1 Fraudulent behavior in companies
Fraudulent behavior is the behavior in which fraudster (the person who commits fraud) tries to deceive someone in getting financial or non financial benefit. In other way we can say that this is a dishonest behavior. Under the framework of law this behavior is known as crime.
This behavior can be seen in companies through many ways.
- Insider dealing
- Money laundering
- Wrongful trading
- Fraudulent trading
- Market abuse
- General criminal activities in the business
Now in this chapter the above topics will be discussed in full detail with their consequences.
This is one of the financial crime and fraudulent behavior.
Insider dealing is an offence which is specifically related to the inside information. As we know that inside information must remain confidential and all the inside people are prohibited to disclose it. But sometime this information is used by the inside people directly or indirectly to get benefit in the securities of stock exchange while the price of these securities affected by that inside information.
Insider dealing is dealt under the criminal justice Act 1993.
So by understanding above paragraph we can simply define that insider dealing is a financial crime in which people get benefit in securities of stock exchange while processing inside information.
Now what is inside information?
Confidential information which is related to the price of securities (shares) or stock exchange and the investors do not have access to that information. For example the price of shares may be increased or decreased by the growth in profits. When the price of shares will go up, more investors want to buy it while in opposite situation investors try to sale them.
If this information leaked intentionally then some people be enriched and get a significant benefit over the stock exchange while the interest of all people involved in it.
This information is leaked through inside people. And these people get benefit directly or some time transfer the information to give benefits to others (close family members, friends and relatives)
Insider is the person having inside information. Mostly they are the company officers or employees. There may be two types of insiders.
Primary insiders: having direct information while working in the company like the directors, managers and employees. These may also include the individuals from outside the company by their professional involvement or contact with the company for example the solicitors, auditors and banks.
Secondary insiders: they are mostly not within the company but they get information through the primary insiders.
Identifying insider dealing
After understanding insider dealing who we can identify or prove that someone is trading through inside information. We can prove this offence by identifying following acts.
- Dealing in price affected securities over the stock exchange
- Enforcing or encouraging others to deal in that price affected securities
- Disclosing sensitive information which is prohibited to disclose
Generally the director or the employees get the secret information and used it. For example the director of the company is aware that price of the shares from subsidiary company will rise after some days. So he immediately purchased shares by himself and gets financial benefit after some days.
So this is the direct dealing while processing inside information.
To encouraged other people to deal in that securities also considered as offence of insider dealing.
A director processing inside information may transfer that information to his brother to purchase those securities. This can be done weather the other person is aware that a reasonable dealing would take place or unaware altogether about it. If other person is not involved in it but generally recommended to purchase that securities than he is not involved in this crime but the person who gave sensitive information is in a position of crime.
Third situation is also clear which is related to the insiders. There may be two situations in it. If they intentionally disclose the sensitive information then obviously they are commencing fraud but if they don’t have any intention then they have to prove that we are not involved in it.
- They have to prove following situations.
- They did not expect any profit or loss by exchanging these securities.
- They would have to done even if they did not have any information.
- They considered it as general information.
The people who are in an offence of insider dealing may be imprisoned for maximum seven years and unlimited fine also