Emerging economies offer huge potential to Western companies in terms of new customers and suppliers, as well as low-cost manufacturing and labour. However, globalisation is also increasing companies’ exposure to fraud as they continue to expand into riskier markets.
Investigative due diligence, background checks, third-party screening and forensic financial analysis are all important steps to take in the pre-transaction phase in order to identify risks and manage opportunities overseas. If potential issues are not identified and dealt with early, problems can arise further down the line and necessitate an internal investigation. This often requires significant use of management time and can result in severe financial and reputational damage.
At Kroll, over 75% of internal investigations that we’ve conducted on behalf of corporations and their legal counsel over the past three years have been cross-border in nature. When internal investigations involve foreign jurisdictions, there are a number of practical steps to be aware of. In a recent investigation Kroll conducted for a multinational with problems in Eastern Europe, several issues had to be navigated in collaboration with the client’s external counsel prior to commencing the investigation, namely:
- Confidentiality - the potentially fraudulent contract in question was live and there was a risk of negative publicity;
- The investigation had to comply with data protection laws in multiple jurisdictions;
- Multiple languages and cultures were involved;
- The company had a decentralised accounting system.
Kroll’s forensic accountants worked with the client’s regional internal audit team to interrogate the local accounting system and identify all revenue and expense payments relevant to the contract. Over a terabyte of electronic data was collected, discreetly, from multiple jurisdictions after counsel sought local advice on data privacy laws relevant to each jurisdiction.
Information identified from the analysis was fed into an electronic data review team, who in turn relayed their relevant findings for follow up. The electronic review required local language and cultural awareness, achieved through co-ordination with the corporate counsel’s international footprint.
Extensive external investigative research was conducted in the relevant jurisdictions to understand the legitimacy of suppliers, as well as the corporate interests and political affiliations of current and former employees involved in the contract.
As a result, significant red flags were identified involving third parties’ profiles and irregular documentation. These included sequential invoices, round sum and one-off payments, websites created just before the contract was awarded and the use of prepayments and shell companies (which exist on paper only).
Additional suspicious payments to suspect entities were also identified via forensic accounting and data mining. This led to the scope of the investigation being extended to include other suspect contracts. A follow up email review and additional research found that corrupt local management had seeded a number of entities across the supplier base for their own financial gain. Kroll compiled fund flow analyses and evidential reports relating to the beneficiaries of the frauds, enabling corporate counsel to initiate actions for recoveries.
The results of the investigation led to the client’s decision to self-report to the regulators. They subsequently entered into a significant remediation exercise, designed to implement controls to prevent the reoccurrence of similar events. These included: retrospective risk profiling of its supplier base, taking into account enhanced risk measures in high-risk jurisdictions; a gradual phasing out of the branch structure in favour of subsidiaries; implementation of a whistleblowing hotline in all country locations, in local language, and adaptation of the internal audit cycle and scope to incorporate data mining and country-specific expertise.
How can companies avoid these issues? Proper due diligence, both pre and post-acquisition, can identify and address potential problems at an early stage and enable companies to implement appropriate measures. Similarly maintaining a close nexus, both culturally and practically, to overseas operations is crucial.
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