MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS HO CHI MINH CITY FULBRIGHT ECONOMICS TEACHING PROGRAM ANH NGUYEN NHAT CORPORATE FRAUD IN THE VIETNAM UPCOM STOCK MARKET: A CASE STUDY OF THE CENTRAL MINING, MINERAL EXPORTING AND IMPORTING COMPANY MASTER IN PUBLIC POLICY THESIS HO CHI MINH CITY - 2017 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com MINISTRY OF EDUCATION UNIVERSITY OF ECONOMICS HO CHI MINH CITY FULBRIGHT ECONOMICS TEACHING PROGRAM ANH NGUYEN NHAT CORPORATE FRAUD IN THE VIETNAM UPCOM STOCK MARKET: A CASE STUDY OF THE CENTRAL MINING, MINERAL EXPORTING AND IMPORTING COMPANY MASTER THESIS Major: Public Policy Code: 06340402 THESIS ADVISORS Prof. Dapice Thanh Nguyen Xuan Ho Chi Minh City, 2017 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com i CERTIFICATE OF ORIGINALITY I hereby declare that the thesis entitled: "Corporate fraud in the Vietnam Upcom stock market: A case study of the Central Mining, Mineral Exporting and Importing Company" is my own original work carried out as a Master's student at Fulbright Economics Teaching Program (FETP) except to the extend that assistance from others in the thesis design and conception or in style, presentation and linguistic expression are duly acknowledged. All sources used for the thesis have been fully and properly cited. It contains no material which to a substantial extent has been accepted for the award of any other degree at FETP or any other educational institution in any language fully or partly except where due acknowledgement is made in the thesis.
The thesis does not reflect the views of the University of Economics Ho Chi Minh City or FETP. Hanoi, 08/09/2017 Author Nguyen Nhat Anh LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com ii ACKNOWLEDGEMENT Studying in FETP seems to be the hardest way to get Master degree, however it is the fastest way that you can learn every things about how our society is going on. I am not able to complete the coursework as well as the thesis without elegant supports by FETP staff, my classmates and family. I would first like to thank my thesis advisor Mr.
Thanh Nguyen Xuan of the Fulbright School of Public Policy and Management at Fulbright University Vietnam. He consistently allowed this thesis is my own work and steered me in the right direction when I lost my way. Without his adjustments, I do not think that I can have my own perfect theoretical framework to solve a case study. I would also like to thank experts in the Committee of my thesis defense: Dr.
Khai Dinh Cong as Chairman, Dr. Giang Tran Thi Que and Dr. Du Huynh The as the second readers of my thesis, and I am deeply indebted to your valuable comments and corrections on my thesis. I very much want to thanks again Dr.
Du who is my second tutor in the finalize stage of my thesis. His suggestion about the second framework is a brilliant idea to wake me up to see what happened in the real life. I do not know how to thank MPP7 members enough for your physical and mental backup. Many challenges and accomplishments would not have been possible without our teamwork.
I also have a big thank to Mr. An Bui Quoc in particular, who sat next to me in the 1st year and provide tremendous assistance to me in the finalize stage. Finally, I owe my wife a great debt of gratitude for unfailing support and continuous encouragement throughout my years of studying and researching. Hanoi, 08/09/2017 Author Anh Nguyen Nhat LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com iii ABSTRACT The Central Mining, Mineral Exporting and Importing Company (MTM) is the typical case that illustrates clearly the situation of agency cost and fraudulent behaviors in the Vietnam Upcom stock market.
The first part reveals the weaknesses of regulation and current policies in Vietnam by using the principal-principal agency perspective of Young (2008) particularly with regard to the mechanisms of stock scanning, no controlling the changes of regulated capital, the undemanding capital contribution and no legal responsibilities of former majority shareholders. The second part of thesis uses the modified fraud of triangle of Soltani (2014) as a theoretical framework with several adjustments to adapt the current circumstance of MTM. The case of MTM shows a number of fraudulent behaviors by controlling shareholders including: (1) The reconstruction of human resource before listing; (2) Having no major shareholder - holding more than 5% of the chartered capital - but the power is concentrated; (3) Using the brand and pictures makes confusion with another company; (4) Increasing the regulated capital in the short term; (5) No core business or production, mainly the joint venture or capital contribution; (6) The external audit accepted despite of the fact that financial statements have the problems; (7) The business situation is not good but the price and volume of stock trading is still high; (8) Tax obligation and social insurance are not completed. In conclusion, the thesis strongly recommends the policies to reduce the likelihood of expropriation of minority shareholders due to the principal-principal agency conflicts and these fraudulent behaviors.
Keywords: corporate fraud, fraud triangle, MTM, principal-principal agency conflicts LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com iv LIST OF ABBREVIATIONS Abbreviations Meaning BoD Board of Director HNX Hanoi Stock Exchange IPO Initial public offering JSC Joint stock Company Ltd Private Limited Company MoF Ministry of Finance MTM The Central Mining, mineral Exporting and Importing Joint Stock Company OTC Over-the-counter market SFP Statement of Financial Position SSC State Securities Commission of Vietnam PO Payment order Upcom Unlisted Public company market US The United States VSD Vietnam Securities Depository VND Vietnamdong LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com v TABLE OF CONTENT CERTIFICATE OF ORIGINALITY .iii LIST OF ABBREVIATIONS. iv LIST OF FIGURES .viii LIST OF APPENDICES .viii LIST OF TABLES. Thesis motivation and contribution. The structure of thesis.
