9/8/2014 - society of corporate compliance and ethics (scce) · · 2014-09-109/8/2014 1...

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PREVENTING MISCONDUCT THROUGH PROPER DUE DILIGENCE IN ASIA

SCCE COMPLIANCE & ETHICS CONFERENCE | CHICAGO | SEPTEMBER 2014

REGIONAL CAPABILITIES WITH LOCAL EXPERTISE

BLUE UMBRELLA IS ASIA’S LEADING PUBLIC SOURCE DUE DILIGENCE PROVIDER

HONG KONG. NEW DELHI. TOKYO. SINGAPORE. BANGALORE. NEW YORK.

150+ PROFESSIONALS. 73+ COUNTRIES.

• Top-tier investment banks • Multinational companies • Hedge funds • Private equity companies • Western governments • Consumer & commercial

banks

• Law firms • Risk management

consultants • Major American

screening firms

Our clients include:

PROPER DUE DILIGENCE IN ASIA | 2


New Delhi

Hong Kong

Tokyo

Singapore

New York

Australia Bangladesh China India Indonesia Japan

Korea Malaysia New Zealand Philippines Singapore Sri Lanka

Taiwan Thailand United Kingdom United States

Volume checks are conducted in the countries listed below:

GEOGRAPHIC REACH Our Operations

Our Account Managers

Bangalore

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TABLE OF CONTENTS

1 | Obligation to Prevent and Predict Misconduct

2 | Setting up a Due Diligence Process

3 | Public Source Due Diligence

4 | Tiering a Risk-based Approach

5 | Case Studies


HOW CAN DUE DILIGENCE HELP YOU PREVENT AND PREDICT MISCONDUCT?

SEC charged Garth R. Peterson, former Morgan Stanley Executive, with secretly acquiring millions of dollars worth of real estate investments for himself and an influential Chinese official who in turn steered business to Morgan Stanley's funds. He agreed to a settlement in which he is permanently barred from the securities industry and must pay more than $250,000 in disgorgement and relinquish his approximately $3.4 million interest in Shanghai real estate acquired through the scheme.


The Morgan Stanley Case

From the full press release: “The SEC alleges that a Morgan Stanley compliance officer specifically informed Peterson in 2004 that employees of Yongye, a Chinese state-owned entity, were government officials for purposes of the FCPA. Peterson also received at least 35 FCPA compliance reminders from Morgan Stanley, but nonetheless committed the FCPA violations… Morgan Stanley, was NOT CHARGED in the matter, cooperated with the SEC’s inquiry conducted a thorough internal investigation to determine the scope of the improper payments and other misconduct involved.”

Source: U.S. SECURITIES AND EXCHANGE COMMISSION Litigation Release No. 22346 / April 25, 2012

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7 PROPER DUE DILIGENCE IN ASIA |

Actual knowledge is NOT A

PREREQUISITE for a FCPA violation.

“Knowledge can be established under

anti-bribery provisions when it appears

that the act is made with conscious

disregard of or willful blindness to the

evident purpose of the offer or payment.“ 1

FCPA STANDARD

1. United States v. Nektalov


2013-14 FCPA ENFORCEMENT FCPA enforcement actions that involved THIRD PARTIES (7 out of 11 cases)::

Source: SEC Enforcement Actions: FCPA Cases

Smith & Wesson $1.9 million

Hewlett-Packard $108 million

Alcoa World Alumina $384 million

Weatherford International $250 million

Stryker $13.2 million

Ralph Lauren $882,000 criminal penalty and $734,846 in disgorgement and interest to the SEC

Parker Drilling $4 million

Smith & Wesson $1.9 million

Hewlett-Packard $108 million

Alcoa World Alumina $384 million

Weatherford International $250 million

Stryker $13.2 million

RALPH LAUREN $882,000 CRIMINAL PENALTY AND $734,846 IN DISGORGEMENT AND INTEREST TO THE SEC

Parker Drilling $4 million

FCPA enforcement actions that involved THIRD PARTIES (7 out of 11 cases)::


2013-14 FCPA ENFORCEMENT

Source: SEC Enforcement Actions: FCPA Cases

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Enforcement authorities have encouraged entities to SELF REPORT. • Ralph Lauren received praise from investigators

for voluntarily disclosing relevant information

• The DOJ granted the company a non-prosecution agreement based on Ralph Lauren’s extensive and timely cooperation: ‐ Provided the DOJ with status updates and findings from

its international investigations

‐ Voluntarily made employees available for interviews and document disclosures

RALPH LAUREN $882,000 criminal penalty and $734,846 in disgorgement and interest to the SEC




TABLE OF CONTENTS





5 | Case Studies

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• Suppliers and Manufacturers

• Agents and Intermediaries

• Resellers

• Distributors

• Charities

• Other Third Parties

• Employees


WHERE TO BEGIN – THIRD PARTY BASE


Contract Renewal

Review

On-boarding

Selection

Different stages to MITIGATE COMPLIANCE RISK

DUE DILIGENCE STAGES

Due diligence helps not only to verify existing information, but also to search externally for .

