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
Agenda
 Singapore’s Legal System
 Overview of Recent Cases
 Case Study: China Aviation Oil
 Proposed Reforms
 Q&A
Singapore’s Legal
System
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



Singapore’s
Legal System
Companies Act (CA)
Securities and Futures Act (SFA)
Prevention of Corruption Act (PCA)
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

Singapore’s
Legal System
If made honestly and with reasonable
belief it was in the best interest of the
company
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
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


Singapore’s
Legal System
Lower burden of proof
No criminal sanctions for offenders
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
Singapore’s
Legal System
Overview of
Recent Cases
Case Study:
CAO
Proposed
Reforms
Overview of Recent
Cases
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


Singapore’s
Legal System
CEO and CFO most common
Little action against directors, none against
independent directors
Overview of
Recent Cases
Case Study:
CAO
Proposed
Reforms
Criminal Actions
 Wide range of offences


Singapore’s
Legal System
Making false statements, falsifying
documents, insider trading, corruption,
cheating
Few directors faced breach of duties
offences
Overview of
Recent Cases
Case Study:
CAO
Proposed
Reforms
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
Statutory Civil Penalty
 Increased frequency in use
 Majority of cases involved insider trading

China Aviation Holding Corporation paid
S$8 million penalty
 Exceptions:


Singapore’s
Legal System
Breaching continuous disclosure
requirement
Market rigging to manipulate share price
Overview of
Recent Cases
Case Study:
CAO
Proposed
Reforms
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


Singapore’s
Legal System
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
Overview of
Recent Cases
Case Study:
CAO
Proposed
Reforms
Case Study:
China Aviation Oil
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


Singapore’s
Legal System
In late 2003, bet oil price would fall
Oil prices rose from US$35 to US$55 by
Nov 2004
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
Singapore’s
Legal System
Overview of
Recent Cases
Case Study:
CAO
Proposed
Reforms
Risk Management Structure
Board of Directors
Delegated Daily
Risk
Management
Chief Executive Officer
Received reports of
risk exposure
Risk Management
Committee
Managed Internal Controls
and Business Risk
Audit Committee
Failed to
detect losses
Internal Audit
Department Heads
Traders
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
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

Singapore’s
Legal System
A breach if suspected a problem and did
nothing
Overview of
Recent Cases
Case Study:
CAO
Proposed
Reforms
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
Singapore’s
Legal System
Overview of
Recent Cases
Case Study:
CAO
Proposed
Reforms
Q&A
Thank you!