Enhancing the Deterrent Effect of Anti-Fraud Measures in Thai Securities Law and Compliance Procedures

Abstract

Securities markets have become increasingly important financial institutions in creating economic growth. Investment from different types of investor - local, foreign, retail, and institutional - injects much-needed capital to listed companies to expand their businesses. To persuade investors to invest in those markets, one of the key conditions is the presence of an effective investor protection regime. In Thailand, lack of investor protection is a particularly important regulatory issue, especially in cases involving protection of retail investors. This lack of investor protection can be attributed mainly to Thai retail investors generally lacking adequate knowledge and sophistication to protect themselves from complex fraud. It is most striking that retail investors are more often than not taken advantage of by their own brokers, who ideally should be the ones who protect their interests.

This research attempts to enhance the current Thai anti-brokerage-fraud regime through the use of Donald R. Cressey’s Fraud Triangle Theory to identify contributing factors - pressure, opportunity, rationalization - leading to the commission of fraud and regulatory violations by Thai securities brokers, taking into account Thai cultural and business contexts, and then to develop recommendations in response to those factors. An empirical approach with qualitative data analysis is employed. The researcher realises that the best way to investigate all relevant dynamics is to interview securities brokers, regulators, and representatives of investors to obtain information about their respective roles in the securities market, as well as their views and perceptions of brokerage fraud, and their opinions of the current anti-fraud regime.

This thesis focuses on deterrence of four related low-level frauds and regulatory violations, which – ranging from less severe to most severe – are: 1) The offence of failing to properly record trading orders; 2) The offence of making trading decisions on behalf of clients; 3) The offence of using a client's account for the broker's own benefit; and 4) The offences of deception and misappropriation.

Proposals to enhance deterrence of the regime, that is, to reduce pressure, to remove opportunities, and to limit rationalisations, are developed under Ian Ayres and John Braithwaite’s responsive-regulation approach, where effective regulatory strategies respond to the conduct of the regulatees and to the industry context. The recommendations start from education-based and persuasion-based strategies implemented externally by government agencies, and then escalate to deterrence-based measures of administrative and criminal sanctions when a lack of positive response from brokers and securities companies is evident. The use of corporate-based strategies of fraud prevention and detection through internal control mechanisms is also discussed in the latter part of the thesis.