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EXTERNAL: Public source information External investigation

INTERNAL: HR application forms HR background checks Commercial information Annual audits Corporate audits Internal investigations Procurement documents Third party onboarding documents Legal contracts and contract annexes Codes of conduct Declarations of conflicts of interest Expense claims


RESOURCES

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RESOURCES

EXTERNAL: Public source information Investigations

The combined power of sharing existing data and proper due diligence will help to misconduct from .

INTERNAL: HR application forms HR background checks Commercial information Annual audits Corporate audits Internal investigations Procurement documents Third party onboarding documents Legal contracts and contract annexes Codes of conduct Declarations of conflicts of interest Expense claims


RESOURCES The combined power of sharing existing data and proper due diligence will help to

misconduct from .

VERIFY & INVESTIGATE

WHY DUE DILIGENCE?


• Your duty to know your

counterparties

• What should you know?

• Rana Plaza example

‐ 1129 people perished

‐ Warnings of building integrity

were made public beforehand

‐ Owner was extremely

well connected politically

‐ Subcontracting rife

Photo by rijans

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http://www.english.rfi.fr/france/20140424-french-supermarket-face-charges-one-year-after-rana-plaza-tragedy

Auchan has denied having any relation with Rana Plaza and

said it had been the victim of “concealed subcontracting”.

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http://www.economist.com/news/leaders/21577067-gruesome-accident-should-make-all-bosses-think-harder-about-what-behaving-responsibly


TABLE OF CONTENTS





5 | Case Studies

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Presence of consistent and admissible sources

Ensure legal compliance with regulators

Confirm that consistent controls are in place

Easier to tier and manage real costs

WHY USE PUBLIC SOURCE DUE DILIGENCE?

Corporate registries

Court records

Industry regulators

Annual reports

Risk databases

Media & Internet

databases

Directorship records

Land searches

Information provided by 3rd parties


Public source due diligence investigation starts with the SOURCES OF INFORMATION

PROCESS

INVESTIGATION

Public source due diligence investigation starts with the SOURCES OF INFORMATION

PROCESS

INVESTIGATION

It is crucial that information found from all sources is CROSS-REFERENCED; this is the best way to obtain the most comprehensive understanding of a third party.


Corporate registries

Court records

Industry regulators

Annual reports

Risk databases

Media & Internet

databases

Directorship records

Land searches

Information provided by 3rd parties

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* Reverse directorship search

PUBLICLY AVAILABLE RESOURCES – ASIA


China India Indonesia

COMPANY RECORDS √ √ √

Company Financials ? √ -

Civil Litigation Check √ √ √

Bankruptcy Proceedings - - √

Directorship Search √ √ √*

Financial Regulatory Check √ √ √

Compliance Check √ √ √

Winding-up Search - - -

Local Language Media √ √ √

Global Language Media √ √ √

Company Records: Indonesia


Official documents for Indonesian companies can be acquired through several sources:

• Ministry of Law and Human Rights

• Supplement to State Gazette

• Legal Administration System (SABH)

‐ Only notary publics in Indonesia have access to this system



Process of registering or making amendments for companies in Indonesia:

• Starts with a General Meeting • Results conveyed to notary public for legalization

Company Registration or Amendment

• Takes note of the incorporation or amendment • Submits to Ministry of Law and Human Rights within 30 days

Notary Public

• 2 weeks to process the documents • Issues a Ministerial decision number

Ministry of Law and Human Rights

• Government Printing Office will print one State Gazette for all the companies monthly Berita Negara (State Gazette)

• Actual amendments will be printed in the Supplement TBN (Supplement)

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• The information is TECHNICALLY PUBLIC, but other amendments could be

in progress and not reflected

• Information may be OUTDATED

• Need on the ground team to MANUALLY RETRIEVE records in Indonesia

The Complexity





Company Records √ √ √

COMPANY FINANCIALS ? √ -







Local Language Media √ √ √

Global Language Media √ √ √

30 30 Source: Xiamen

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Company Records √ √ √

Company Financials ? √ -







LOCAL LANGUAGE MEDIA √ √ √

Global Media √ √ √





WHY LOCAL LANGUAGE?

