Analysis

Traditional investigative approaches in Asia

  • Asia Pacific
  • Creating a Compliant Organisation
Traditional investigative approaches in Asia may lead a company into a sinkhole

 

Multinational companies across Asia are no strangers to employee and third-party malfeasance, and often use significant resources investigating it. However, rather than solving problems, traditional investigation approaches increasingly backfire, leading to financial and reputational damages.

Poorly executed investigations can exacerbate compliance, regulatory and business continuity problems, and can often increase the risk of government scrutiny, supply/distribution chain disruption, and reputational damage on social media. Recent examples include:

Business continuity

After receiving serious whistle-blowing reports, a foreign company conducted an internal financial audit into its China subsidiary, finding solid evidence against its Chinese general manager (GM). Without any planning, the company fired the GM and announced to all employees that he had been dismissed for gross misconduct. The GM was so insulted that, on the way out the door, he took the company chops and business licence, preventing the company from doing any business. He also emailed employees and clients claiming to still be the GM, causing massive confusion in the market and loss of reputation. The company went to the local police, who were not interested in pursuing the matter and told the company to deal with it themselves. It took the company months to negotiate a settlement and get the business running again.

Political connections

A Thai joint-venture partner with strong connections to the ruling elite was disrupting distribution of high-value products throughout the country and region. Using a mix of parallel, grey and black market trade, along with distributing competitor products, the partner was frustrating business to the point of economic unviability. Legal proceedings to terminate the JV were met with threats to withhold relevant business licences, all of which were held by the JV partner. It took a year to exit the relationship and move business and licences to a more reputable partner, during which time operations were severely disrupted.

Business restructuring

After discovering that distributors were committing fraud, the US headquarters of a China subsidiary made the decision to terminate 27 of them. The distributors immediately started using WeChat, China’s most popular social media platform, to accuse the company of illegal business practices. Customers quickly stopped orders and the company had to back away from terminating the distributors (even though the fraud was proven) and negotiate separation agreements with them. It took nearly nine months for the company to recover.

Regulatory

A routine audit of a company’s South-east Asian subsidiary revealed one agent was managing the majority of interactions with public officials through one senior employee. Research revealed there was no need to outsource these interactions and the agent lacked necessary qualifications. Fraud was suspected. The head office duly dismissed the agent and employee. The following day, the police raided the subsidiary’s offices and detained the auditors, confiscating their passports. Subsequent inquiries revealed the agent’s brother-in-law was a prominent police chief. Months of negotiations followed to ensure the business could re-open, at considerable expense.

 
When the solution is the problem

So, how does the suspect get the upper hand? We believe this is because the traditional linear approach actually causes problems by not taking into account Asia’s diverse business and legal environment:

  • Tolerance of corruption – Corruption remains pervasive across much of Asia, despite efforts to combat it in markets such as China and Indonesia. Low-ranking government officials seek to extort payments to fulfill designated duties; mid-ranking officials seek “rent”, and the political and business elites expect a cut to award tenders. Prosecution remains politicized and patchy. The relevant authorities’ technical capacity to investigate is weak or they are complicit. This creates an environment where employees understand there is little chance of any repercussions for maintaining corrupt relationships and pocketing the associated kickbacks.

  • Tolerance of conflict of interest – The notion prevalent across Asian markets that “everyone is making some money on the side, so I should too” lives on. Conflicts of interest, establishing competing side companies and committing financial fraud are common. Often, perpetrators do not see their actions as unlawful and tend to extreme reactions if that income is taken away.

  • Nationalism – There is a perception in many sectors and countries in Asia that “foreign companies have had it good.” When foreign companies complain of unfair treatment – including extortion, fraud and interference by employees – the response is not always sympathetic. Nationalism is a convenient card to play for officials linked to implicated employees, who would have much to lose if their commercial relationships and income were examined.

  • Face – The need to maintain a personal reputation and high standing among peers, customers and employees – and the severe reactions if that reputation is threatened – is an important but often-overlooked motivator. In particular, senior managers who have engaged in fraud and embezzlement will often work hard to clear their name, publicly blaming the company for mistreatment.

  • Local authorities – Local police are under-staffed in many cities across Asia and are rarely interested in investigating cases of employee misbehavior. They typically require a lot of “homework” to be done, with supporting evidence gathered, before they agree to open a new case. This means companies often have to take corrective action themselves.

  • Relationships – While the importance of relationships across Asia is a bit overplayed and not as important as it once was to succeed, well-connected employees can use the full extent of their political (and criminal) influence to cause problems: causing delays in licensing renewals, triggering tax, safety and environmental investigations, orchestrating physical violence, etc.

  • Labor laws favor the employee – It is extremely difficult to fire employees in much of Asia, even with good cause. This often makes fraud a “punishment-less crime”.
 
Your objective is to recover

The objective of an investigation should be to improve business operations long-term. As situations can quickly disintegrate into crisis, Control Risks recommends a “recovery-led” approach. Unlike traditional approaches, the recovery-led approach focuses on business continuity and takes into account the unique challenges of operating in the region.

This approach is preventative, rather than reactive. It first takes suspicions and considers how to react to various scenarios. These scenarios examine what damage the suspected individual(s), or their connections, might do to the organisation – what “crisis” they could set off. For example, the potential for trouble is quite different if the suspect is a senior commercial leader versus a finance manager. To ensure a holistic assessment, the investigation includes internal and external sources. The most damaging evidence is often found by discretely talking to people in the market. After evidence is gathered, it is critical not to act immediately, but rather to assess potential risks, and put plans in place to mitigate them before finally taking any action.

We find, when companies take a “recovery-led” approach to investigations, problems are resolved in the company’s best long-term interests.

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