PREVENTING MISCONDUCT THROUGH PROPER DUE DILIGENCE IN ASIA

Transcription

1 PREVENTING MISCONDUCT THROUGH PROPER DUE DILIGENCE IN ASIA SCCE COMPLIANCE & ETHICS CONFERENCE CHICAGO SEPTEMBER 2014 BLUE UMBRELLA IS ASIA S LEADING PUBLIC SOURCE DUE DILIGENCE PROVIDER HONG KONG. NEW DELHI. TOKYO. SINGAPORE. BANGALORE. NEW YORK PROFESSIONALS. 73+ COUNTRIES. REGIONAL CAPABILITIES WITH LOCAL EXPERTISE Our clients include: 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 PROPER DUE DILIGENCE IN ASIA 2 1

2 GEOGRAPHIC REACH Our Operations Our Account Managers New York Volume checks are conducted in the countries listed below: Australia Bangladesh China India Indonesia Japan Korea Malaysia New Zealand Philippines Singapore Sri Lanka Taiwan Thailand United Kingdom United States New Delhi Bangalore Tokyo Hong Kong Singapore PROPER DUE DILIGENCE IN ASIA 3 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 PROPER DUE DILIGENCE IN ASIA 4 2

3 HOW CAN DUE DILIGENCE HELP YOU PREVENT AND PREDICT MISCONDUCT? PROPER DUE DILIGENCE IN ASIA 5 The Morgan Stanley Case 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. Source: U.S. SECURITIES AND EXCHANGE COMMISSION Litigation Release No / April 25, 2012 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. PROPER DUE DILIGENCE IN ASIA 6 3

4 FCPA STANDARD 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 United States v. Nektalov PROPER DUE DILIGENCE IN ASIA FCPA ENFORCEMENT FCPA enforcement actions that involved THIRD PARTIES (7 out of 11 cases):: Smith & Wesson Hewlett-Packard Alcoa World Alumina Weatherford International Stryker Ralph Lauren $1.9 million $108 million $384 million $250 million $13.2 million $882,000 criminal penalty and $734,846 in disgorgement and interest to the SEC Parker Drilling $4 million Source: SEC Enforcement Actions: FCPA Cases PROPER DUE DILIGENCE IN ASIA 8 4

5 FCPA ENFORCEMENT FCPA enforcement actions that involved THIRD PARTIES (7 out of 11 cases):: Smith & Wesson Hewlett-Packard Alcoa World Alumina Weatherford International Stryker RALPH LAUREN Parker Drilling $1.9 million $108 million $384 million $250 million $13.2 million $882,000 CRIMINAL PENALTY AND $734,846 IN DISGORGEMENT AND INTEREST TO THE SEC $4 million Source: SEC Enforcement Actions: FCPA Cases PROPER DUE DILIGENCE IN ASIA 9 RALPH LAUREN $882,000 criminal penalty and $734,846 in disgorgement and interest to the SEC 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 PROPER DUE DILIGENCE IN ASIA 10 5

6 HOW CAN DUE DILIGENCE HELP YOU PREVENT AND PREDICT MISCONDUCT? PROPER DUE DILIGENCE IN ASIA 11 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 PROPER DUE DILIGENCE IN ASIA 12 6

7 WHERE TO BEGIN THIRD PARTY BASE Suppliers and Manufacturers Agents and Intermediaries Resellers Charities Other Third Parties Employees Distributors PROPER DUE DILIGENCE IN ASIA 13 Selection DUE DILIGENCE STAGES Different stages to MITIGATE COMPLIANCE RISK On-boarding Review Contract Renewal PROPER DUE DILIGENCE IN ASIA 14 7

8 RESOURCES Due diligence helps not only to verify existing information, but also to search externally for. 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 EXTERNAL: Public source information External investigation 15 PROPER DUE DILIGENCE IN ASIA 15 RESOURCES 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 EXTERNAL: Public source information Investigations PROPER DUE DILIGENCE IN ASIA 16 8

9 RESOURCES The combined power of sharing existing data and proper due diligence will help to misconduct from. VERIFY & INVESTIGATE PROPER DUE DILIGENCE IN ASIA 17 WHY DUE DILIGENCE? Photo by rijans 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 PROPER DUE DILIGENCE IN ASIA 18 9

