Why enforce commercial laws?

• DOI: 10.10520/EJC73781
• Published date: 01 January 2001
• Date: 01 January 2001
• Pages: 30-50
• Author: H.C. Nel

WHY ENFORCE COMMERCIAL LAWS?

HCNel

Judge: High Court of South Africa; Chairman: Nel Commission of Inquiry

into Affairs of the Mastesrbond Group and Investor Protection and Empo-

werment in South Africa.

Mark Twain reputedly defined a goldmine as

Hole in the ground with a lying broker standing on top.

The thought that a criminal justice system exists which theoretic-

ally could investigate, apprehend, try and punish the ‘lying broker’

or the fraudulent promoter, director, trustee or auditor, is cold com-

fort to the destitute investor whose money has disappeared into

the hole in the ground.

Even colder is the comfort when the investor realises that the cri-

minal justice system which appears so wonderful on paper is ba-

sically ineffective in regard to commercial crime, that the police

and prosecutors are underpaid, understaffed, undertrained and

disinterested, that speedy justice is a myth, that the chances of a

successful prosecution, even some time in the remote future, is

virtually non-existent and that the possibility of recovery of invest-

ments via the criminal justice system could be describes as ‘nil’.

In its First Report, the South African Commission of Inquiry into

the Affairs of the Masterbond Group and Investor Protection in

South Africa, stated that —

Effective and efficient prosecution of ‘white collar’ criminals

does not exist in South Africa.

Save at times when ‘high profile’ accused is involved, pro-

secution of complicated frauds hardly ever eventuates. If it

does eventuate, it is generally so many years after the

event that conviction or sentence cannot serve as a deter-

rent to others.1

South Africa is by no means an exception. In many countries pro-

blems with the criminal justice systems occur. Whether or not the

problems originate in the apathy or ineptitude of law enforcers or

the inefficiency of the jury system, more and more voices propa-

gate the decriminalization of contravention’s of companies acts

and securities regulations.

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1Republic of South Africa. Report of the Commission of Inquiry

into the Affairs of The Masterbond Group of Companies 1997.

In the Consultancy Report of the Review of the Hong Kong Com-

panies Ordinance (March 1997) the following is said:2

Asecond major concern, raised primarily by the Registrar

of Companies and the Deputy Crown Solicitor, was the ba-

lancing of formal enforcement mechanisms against ‘self-

enforcement’ in the from of civil remedies. Approbation was

given to the creation of a self-enforcing corporate regime

that would permit the ‘decriminalization’ of company law in

Hong Kong. Investigatory powers would be left as a residu-

al recourse in exceptional circumstances.

In the Consultant Report by Glorianne Stromberg: “Investment

Funds in Canada and Consumer Protection” (October 1998), she

states:

Most people do not think that the consequences of breach-

ing the rules of a self-regulatory organization or the pro-

visions of applicable legislation are serious enough. They

do not think that the consequences of breaching such rules

operate either as a deterrent to doing so or as an incentive

to ensure compliance by others with the rules. Further-

more, the consequences do not offer any recompense to

people who have suffered loss as a result of the failure to

comply with the rules.3

In the Consultation Document “Financial Products, Service Provi-

ders, and Markets - An Integrated Framework” issued by the Aus-

tralian Government (1999) the following appears:

To achieve efficiency in the financial system, the enforce-

ment mechanism for market misconduct provisions will be

brought within the civil penalty provisions in Part 9.4B of

the Law. The effect will be that a contravention of the pro-

visions will not automatically give rise to an offence, unless

a person contravenes a provision with the requisite state of

mind attaching to the offence.

This approach is intended to address concerns that the

current enforcement measures in the Corporations Law

have been relatively ineffective in shaping market behavi-

our. In addition, the availability to the regulator of civil pe-

nalties will help to improve the standards of company con-

duct and reduce difficulties faced by the regulator in en-

forcing compliance with the Law.4

Spectacular successes have been achieved by the enforcement

of commercial laws but the ordinary investor in South Africa, as in

many other countries, is not armed with proper resources or prac-

tical remedies. Three basic requirements are —

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2(par. 50).

3(par. 16.9).

4(par. 10.3).