Firms queue up for forensic check
Number of companies going to experts to track and mitigate insider trading has tripled in the past year
Recent regulatory action has prompted a number of the top listed entities to approach forensic auditors for curbing instances of insider trading within their organisations.
The misuse of unpublished price-sensitive information or UPSI came into the limelight after the financial results of companies circulated through WhatsApp messages caught the attention of the markets regulator, Securities and Exchange Board of India (Sebi), late last year.
The regulator even checked social media to ascertain wrongdoing. It might soon issue guidelines to help companies tackle the problem in a better way.
“The number of companies approaching us to track and mitigate insider trading has tripled in the past one year,” says Arpinder Singh, partner and head for India & emerging markets at consultancy EY's fraud investigation and dispute services.
These could be companies embroiled in alleged insider trading issues, as well as those wanting to improve their governance standards. Corporates with a global presence or significant private equity investment, and firms preparing for listing, are also queuing.
India has historically not had a strong compliance mechanism around insider trading. This is in stark contrast to developed countries. In America, federal courts have gone to the extent of upholding use of wiretap evidence in recent insider trading prosecutions.
Until now, employee-related cases, in particular, have not drawn adequate attention. Top on the agenda is preventing the leakage of financial results. This is used by employees to trade from own accounts, through kin or through brokers. Brokers, in turn, could trade through their own account or pass on the information to other clients.
Companies are evaluating mechanisms such as Intellectual Propertybased controls and data encryption to prevent such leaks. Identifying teams privy to insider information and monitoring these by obtaining periodic non-disclosure undertaking, reviewing their assets and trading accounts is another control mechanism.
Employees could also be asked to back up their mobile and desktop data, to ensure a visible audit trail. Disabling of USB devices, controlling the printing of sensitive documents and monitoring of information exchange over non-company e-mails are other measures.
“Forming an internal online repository will help establish an audit trail and minimise information leak. Dummy entries for key financial figures can be used after the financial results are initially prepared and reversed just prior to the formal announcement of results,” says Nikhil Bedi, head of consultancy Deloitte’s forensic practice in India.
The insider information issue is not restricted to financial results. It could relate to information on impending business transactions such
mergers or acquisitions. Or organisational changes such as restructuring of senior management or resignation of key personnel.
For instance, news of a major and impending financial restructuring at a company was leaked shortly after a confidential board meeting. This information was used by minority shareholders to ask for changes to the restructuring, by putting pressure on the stock price and making public announcements, among other things. This destabilised the restructuring process at the company. However, forensic investigations are being initiated weeks or even months after insider information is allegedly misused. In such cases, a sudden improvement in an employee’s lifestyle might be an indication of benefit from illegal trades, say experts. However, unless a trail of money can be identified, it could be challenging to prove that someone accessed insider information and traded on it. “Forensic auditors cannot ensure insider information is not leaked, as we are brought in after an event has occurred,” says Reshmi Khurana, managing director and head of South Asia for Kroll, a multinational risk mitigation and response adviser. “Our role is to investigate weaknesses in people, information technology systems and processes at a company that can lead to a leak in insider information. But, deterrence can be best achieved by prosecuting and punishing insider trading.”
Sebi has said a penalty between ~1 million and ~250 million or three times the amount of profit made out of insider trading, whichever is higher, may be levied for insider trading. It is also punishable with a prison term of up to 10 years.