10 Auchan has denied having any relation with Rana Plaza and said it had been the victim of concealed subcontracting

11 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 PROPER DUE DILIGENCE IN ASIA 21 WHY USE PUBLIC SOURCE DUE DILIGENCE? 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 PROPER DUE DILIGENCE IN ASIA 22 11

12 PROCESS INVESTIGATION Information provided by 3 rd parties Corporate registries Court records Public source due diligence investigation starts with the SOURCES OF INFORMATION Land searches Industry regulators Directorship records Annual reports Media & Internet databases Risk databases PROPER DUE DILIGENCE IN ASIA 23 PROCESS INVESTIGATION Information provided by 3 rd parties Corporate registries Court records Public source due diligence investigation starts with the SOURCES OF INFORMATION Land searches Industry regulators 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. Directorship records Media & Internet databases Risk databases Annual reports PROPER DUE DILIGENCE IN ASIA 24 12

13 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 * Reverse directorship search PROPER DUE DILIGENCE IN ASIA 25 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 PROPER DUE DILIGENCE IN ASIA 26 13

14 Company Records: Indonesia Process of registering or making amendments for companies in Indonesia: Company Registration or Amendment Starts with a General Meeting Results conveyed to notary public for legalization Notary Public Takes note of the incorporation or amendment Submits to Ministry of Law and Human Rights within 30 days Ministry of Law and Human Rights 2 weeks to process the documents Issues a Ministerial decision number Berita Negara (State Gazette) Government Printing Office will print one State Gazette for all the companies monthly TBN (Supplement) Actual amendments will be printed in the Supplement PROPER DUE DILIGENCE IN ASIA 27 Company Records: Indonesia The Complexity 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 PROPER DUE DILIGENCE IN ASIA 28 14

15 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 * Reverse directorship search PROPER DUE DILIGENCE IN ASIA 29 Source: Xiamen 30 15

16 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 Media * Reverse directorship search PROPER DUE DILIGENCE IN ASIA 31 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. PROPER DUE DILIGENCE IN ASIA 32 16

17 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 PROPER DUE DILIGENCE IN ASIA 33 TIERING DUE DILIGENCE Some checks cost USD $50 while others may cost more than USD $3000. Which one is right for you?. 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 internet search Risk databases Full Company Scope: Corporate registries Directorship records Court records Annual reports Industry regulators Media and internet search Risk databases Database Search: Compliance Check Regulatory Check Related Companies: Negative media search on 3 related companies PROPER DUE DILIGENCE IN ASIA 34 17

18 TIERING DUE DILIGENCE Give the third party a risk score based on different addition to all the information you have internally., in 1. Jurisdiction 2. Industry 3. Company Type 4. Company Function PROPER DUE DILIGENCE IN ASIA 35 JURISDICTION Source: Transparency International 2013 PROPER DUE DILIGENCE IN ASIA 36 18

19 Obvious differences between countries: Risk Language Customs Level of Development COUNTRY CUSTOMIZATION But there are also more subtle differences: Privacy Regimes Publicly/Legally Available Information Degree of Centralization of Data Information Access: Online/Offline It is important to understand the differences but CONTROLS SHOULD BE CONSISTENTLY APPLIED. PROPER DUE DILIGENCE IN ASIA 37 WHAT DOES THAT MEAN FOR DUE DILIGENCE PRACTICES? PROPER DUE DILIGENCE IN ASIA 38 19

20 BANGLADESH Access to and timeliness of information Dependability of information Corruption / bribery CHINA Politically Exposed Person Corruption / bribery Internet as whistleblower INDIA Accessible online False positives ID information MALAYSIA Online access Understanding of local cultural boundaries Bahasa, English COUNTRY CUSTOMIZATION INDONESIA Access to and timeliness of information Dependability of information Bahasa, English PROPER DUE DILIGENCE IN ASIA 39 RISK LEVEL: INDUSTRY PROPER DUE DILIGENCE IN ASIA 40 20

21 TRAVEL AGENCIES: CHINA VS. HONG KONG A travel agency in China A travel agency in Hong Kong PROPER DUE DILIGENCE IN ASIA 41 RISK LEVEL: COMPANY TYPE Sole Proprietorship Non-Profit & Charity Private Limited Company Publicly Listed Company PROPER DUE DILIGENCE IN ASIA 42 21

