Earlier this week, the SEC’s Division of Enforcement released a statement affirming its commitment to market integrity by emphasizing the department’s heightened attention to attempts of insider trading.
How are modern data-driven techniques enhancing the art of “following the money”?
“Where has all the money gone?” is probably the most impor¬tant question in asset recovery. This is swiftly followed by “How can we get it back, and who can help us?”
In the old days, legal teams helping their client recover assets would obtain 50 boxes of documents from banks and turn it over to a forensic accountant. Manually entering large volumes of data into spreadsheets to identify patterns and leads was time-consuming and often the result of pure luck or the good memories of the team members. Today, data analytics and data visualisation techniques can transform how efficiently and effectively the tracing team can overcome the other side’s diversionary tactics and track down the stolen assets.
In CDR Essential Intelligence: Fraud, Asset Tracing & Recovery, FRA experts in forensic investigations and data analytics explain how modern data-driven techniques are enhancing the art of “following the money”. From data collection to analysis and visualization methods, they discuss how a multi-disciplined team can reap the benefits of new tools and technologies. Key challenges include establishing a central repository of information in compliance with various data privacy laws, combining structured and unstructured data, and using advanced data analytics to automate matching tasks and uncover hidden connections.
Now Available on Demand | Find out how approaches to disgorgement and fine calculations are evolving
FRA experts Toby Duthie and Rik Workman share high level trends as well as detailed technical expertise gathered from decades of involvement in high profile cross-border disgorgements and fine calculations. From jurisdiction-specific challenges to harmonisation of fine calculation methodology across agencies, they offer you insights from major FRA engagements that have helped clients find beneficial outcomes from the most complex investigations.
What you will learn
As more companies such as Airbus and Rolls Royce negotiate landmark global settlements with multiple national regulators at once, there is an evident international shift away from prosecution and towards self-reporting and remediation as the preferred route. So, what can we learn from recent investigations on the approach to reaching these types of settlements? Join us as we discuss:
1. Key considerations for managing data across borders
2. How gain differs from gross profit
3. How much does cooperation count in the final settlement
4. What pre-emptive steps can your company or client take today
Find out more about our expertise with Disgorgement, Gain and Ability to Pay Calculations
Our engagements in complex calculations require an empirical approach to financial data and a strong understanding of accounting and reporting in international businesses. Our strength in data mining combined with strong accounting knowledge and financial modeling skills enables us to provide empirical, robust and defensible analysis.
What are the key risks to doing M&A deals in China?
The exponential increase in the volume of M&A transactions involving Chinese companies since Deng Xiaoping opened China’s doors to the international market is evidence that foreign investors see the potential rewards to be well worth the risks and challenges. What are these risks and how have some overcome them more successfully than others?
The most common risks associated with M&A deals in China generally relate to political or regulatory climate, the documented historical bribery and corruption risk, and the financial risk related to moving monies in and out of China, among other operational risks. In this chapter for GTDT Lexology’s Practice Guide on China M&A, FRA forensic accountants with rich experience in M&A due diligence detail specific risks through concrete examples and discuss how awareness and planning can make for a more viable and rewarding investment.
Bribery and Corruption
Various reasons have been cited for bribery and corruption risks in China: restricted press, ambiguous interpretation of the law, burdensome bureaucracy and guanxi (relationships). Companies operating under enforced extraterritorial laws such as the Foreign Corrupt Practices Act (FCPA) or UK Bribery Act should be aware that many settlements have involved allegations of bribery and corruption in China. China’s amendment to the Anti-Unfair Competition Law (2018) and its forthcoming implementation of a social credit system are signals that the government is trying to level the playing field.
- Successor liability riskThis is an overarching corruption risk as acquiring a company covered by the FCPA exposes the acquirer to potential liability for pre-acquisition acts. The DOJ and SEC’s Resource Guide to the US FCPA emphasises the importance of pre-closing due diligence and post-closing integration of the target into the acquirer’s compliance and internal control programmes.
- Third-party due diligenceIn addition to bribery and corruption, third-party risks include fraud, money laundering and conflict of interest. A number of regulatory cases in the past few years have shown the punitive damages that can arise from failing to invest in robust due diligence on third parties.
