Remember NAB banker Lukas Kamay and Australian Bureau of Statistics analyst Christopher Hill, who were sentenced to jail for pocketing $7 million in an insider trading scheme?
Victorian Supreme Court Justice Elizabeth Hollingworth, when handing down the sentence in 2015, noted this was “the worst instance of insider trading to come before the courts in this country”.
And although in this high-profile case, tough action was taken against the offenders, had they been elsewhere in the world, the result may have been different.
We recently conducted a study examining the sanctions imposed for insider trading over seven years from 2009 to 2015 in Australia, Ontario (Canada), Hong Kong, Singapore, the United Kingdom and the United States. What we found was that even in jurisdictions with similar insider trading laws, such as Australia and Singapore, very different sanctions are used to enforce these laws.
Previous research in this area typically focuses on legal analysis of legislation and judgments. But academic studies show that strong laws without strong enforcement are not enough to maintain trust and confidence in the integrity of financial markets.
Although we operate in a global marketplace, ultimately insider trading laws and the enforcement of these take place at a local level. That’s why it is important to explore the application and severity of sanctions across jurisdictions.
Sentences, fines and bans
Breaches of insider trading laws can result in custodial sentences, financial penalties and bans.
In gathering evidence for this study we pored over regulatory media releases, court judgments, a variety of media reports and other publicly available information. We identified nearly 700 individuals and companies in contravention of insider trading laws and approximately 1,400 sanctions imposed.
In Australia, criminal proceedings were much more common than in other jurisdictions, particularly Singapore and Ontario. Australia was also more likely to impose custodial sentences (in nearly two-thirds of cases); however, a large proportion were fully suspended. This is in contrast with the United States, where almost all offenders faced some sort of financial penalty, but custodial sentences were imposed on fewer than 16 per cent of offenders.
Our research showed the United States, United Kingdom and Ontario all recorded much higher financial penalties than the other jurisdictions, with median fines of US$176,926, US$258,256 and US$338,431, respectively. However, there were much larger amounts imposed too, particularly in the United States where the three largest penalties added up to around US$3 billion, reflecting the massive size of the illegal profits made by some of the most high profile insider traders. Australia had the second lowest median financial penalty, at US$38,861.
The median length of the maximum custodial sentence imposed in Australia, the United States and the United Kingdom hovered around two years. Custodial sentences in Hong Kong were substantially shorter than this, while only one custodial sentence was identified in each of Ontario and Singapore.
The most common types of ban were those prohibiting offenders from taking on roles as directors or managers of businesses, or forbidding participation in the securities industry. Bans on offenders had a median length of around four to five years in all of the jurisdictions apart from Ontario.
The differences across sanctions may arise from the very different enforcement budgets, priorities and strategies of each jurisdiction. Discovering minimal enforcement in certain jurisdictions is a significant finding in itself, which may reflect both the difficulty of enforcement and the small appetite to do so.
Ultimately, what underpins the strong enforcement in some jurisdictions is a belief among regulators that the enforcement of these laws plays an important role in deterring misconduct and strengthening the integrity of capital markets.
Severity of sanctions
One of the complexities in comparing sanctions and enforcement across jurisdictions is the different enforcement approaches taken: offenders often received multiple sanctions for the same conduct — for example, a financial penalty and a ban from managing companies. To account for this, we developed a model that assigns numerical values to sanctions based on their type and magnitude. All of the values for a given offender are added to indicate the severity of the sanctions imposed.
Our study found that the most severe sanctions for insider trading were imposed in Australia and Hong Kong. The least severe were imposed in Singapore, whilst typical sanctions in the United States were also relatively low (notwithstanding some very significant sanctions too).
By comparing the severity and frequency of sanctions imposed, we could also use this model to compare the enforcement intensity in each of the jurisdictions.
The number of insider trading offenders in the United States was the highest, and therefore the United States had a high level of enforcement intensity. However, when the size of the respective share markets was factored in, Australia, with its high reliance on criminal sanctions, had the highest level — more than 50 per cent higher than the United States.
Informing regulatory policy
Our research provides a new perspective on how an empirical model can be applied to enforcement data.
Securities regulators are under increasing pressure to be transparent in how they enforce financial regulation such as insider trading laws. In other words, investors in financial markets want to know there is a strong cop on the beat. Weak enforcement, over time, erodes trust in market fairness and efficiency. Issuers and investors may be dissuaded from entering the market in a country — ultimately harming the economy.
Our research suggests that Australia rates very highly for insider trading enforcement intensity. Our study illustrates the country’s tough approach to enforcement, aimed at strong punishments and significant deterrence. This makes Australia a model for this type of law, one that could be effectively emulated in other jurisdictions.
While our empirical model of research is imperfect, what it does do is illustrate how this type of research can shed new light onto enforcement data, providing useful insights for policy-makers, international regulators and those investing in financial markets.
At a time when financial regulators are facing increased scrutiny in their enforcement reporting, further work on how empirical research may be applied to data has the potential to inform future policy thinking in this area.
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