probabilities) Private rights of action

13. Disciplinary Other actions administrative 4% actions 3% 38% Compound 27% An array of different sanctioning options is crucial for effective enforcement Nature of sanctions meted out by the Securities Commission (2002 – Aug 2004) • Restitution • Restrain dealing in assets • Appointment of receivers • Revocation of license • Barring of submissions • Issuance of directions Civil actions 2% Prosecution Warning & public reprimand 26%

14. Criminal prosecution is used for serious breaches of the law Profile of Offences Prosecuted by the Securities Commission (1999-August 2004) Fraud (5.7%) Corporate Governance (45.3%) • Corporate Governance offences include: • Providing false or misleading info on proposals/dealings in securities or affairs of company • Fraud involving directors or management • Mis-utilisation of public issue proceeds • Breach of condition of SC’s approval • Trading offences involving directors or management (3 cases,11 individuals) (24 cases, 40 individuals) Short selling & licensing related offences (32%) Futures industry Offences (17%) (17 cases, 18 individuals) (9 cases, 17 individuals) 14

15. Increasingly a significant proportion of criminal prosecution relates to corporate governance offences Profile of Offences Prosecuted by the Securities Commission (1999-August 2004) 3 cases, 5.7% 11 individuals Fraud 17.0% 9 cases, 17 individuals Futures industry offences Short selling & licensing related 32.0% 17 cases, 18 individuals offenses 45.3% 24 cases, 40 individuals Corporate Governance offences 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% 45.0% 50.0% Source: Securities Commission

16. For effective enforcement of corporate governance, public enforcement agencies need a wide array of powers Case study 1: Energro Berhad (August 2004) • Issue • The case involved a restructuring and listing exercise which entailed alleged breaches of securities law, ie, false and misleading submissions to the SC and prospectus disclosures • Enforcement action taken • Revoked prior granted regulatory approval for listing • Directed the company to transfer monies raised from the restructuring exercise into trust accounts to safeguard investors interests • Initiated civil enforcement action, to restrain any dealings with assets, and for restitution of monies to affected investors/subscribers • Prosecuted promoter and accountant • Criminal trial pending

17. Regulators also need to be empowered to take action against ‘reputational intermediaries’ such as external auditors Case study 2: Kiara Emas Asia Industries Bhd (KEAIB) – August 2004 • Issue • A company (KEAIB) had utilised the proceeds of its rights issue in breach conditions of a prior granted approval of the SC. False disclosures were submitted to the SC • Enforcement action taken • Director charged for criminal breach of trust (CBT) as the preferred charge, and in the alternative, the breach of condition of SC's approval in the utilisation of KEAIB's rights issue under securities law  • Internal accountant charged for role in submitting false information to the SC • External auditor charged for role in submitting of false information to the SC

18. Our efforts in public enforcement have shown results CLSA Reports on Corporate Governance in Asia (2001-2004) Year-on-year improvement in relation to country rating on corporate governance enforcement: CLSA Country Ratings on Enforcement (Malaysia) – Trend Analysis Year 2001 2002 2003 2004 5.0 Enforcement 2.0 3.0 3.5

19. Agenda • Issues and Challenges III

20. Various issues potentially arise in a multiple agency environment • The surveillance, investigation and prosecution of corporate governance violations typically involve the overlapping jurisdictions of multiple regulators • Inter agency co-operation and information sharing at all stages are crucial • During investigations, there may be restrictions either operationally or at law, which impede information sharing and co-operation, slowing down the enforcement process • Upon investigation, agencies may often discover that the preferable charge for a given wrong may lie outside their jurisdiction • Different agencies may have varying levels of capacity and resources to meet enforcement challenges • The fact that agencies are accountable to different government ministries does not facilitate co-operation

21. In Malaysia enforcement of corporate governance may involve numerous agencies • Domestic regulatory agencies that may be involved in corporate governance breaches include: Prime Minister’s Dept Ministry of Home Affairs Ministry of Domestic Trade and Consumer Affairs Ministry of Finance Companies Commission Attorney General Anti- Corruption Agency Police Securities Commission Central Bank Consent required in criminal prosecutions May pursue certain offences involving corruption Company Law Penal Code Banking Law Securities Law Key agencies involved in enforcing corporate governance violations of listed companies Government ministries and other relevant agencies

22. Formal and informal channels for cooperation and information sharing are vital • Working committees/dialogues • Regular inter-agency meetings between government agencies to discuss operational issues and sharing of information • Formal agreements/arrangements • Various MOUs were entered into between the SC and other domestic and foreign • regulators (eg., between Securities Commission and Labuan Offshore Financial • Authority) • Prosecutors from the Attorney General’s Chambers are seconded to the Securities Commission, allowing speedy charges for Penal Code offences to be brought (eg., • criminal breach of trust) • Joint training and education efforts • The Securities Commission provided training programmes for the Police and the Judiciary on matters related to securities law and its enforcement • Overarching/national level committees • A High-Level Enforcement Committee was formed chaired by the Securities • Commission, which includes the Police, and the Companies Commission which • reports to Prime Minister to ensure accountability

23. Other possible options • The ‘hot pursuit’ model: • - The Malaysian Anti-Corruption Agency (ACA) is statutorily empowered to apply its powers of investigation and prosecution to ‘prescribed offences’ under the jurisdiction of other regulators. (eg., the Penal Code, Elections Act and Customs Act) • - Is this model relevant for the enforcement of corporate governance-type offences in a multiple regulator environment? • A dedicated agency for enforcement: • - Should enforcement reside, not with the securities regulator or the registrar of companies, but with a single agency dedicated to enforcement? • Widening powers of the securities regulator: - Would the widening of the scope of securities laws to include all offences involving elements of fraud in public listed companies make enforcement more effective?

24. Reducingdependence on public enforcement The current review of company law under the auspices of the Corporate Law Reform Programme will, inter alia, review the merits of introducing… A more facilitative regime for class actions A legislative framework for statutory derivative actions • Investor education is vital . • Strengthening the legal foundations for private enforcement: In securities law, the trend has been towards statutorily entrenching private rights of enforcement… • Insider trading and market offences (1997) • False and misleading prospectus disclosures (2000) • Breaches of the listing standards and the Securities Industry Act 1983 (2004) • Prospective developments:

25. Developing expertise and building capacity in agency enforcement • Public enforcement agencies must be well funded • Public enforcement is resource intensive • Public enforcement agencies must have staff with appropriate investigative and prosecutional skills • Public enforcement agencies must be able to handle international

26. Comprehensive public enforcement powers require accountability on the part of regulators • Transparency - Meaningful disclosures of enforcement activities by regulatory agencies are crucial for accountability Enforcement disclosures by the Securities Commission: • The SC annual report is tabled before Parliament. Enforcement activity disclosures include, inter alia: • investigations taken • criminal prosecutions • civil and administrative actions taken • The SC website includes the annual report and quarterly updates on enforcement activity. (see www.sc.com.my) • The exercise of wide powers endowed at law – What measures need to be in place to • ensure consistent and fair action? Is redress under administrative law enough – or are • other simpler challenge or appellate structures necessary?

27. With comprehensive tools and wide powers, regulators must have an enforcement strategy • Use of criminal vs Civil powers or administrative • Cost vs. Benefit • Serious Offences vs. `Technical’ breaches • Quantity vs. Quality of enforcement action • When to take action on behalf of investors

28. Thank you Kindly refer to the website of the Securities Commission for further information regarding our work on corporate governance and enforcement: www.sc.com.my