The abusive use of confidential information

José Zalaquett

José Zalaquett

Head of the Project at MOOC Chile
Lawyer, Universidad de Chile. Doctor Honoris Causa, by the Universities of Notre Dame and City University of New York.
José Zalaquett

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In a well ordered market, every economic agent should gain knowledge at the same time of relevant information for making their decisions.
Now, different public authorities, as well as high level executives of some private corporations who represent or safeguard the interests of consumers or stockholders usually possess, due to their position, information about future events that may have an economic value for those who learn about them in advance.
Such information is deemed confidential and its use for obtaining private gain is an act of corruption known as abusive use of confidential information or “insider trading”.
Some examples of such misuse are the following: (a) the minister of the economy in a given country is planning to devaluate the currency vis-à-vis the American dollar; he tips a relative of his/her who purchases dollars and obtains an illicit gain. (b) the CEO of a corporation knows that the company’s profits will be high for the year; he passes along the information to a friend, who acquires stock from the company, which, once disclosed the company’s financial results rise in value.
In many developed countries with market economies, the undue gain from insider trading is punished with significantly severe sanctions.
It is well known that the so called “white collar criminal” acts not spontaneously but following a rational cost-benefit analysis. According to this analysis, the expected profit is weighted according to the probability of being caught and punished, considering also the severity of the punishment that might be imposed. Thus, if, say, the likely profit from an illicit transaction amounts to 10 and the probability of being caught is estimated at a 50%, but the highest sanction that could be imposed amounts is less than 10, the incentives to carry on with the transaction are powerful. That is why an effective deterrent for the perpetration of economic crimes presupposes two elements: on the one hand, an effective system of investigation, prosecution and trials; on the other, pecuniary sanctions that amount to twice or more the expected or gained profit.
Chile has had for a long time a reputation of being a country with relatively low levels of corruption. The scandals that have shocked the country in 2015 do not completely disproof this fact, precisely because they have provoked citizen outrage rather than resignation or skepticism.
Yet, although in Chile there are relatively few practices of outright corruption, such as bribery and embezzlement, a much greater awareness is needed among economic agents – especially the elites – as to the corrupt nature of favoring private interest over public duties, particularly in situations of conflicts of interests or of insider trading.

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