Strengthening the legal framework of Sri Lanka’s financial markets
A robust legal framework is the nucleus of a healthy financial market. The corruption and scandals that have seeped into Sri Lanka’s financial markets have dealt severe blows to the integrity and reputation of the markets. The country as a whole will have to pay dearly for these, as potential investors will shun the market, creating a shortage of investments and thereby impeding economic growth.
When a prominent business personality claims that insider dealing is happening in Sri Lanka and is an acceptable practice, and when there are billion-rupee market scandals, this should ring immediate alarm bells with the authorities. This is not just a matter of an individual making a huge profit, but puts the future of the country at stake. Hence, the authorities will have to take immediate action to strengthen the legal framework surrounding the financial markets, to assure investors that the system is fair and just.
Traditional crime vs financial crime
Traditional criminal law is different from financial criminal law. The objective of traditional criminal law is to deter obvious crimes such as murder and theft, and to punish those who commit them. Generally, traditional criminal law acts retrospectively. It reacts to a crime that has actually been committed. It is very narrowly defined, and is laid out in black and white so that the public is aware of the exact acts that are deemed to be criminal.
Financial criminal law, on the other hand, has the same objectives as traditional criminal law but also has the macroeconomic objectives of maintaining the integrity of the market and achieving wider economic goals. Insider trading, money laundering and market manipulation are some examples of financial crime. The taboos surrounding financial crime or other white collar crimes are not as obvious as those surrounding traditional crimes. For instance, using insider information (price sensitive information that is not made public) to make a quick profit on the stock market is, essentially, stealing from other investors. It is not judged to be as dreadful as murder, but nonetheless society has classified it as a crime because it involves taking advantage of other participants in the market by selling or buying at an inappropriate price.
Consequences of financial crime
Financial crime has wider negative economic effects that are not general- ly understood by the law makers and the general public. Those who break financial laws take advantage of the honest hard work of other market participants. If, for example, an investor learns from a company insider about a huge upcoming dividend, he can buy shares before other investors and make a profit. Such actions create an imbalance between market participants, enabling some to cheat and make a profit at the expense of others. If this trend continues, investors will get disheartened and shy away from the market, resulting in fewer investors, less investment and higher funding costs and ultimately to sluggish economic growth.
Burden of proof
It is very rarely that people are punished for financial crimes, and there are many reasons for this. Sometimes society does not see such crimes as being as immoral as murder or theft. Sometimes financial crime is seen as a victimless crime; for instance, it is hard to point to a victim of insider dealing. Also, traditional police and judicial systems are not equipped to monitor sophisticated financial markets. However, the main struggle for the financial criminal law is proving criminality. This has always been difficult, as there should be overwhelm- ing evidence to prove that the accused is guilty beyond reasonable doubt.
Regulatory reinforcement
To address this flaw in the financial law, regulators should be present to police the financial markets. Regulators should treat unethical behaviour as illegal and bring civil proceedings, for which the burden of proof is lower than the burden of proving that the culprit is guilty beyond reasonable doubt.
Direction or wishful thinking?
The authorities can learn a lesson from the longest sentence handed down for insider trading in the US to well-known Sri Lanka-born billionaire Raj Rajaratnam. To curb financial crime, promote ethical behaviour and improve the integrity of the financial markets, it is imperative that the financial criminal law and the financial regulators fulfil their functions. If this does not materialise, in the absence of a setting that is conducive to investment, Sri Lanka will remain a Third World country for a prolonged time. However, unfortunately, given the current political state in which high-powered individuals who commit crimes get away scot free, a strong legal framework might be simply wishful thinking.