Official documentation and media

information may not be available in English.

Local language media provides a more

comprehensive result of derogatory

information regarding the subject.

English entity names may overlap but local

language names are distinct and different.


TABLE OF CONTENTS





5 | Case Studies

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Full Company Scope: • Corporate registries • Directorship records • Court records • Annual reports • Industry regulators • Media and internet search • Risk databases

PROPER DUE DILIGENCE IN ASIA |

Some checks cost USD $50 while others may cost more than USD $3000. Which one is right for you?.

TIERING DUE DILIGENCE

Database Search: • Compliance Check • Regulatory Check

Full Company Scope: • Corporate registries • Directorship records • Court records • Annual reports • Industry regulators • Media and

internet search • Risk databases

3 Key Directors or Shareholders:

• Directorship records • Court records • Industry regulators • Media and


Related Companies: • Negative media search on 3 related companies

Give the third party a risk score based on different , in addition to all the information you have internally.

1. Jurisdiction

2. Industry

3. Company Type

4. Company Function




JURISDICTION

Source: Transparency International 2013

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But there are also more subtle differences:

• Privacy Regimes

• Publicly/Legally Available Information

• Degree of Centralization of Data

• Information Access: Online/Offline

Obvious differences between countries:

• Risk

• Language

• Customs

• Level of Development

COUNTRY CUSTOMIZATION

It is important to understand the differences but CONTROLS SHOULD BE CONSISTENTLY APPLIED.


WHAT DOES THAT MEAN FOR DUE DILIGENCE PRACTICES?


COUNTRY CUSTOMIZATION

INDIA • Accessible online • False positives • ID information

CHINA • Politically Exposed Person • Corruption / bribery • Internet as whistleblower

INDONESIA • Access to and timeliness

of information • Dependability of information • Bahasa, English

MALAYSIA • Online access • Understanding of local

cultural boundaries • Bahasa, English

BANGLADESH • Access to and timeliness

of information • Dependability of information • Corruption / bribery

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RISK LEVEL: INDUSTRY


TRAVEL AGENCIES: CHINA VS. HONG KONG

A travel agency in China A travel agency in Hong Kong

Publicly Listed Company

Private Limited Company

Non-Profit & Charity

Sole Proprietorship


RISK LEVEL: COMPANY TYPE

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Service Provider

Manufacturer

Distributor

Agent

Contractor

Reseller


RISK LEVEL: COMPANY FUNCTION

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Full Company Scope: • Corporate registries • Directorship records • Court records • Annual reports • Industry regulators • Media and internet search • Risk databases

PROPER DUE DILIGENCE IN ASIA |

Tiering can be based on JURISDICTION, INDUSTRY, COMPANY TYPE or COMPANY FUNCTION.


Partial Company Scope: • Company registration • Negative media • Risk databases

Full Company Scope: • Corporate registries • Directorship records • Court records • Annual reports • Industry regulators • Media and


3 Key Directors or Shareholders:

• Directorship records • Court records • Industry regulators • Media and


Related Companies: • Negative media search on 3 related companies

SOLE PROPRIETORSHIP CARGO-HANDLING CONTRACTOR IN INDONESIA

PRIVATELY OWNED APPAREL PROVIDER IN KOREA

PUBLICLY LISTED MANUFACTURER IN HONG KONG


Companies in countries with little to no public data can be investigated at .

COMPANIES WITH LITTLE TO NO DATA

Ethics questionnaire

Investigations

Phone interview

Site inspection

Source enquiries

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Give them the green light but make sure to set a time for the next check

Good third parties may change as time goes on

ALL CLEAR

For third parties with little to NO RISK:

For third parties with IDENTIFIED RISKS:

Communicate with your third party to see how you can mitigate the risk

Can the third party be “rehabilitated” through education and training?

MITIGATE RISK

Plan your way out; prepare an alternate third party

PREPARE SWITCH

If the aggregate risk is too high, you may consider cutting the third party off immediately

STOP

After you have consolidated all your results, you must decide on the next COURSE OF ACTION.