The Principal-Principal Agency Perspective. Transformation of Fraud triangles. The weaknesses of regulations in Upcom market. Overview of regulatory framework in the Vietnam stock markets.
No scanning fraudulent companies in the Upcom market. The easy and quick process to be listed. 16 LUAN VAN CHAT LUONG download : add luanvanchat@agmail. Audit companies are not the market guardians.
Ranking is not enough. The increase of the registered capital without controlling. The undemanding capital contribution. The capital contribution through investment.
The capital contribution though invoices. The legal responsibilities of former majority shareholders. The fraudulent behaviors that led to the collapse of MTM. Overview of MTM.
Stealing the brand name of unlisted company. No tax payment. A ghost company and its address. Be a public company.
The capital contributions. Fake invoices and manipulating the financial statements. The high profit in the harsh economic. Selling the stock of the valueless company.
The collusion of the former BoD. The fraudulent behaviors in the case of MTM:. Conclusion, policy recommendation, limitation. 44 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com vii References.
Market capitalization of the Upcom market since 2013 to 1st quarter 2017 47 Appendix 2. The trading detail of MTM stock. The detail of Market Capitalization and trading value on the Upcom market 48 Appendix 4. The reform of Vietnam in Business report over time.
The highlighted fraudulent cases in the Vietnam stock market. The business license of MTM. 52 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com viii LIST OF FIGURES Figure 1. Market capitalization of the Upcom market since 2013 to 2rd quarter 2017 .Trading value and volume of the Upcom market annually.
Principal-agent conflicts versus Principal-principal conflicts (Young, Peng, Ahlstrom, Bruton, & Jiang, 2008). Classification of incentives for fraud-committing. Modified Fraud Triangle. The components of ethical problems.
The modified fraud triangle with several adjustments. Legal Matrix System. The timeline of the MTM collapse. The continuous process of selling and issuing stocks of FID and MTM.
Trading price and volume of MTM stock since 15/4 to 20/6/2016. 37 LIST OF APPENDICES Appendix 1. Market capitalization of the Upcom market since 2013 to 1st quarter 2017 47 Appendix 2. The trading detail of MTM stock.
The detail of Market Capitalization and trading value on the Upcom market 48 Appendix 4. The reform of Vietnam in Business report over time. The highlighted fraudulent cases in the Vietnam stock market. The business license of MTM.
52 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com ix LIST OF TABLES Table 1.Comparison of traditional principal-agent model and principal-principal model. The strength of minority investor protections in Vienam and some countries in 2017 .The market capitalization and the value matching monthly in Upcom. The document of changing the regulated capital. Some highlighted contents in Decree 71/2017/Dec-Gov.
The information of tax payer - MTM. The submitting document of MTM to HNX to list. The increase of regulated capital. The fake invoices of MTM.
The first part of the note of the financial statement. The short-term receivables in 2014 audited financial statement. The capital construction in process. The warning list in the Announcement of HNX.
The list of MTM members. The money transactions to another companies/bank of the former MTM BoD. The structure of the shareholders in MTM. The characteristics of new leaders of MTM.
The fraudulent behaviors in the case of MTM. 42 LUAN VAN CHAT LUONG download : add luanvanchat@agmail. Background The collapse of the Central Mining, Mineral Exporting and Importing Company (MTM) raised the concern of corporate deviances in Vietnam. Known as the frontier market, minority investors have suffered from series of frauds, scams, fraudulent financial statements and failure of the external audits.
Although the number of scandals in the stock market is still small compared the huge number of listed companies (see Appendix 5), but it should be considered the warning signal for the financial consequences that has direct impact on the economic progress and dampen a confidence of investors. According to Giannertti and Wang, if the corporate frauds are revealed in a state, the household decreases the holdings in both the fraudulent and non-fraudulent firms (Giannetti & Wang, 2016). It means that investors intend to reduce their saving on stocks of both good and bad companies as a way to have negative impacts to the capital market. In case of MTM, hundred billions VND were gone with the scammers while thousands of investors had to rebuild this valueless company1 with the hope that the regulatory bodies can bring their valuable investment back.
Upcom market, the abbreviations of a stock exchange that "is the stock market of public unlisted or delisted companies" (Ministry of Finance, 01/2015). The Upcom Market was permitted by HNX to operate officially on 24/06/2006 with 10 registered firms and the market capitalization was 1231. As shown in figure 1 below, the market capitalization has increased dramatically around 400 times with 600 registered firms (at 31/07/2017). With the high volume and value in trading (Figure 2), Upcom has become an active market for investors.
The Upcom stock used to attract the money flows such as WSB, GEX, etc. HNX has increased the transparency, attracted the capital flows, extended the trading time up to 03:00 pm and to ease the reference price up to ±15%. To reduce the gap between the free and listed markets, HNX has operated the Upcom premium ranking3 to direct the investors. 1 Mr Phuong Chu Danh, who is one of the minority investors of MTM, were elected to the BoD Chairman of MTM.
He knew that his investment was lost and he attempts to rebuild MTM which was no core business or money to become a real company.vn/web/upcom/introduction 3 Upcom premium is the companies that has the regulated capital in the last year up to 120 billions dong, EBIT> 30 billions dong and ROE ≥5%.