New guideline to strengthen capital market fraud punishment, prevention

The General Office of the State Council has forwarded a guideline on further improving the comprehensive punishment and prevention of financial fraud in the capital market, a move aimed at reinforcing coordinated policy efforts to strengthen the crackdown on fraud and protect investors' legitimate rights.

This marked the first time the General Office of the State Council published a systematic document specifically focusing on punishing and preventing financial fraud by listed companies.

Experts said this high-level guideline, published on Friday and issued by the China Securities Regulatory Commission and five other central departments, features tougher punishment against those accountable for financial fraud, both from listed companies and intermediaries, and preemptive measures that urge different stakeholders to detect and fend off fraudulent behavior.

The guideline outlined 20 sets of measures, urging efforts to firmly crack down financial fraud in key areas, optimize securities regulatory enforcement, strengthen the multi-dimensional accountability system, improve coordination among different authorities of various levels and amplify fraud prevention on a regular basis.

Stressing intensifying fraud accountability on administrative, criminal and civil fronts, the guideline called for "optimizing the standards for administrative penalties on financial fraud and substantially raising the cost of violating the law".

Experts close to the CSRC said this expression implies that there will be more cases where the maximum penalty is imposed in accordance with the revised Securities Law -- which stipulates that a listed company engages in financial fraud would face an administrative fine of up to 10 million yuan ($1.38 million), and the uniformity of the penalties will be further strengthened. 

The guideline called for efforts to accelerate the introduction of regulation on the supervision of listed companies to clarify the legal responsibilities of the third parties helping with financial fraud, misappropriation of funds and other violations.

In terms of criminal liability, the guideline said the country will launch judicial interpretations on the crime of breach of trust and detriment of the interests of listed companies, strengthening the criminal prosecution of controlling shareholders and actual controllers for organizing financial fraud and misappropriating the property of listed companies.

The launch of the judicial interpretations will provide a sounder legal basis for holding the "worst offenders" criminally responsible, the experts said, who expect to see a significant increase in the criminal prosecution of major shareholders and third parties for financial fraud and misappropriation of funds.

If suppliers, clients, intermediaries, financial institutions and other third parties help with financial fraud and commit crimes, they will be firmly held criminally liable, said the guideline.

The guideline added that China will elevate the applicability of the special representative litigation system for securities disputes, which experts said indicates that class action lawsuits would be more frequently used to compensate investors' losses and serve as a deterrent.

Other civil mechanisms such as advance compensation, supporting litigation and subrogation litigation will also be utilized, the guideline said, to further raise the cost of violating the law.

The guideline also featured new measures to prevent financial fraud, such as encouraging listed companies to establish internal accountability mechanisms — such as remuneration recovery — to urge directors and senior managers to fulfill their duties and listing financial fraud as a deduction item in the performance evaluation of executives of State-owned enterprises at all levels.

In addition, the guideline said intermediaries with major violations will be suspended or prohibited from engaging in securities service business. Systems such as revoking professional licenses and banning practitioners will be strictly enforced.

Yang Haiping, a researcher at the Central University of Finance and Economics' Institute of Securities and Futures, said the guideline has indicated that the government pays heed to the addressing the issue of listed companies' fraudulent behavior and is advancing the task in a systemic manner with tougher punishment.

The guideline is expected to help set the stage for the A-share market to register steady, healthy performance in the long run. "Ensuring the authenticity, accuracy and integrity of financial reporting is the cornerstone for both promoting high-quality development of the capital market and attracting long-term investors."

zhoulanxv@chinadaily.com.cn