Political and regulatory environment
Different risks may arise depending on the type of M&A investment, be it minority investments, joint ventures or majority-owned subsidiaries. These risks are further heightened when the majority equity owner or joint venture partners is a state-owned enterprise (SOE), as access to books and records, financial information and operations details can be significantly restricted.
- Data privacy regulationsA part of any M&A deal is access to data and this necessary access continues after the investment is made. Access to data brings its own set of risks and concerns both in and outside China; for example, China’s national standard Personal Information Security Specification does not align in some areas with the EU GDPR. Investors need to be knowledgeable to avoid unintentional violations.
- Political climateRegulatory changes – both operational and legal – impact business strategy. While China offers a relatively stable and centralised political environment, there have been signs of nervousness at the top levels of government, including over the impact of the Hong Kong protests. Government intervention can be challenging if a company is deemed not to be aligned with government policy, or it can be an advantage when new laws are implemented to protect foreign investors (i.e. the Foreign Investment Law).
- Trade wars, sanctions and anti-competitionThe ongoing US-China trade war is one probable cause of a contraction in M&A activity in the first quarter of 2019, as it impacts more than just the two countries involved. While government involvement from an antitrust perspective is not uncommon in many countries, the Chinese government has historically had a higher incidence of intervention, exacerbated by the trade war.
- National secret considerationsWhen dealing with SOEs or handling information that may be deemed state secrets by the authorities, the State Secrecy Bureau and its counterparts retain maximum flexibility in determining what is a state secret. If information is not properly classified, both the recipient and the sender are at risk of prosecution.
Other financial risks
- Foreign currency transactions and profit repatriationTo maintain control over the fluctuation of its own currency, China’s State Administration of Foreign Exchange (SAFE) imposes strict restrictions on the flow of monies both in and out of China. This makes it a difficult and lengthy process for monies to be remitted from China.
- Money laundering risksAs China’s central bank has signalled its intent to strengthen international cooperation to curb cross-corder money laundering, foreign companies operating in China need to ensure the appropriate Know-Your-Customer procedures and controls are in place, specifically with regard to politically exposed persons (PEPs).
Steps to mitigate risk
One step to consider to mitigate the risks above is carefully considering the structure of the entity and how it suits the business strategy. Pre- and post-acquisition due diligence should include transaction testing to assess the verbal representations made by the target, including for third parties engaged. Experienced advisers who specialize in data protection regulations and state secrecy laws – including attorneys, accountants and data governance professionals – can support the appropriate handling of data to help avoid violations. As corruption is endemic in China, in-country operations should be closely monitored with regular audits to identify potential breaches of laws and regulations and to create a culture of compliance.
This chapter can be found in GTDT Lexology’s Practice Guides: M&A China (2020). The full publication can be accessed here.
How should counsel prepare for reforms due to be made in the wake of recent high-profile company collapses in the UK, and what are the wider implications for businesses?
Almost two decades after the Enron scandal and Arthur Andersen collapse brought sweeping regulatory reform to the US audit profession, the UK is now taking major strides in a similar direction.
Recent scandals in the UK, such as Thomas Cook Group, Carillion and BHS, to name a few, have put auditor independence and audit quality firmly back at the top of the agenda, particularly in the Big Four firms. When the wave of post-Enron scandals stirred similar questions in the US, the result was the establishment of the Public Company Accounting Oversight Board (PCAOB), additional regulation of auditors and tightened rules around selling non-audit services to audit clients. Structural reforms such as these could create new legal obligations for audit firms and businesses in the UK.
What will this mean for counsel to both UK audit firms and businesses?
In their briefing for The Lawyer, FRA Partner Carol Der Garry and Director Weng Yee Ng discuss how counsel should prepare for reforms due to be made in the wake of recent high-profile company collapses in the UK, and consider the wider implications for businesses.
About Carol Der Garry, Partner
Carol joined FRA in 2019 with over 35 years of experience as a Certified Public Accountant in forensic investigations, auditing and accounting, including a leadership role within the Public Company Accounting Oversight Board (PCAOB) Division of Enforcement. At FRA, she will focus on accountant and auditor liability matters. This includes assessing complex accounting and auditing issues as well as auditor conduct in SEC and PCAOB enforcement matters, internal investigations, accounting and financial reporting projects, and accounting restatements.