Individual was director of 100 companies in Singapore
A District Court in Singapore recently dealt with a case involving a chartered accountant who provided corporate secretarial services and acted as a nominee director for numerous companies.
The matter brought to light significant issues surrounding directors' duties and the potential consequences of negligence in corporate governance.
The case centred on the accountant's failure to exercise reasonable diligence in his role as a director, leading to companies under his purview being used for fraudulent transactions.
This highlighted the critical importance of active oversight and due diligence in corporate management, especially when dealing with multiple directorships.
Background of the case
The chartered accountant had expanded his corporate secretarial services to the Chinese market in late 2019, incorporating companies for clients and often registering himself as a director to fulfil statutory requirements.
He would have clients sign an engagement letter stating they would not engage in illegal activities and that he would not be involved in or liable for the company's business.
The accountant was charged with failing to exercise reasonable diligence as a director of one company and abetting another individual to neglect his directorial duties for a second company.
Both companies were used to receive and transfer substantial sums of money that were proceeds of various overseas scams.
Serious breaches of duty
The prosecution argued that the accountant's conduct warranted imprisonment, citing his reckless breach of duties as a director.
They emphasised that he was aware of the risks associated with acting as a nominee director, yet took insufficient steps to verify client identities or monitor company activities.
"Beyond the simple online search, the accused did not do anything to check that the companies were not being used for illegal activity," the prosecution contended. They further noted that the accountant "knew nothing about the clients and businesses of the companies which he incorporated as part of his business structure."
The prosecution also highlighted the accountant's role in abetting another individual to neglect his directorial duties, arguing that his actions had "directly led to [the other individual] being unable to carry out his duty of reasonable diligence in supervising the companies, even if he had wanted to."
‘Negligence, not recklessness’
In contrast, the defence sought a fine rather than imprisonment, arguing that the accountant's conduct was “negligent but not reckless.”
They pointed out that some due diligence measures were in place, including Know-Your-Client checks and anti-money laundering policies.
The defence counsel emphasised the limited time frame in which suspicious transactions occurred and were detected, stating, "We do not see any active prevention by [the accountant] towards [the other individual]. He did not go to [him] and say that 'Look, please do not touch.' ... What does exist … is that there was an employment agreement, right. So the employment agreement says that [he] doesn't have to be involved in the management of the companies. That is different from saying 'I prevent you from doing it. I'm saying you don't have to do it', right."
Court’s legal considerations
The court considered previous cases, particularly one where an offender's conduct was deemed reckless only after multiple bank recall notices.
In this case, there was only one bank notice for one of the companies, which was not a recall notice but a debit advice.
The judge noted that this was not a situation where the accountant was given clear information about suspicious transactions or disregarded obvious signs from the bank.
Balancing accountability and fairness
The court carefully considered both arguments, ultimately deciding that the accountant's conduct was negligent rather than reckless.
The judge noted that unlike in some previous cases, there were no clear "red flags" such as multiple bank recall notices that would have pushed the behaviour into the realm of recklessness.
In weighing the appropriate sentence, the court considered the principle of parity with a related case involving the other individual who had been employed by the accountant. The judge observed:
"As the accused's offences... arose from the same offences committed by [the other individual] who was fined, it stood that the accused should be fined unless there were reasons which called for a custodial sentence. In this light and for my reasons above, the parity principle being applied here was appropriate."
Sentencing and implications
Ultimately, the court imposed a global fine and a five-year disqualification from acting as a director. The judge explained the rationale behind this decision:
"Section 157(1) of the Companies Act has the twin rationales of '(a) protecting the public by deterring directorial misconduct and (b) preserving a vibrant commercial environment'. The sentences imposed, combined with the disqualification order, were sufficient and appropriate to meet the twin objectives based on the circumstances of this case."
The judge concluded with a stern reminder of directors' responsibilities:
"This was a case where the accused was a director of hundreds of companies in Singapore and took on more responsibility than he could handle. It is imperative for directors to take their duties seriously and exercise reasonable diligence in the discharge of their directors' duties."
This case serves as a significant reminder of the weighty responsibilities borne by company directors and the potential consequences of failing to exercise due diligence in corporate governance.
It underscores the need for thorough oversight and active engagement in company affairs, even when acting as a nominee director.