OUTCOMES: ANALYSIS

INTERNALLY

Collect, understand and utilize, information coming from ALL INTERNAL SOURCES

and cross reference with due diligence efforts

Document all COMMUNICATIONS with employees regarding compliance, training

and certifications

ENSURE ONGOING MONITORING AND CONTROLS ARE IN PLACE, with special

attention paid to high-risk regions or activities


NEXT STEPS

EXTERNALLY

Find a risk management firm to COMPLEMENT and SUPPLEMENT existing internal

third party information

Apply due diligence at VARIOUS PHASES of the third party relationship

Ensure that your due diligence process is MEANINGFUL and CONSISTENTLY

APPLIED, especially in a diverse region such as APAC

TIER due diligence based on country, industry, company type and function to apply

appropriate controls


NEXT STEPS

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TABLE OF CONTENTS





5 | Case Studies


1. China

2. India

3. Indonesia

CASE STUDIES


CH

INA

CASE STUDY

Scenario

A Client suspects that his Contractor is subcontracting work orders to a

particular company which was not identified to him and whose facilities

have not been approved for use by our Client. The Client provides the

following information:

• The Contractor disclosed the existence of some subcontractors

but not a possible one that they have been tipped off about

• The Client has audited the Contractor and has the report and

document filings

• Requires third party due diligence to better understand the

relationship between Contractor and possible Subcontractor

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CH

INA

CASE STUDY

Sources

Process

1. Review the Audit Report

2. Start the search with English

3. Continue the search with Chinese

4. Retrieve and cross-reference information from relevant sources

• Administration and

Industry of Commerce

• Directorship Records

• Annual Reports

• Media & Internet Databases

• Trade Databases


CH

INA

CASE STUDY

Source: Administration and Industry of Commerce

AIC Records


CH

INA

CASE STUDY

Findings

• Mr. Li owns Happy Plastic Toys Factory and Fun Industrial

Company Limited

• He is also the legal representative of Red Mountain Industrial

Company Limited

• Happy Plastic Toys Factory holds 100%of 4 other subsidiaries

• The 4 subsidiaries were declared to the Client

• Cannot prove subcontracting relationship at this point

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CH

INA

CASE STUDY

What does legal representative mean?


CH

INA

CASE STUDY

Creative Toys Company claims to be working for Happy Plastic Toys Factory and major clients include our Client.

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CH

INA

CASE STUDY

Prevention of misconduct

1. Consolidate and pass the third party due diligence information to

Client’s quality assurance team

2. Quality assurance team conducts a surprise audit:

- Unapproved subcontractor

- Unapproved materials

- Unapproved work place environment


1. China

2. India

3. Indonesia

CASE STUDIES


IND

IA

CASE STUDY

Scenario

A Client is looking to sign a contract with a potential agent who will act as a

distributor. Prior to that, the Client wants to conduct a background search.

Our research reveals the following:

• Agent is engaged in business with state-owned enterprises

• Close ties with Bharatiya Janata Party

• Director of a Chit Fund Company

• Chit Fund Company defaulted on payment

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IND

IA

CASE STUDY

What is a Chit Fund?

• Collective Finance Model

• Friends and Family

• May be registered and regulated

Risks that may affect the client:

• Likely cheated on friends and family

• Indicates desperation

• Huge political exposure


1. China

2. India

3. Indonesia

CASE STUDIES

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IND

ON

ESIA

CASE STUDY

Scenario

A Client uses a screening database to see if their Vendor has been

sanctioned. He finds the following information and is concerned

whether it is a positive or false hit:

1 matching record found based on name search and country

Search: Entity: EGASSA RESOURCES City: Jakarta Country: Indonesia

EGASSA; a.k.a. HAYAT; a.k.a. AL-IGATHA; a.k.a. IGATHA; a.k.a. IIRO; a.k.a. INTERNATIONAL ISLAMIC RELIEF AGENCY; a.k.a. INTERNATIONAL ISLAMIC RELIEF ORGANIZATION INDONESIA BRANCH OFFICE

Result:

*No further information is provided by the database *Search matches with the Specifically Designated Nationals (SDN) list

IND

ON

ESIA


CASE STUDY

Entity Name: EGASSA

Retrieve Company Records

Run Compliance Check

Conduct a Check with OFAC

Media & Internet Search in English and Local Language (Bahasa)

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IND

ON

ESIA

CASE STUDY

Information from Media and Internet


IND

ON

ESIA

CASE STUDY

SUBJECT COMPANY OFAC SANCTIONED ENTITY

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CASE STUDY LESSONS

CHINA

Due diligence can help identify potential

unknown risks and prevent misconduct

INDIA

It is important to understand cultural context

and customs in a diverse region such as APAC

INDONESIA

A well established due diligence program can

act as a business enabling function



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By properly tiering and ensuring controls are consistently applied, meaningful due diligence can help to misconduct.

www.bluedd.com

ALLAN MATHESON Managing Director +852 3526 0282 [email protected] http://www.linkedin.com/in/blueumbrella

9/8/2014 - society of corporate compliance and ethics (scce) · · 2014-09-109/8/2014 1...

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