Implementation and Enforcement of Rules in Singapore and the Case of China Aviation Oil

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 Overview of Recent Cases Case Study: CAO Proposed Reforms 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)

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

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

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

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

9. Overview of Recent Cases

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

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

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

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

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

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

21. Proposed Reforms

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

23. Q & AThank you!