22 RISK LEVEL: COMPANY FUNCTION Reseller Contractor Agent Distributor Manufacturer Service Provider PROPER DUE DILIGENCE IN ASIA 43 TIERING DUE DILIGENCE Tiering can be based on JURISDICTION, INDUSTRY, COMPANY TYPE or COMPANY FUNCTION. SOLE PROPRIETORSHIP CARGO-HANDLING CONTRACTOR IN INDONESIA PRIVATELY OWNED APPAREL PROVIDER IN KOREA PUBLICLY LISTED MANUFACTURER IN HONG KONG 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 internet search Risk databases Full Company Scope: Corporate registries Directorship records Court records Annual reports Industry regulators Media and internet search Risk databases Partial Company Scope: Company registration Negative media Risk databases Related Companies: Negative media search on 3 related companies PROPER DUE DILIGENCE IN ASIA 44 22

23 COMPANIES WITH LITTLE TO NO DATA Companies in countries with little to no public data can be investigated at. Ethics questionnaire Site inspection Investigations Source enquiries Phone interview PROPER DUE DILIGENCE IN ASIA 45 OUTCOMES: ANALYSIS After you have consolidated all your results, you must decide on the next COURSE OF ACTION. For third parties with little to NO RISK: For third parties with IDENTIFIED RISKS: ALL CLEAR MITIGATE RISK PREPARE SWITCH STOP 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 Communicate with your third party to see how you can mitigate the risk Can the third party be rehabilitated through education and training? Plan your way out; prepare an alternate third party If the aggregate risk is too high, you may consider cutting the third party off immediately PROPER DUE DILIGENCE IN ASIA 46 23

24 NEXT STEPS 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 PROPER DUE DILIGENCE IN ASIA 47 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 PROPER DUE DILIGENCE IN ASIA 48 24

25 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 PROPER DUE DILIGENCE IN ASIA 49 CASE STUDIES 1. China 2. India 3. Indonesia PROPER DUE DILIGENCE IN ASIA 50 25

26 CHINA CHINA 9/8/2014 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 PROPER DUE DILIGENCE IN ASIA 51 CASE STUDY Sources Administration and Industry of Commerce Directorship Records Annual Reports Media & Internet Databases Trade Databases 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 PROPER DUE DILIGENCE IN ASIA 52 26

27 CHINA CHINA 9/8/2014 CASE STUDY AIC Records Source: Administration and Industry of Commerce PROPER DUE DILIGENCE IN ASIA 53 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 PROPER DUE DILIGENCE IN ASIA 54 27

28 CHINA CHINA 9/8/2014 CASE STUDY What does legal representative mean? PROPER DUE DILIGENCE IN ASIA 55 CASE STUDY PROPER DUE DILIGENCE IN ASIA 56 28

29 CHINA 9/8/2014 Creative Toys Company claims to be working for Happy Plastic Toys Factory and major clients include our Client. 57 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 PROPER DUE DILIGENCE IN ASIA 58 29

30 INDIA 9/8/2014 CASE STUDIES 1. China 2. India 3. Indonesia PROPER DUE DILIGENCE IN ASIA 59 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 PROPER DUE DILIGENCE IN ASIA 60 30

31 INDIA 9/8/ 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 PROPER DUE DILIGENCE IN ASIA 62 31

32 INDONESIA 9/8/2014 CASE STUDIES 1. China 2. India 3. Indonesia PROPER DUE DILIGENCE IN ASIA 63 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: Result: 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 *No further information is provided by the database *Search matches with the Specifically Designated Nationals (SDN) list PROPER DUE DILIGENCE IN ASIA 64 32

33 INDONESIA 9/8/2014 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) PROPER DUE DILIGENCE IN ASIA

34 INDONESIA INDONESIA 9/8/2014 CASE STUDY Information from Media and Internet PROPER DUE DILIGENCE IN ASIA 67 CASE STUDY SUBJECT COMPANY OFAC SANCTIONED ENTITY PROPER DUE DILIGENCE IN ASIA 68 34

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36 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 PROPER DUE DILIGENCE IN ASIA 71 HOW CAN DUE DILIGENCE HELP YOU PREVENT AND PREDICT MISCONDUCT? PROPER DUE DILIGENCE IN ASIA 72 36

37 By properly tiering and ensuring controls are consistently applied, meaningful due diligence can help to misconduct. PROPER DUE DILIGENCE IN ASIA 73 ALLAN MATHESON Managing Director