Ethics Resource issue 1 2016

Panama Privacy Laws, Offshore Companies and the ID of Ultimate Beneficiary Owners PG. 12

Does Your Risk Management Program Measure Up to Today’s Threats? PG. 22

Investigative Due Diligence: A Critical Step in Reducing Risk and Liability PG. 26

Ethics Resource ISSUE 1 2016

CRIGROUP.COM

THE WORLD IS WATCHING

Published by

CORPORATE ETHICS & TRANSPARENCY PG. 16 Fraud and White-Collar Crime Investigations

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Background Investigations

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Business Intelligence

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Corporate Security

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Forensic Accounting

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Investigative Due Diligence

Letter from the CEO Strong Corporate Governance: Where Ethics and Business Intersect ZAFAR I. ANJUM, MSc, CFE, CII, MICA, Int. Dip. (Fin. Crime) CRI Group Chief Executive Officer

In our global economy, we’ve gone beyond the point where business leaders can turn a blind eye to ethic and corporate governance issues.

New laws, compliance standards and business practices on the whole have evolved. In this issue of Ethics Resource, we take a deep look at due diligence, risk management and other issues tied to ethics, providing you with the latest news and best practices for your business.

Our cover story, “The World is Watching: Corporate Ethics & Transparency” reminds the reader that an ethical culture in business truly has to come from the top. With strong corporate governance, third-party risk management and proper due diligence, organizations help protect themselves and their stakeholders from potentially damaging situations.

Speaking of risk management, does your organization have an effective process in place? In other words, “Does Your Risk Management Program Measure Up to Today’s Threats?” This article asks engaging questions and offers practical advice that every business leader should read and put into practice.

Two focus pieces provide an insider’s look at ethical issues. In “Investigative Due Diligence: A Critical Step in Reducing Risk and Liability,” you’ll read about the purpose of thorough investigations and important considerations when undertaking them. We also provide an insightful look at the Panama Papers, an unbelievable scandal raising endless ethical issues and questions.

I hope you enjoy this edition of Ethics Resource, and find it informative and helpful in your efforts to maintain an ethical corporate culture.

2 | Ethics Resource | ISSUE 1 2016

Spotlights & Features Ethics Resource | Issue 1 2016

16

The World is Watching: Corporate Ethics & Transparency Preparedness for investigations and management of vulnerabilities is critical for organizations seeking to maintain a global competitive advantage. Learn five best practices for risk management, investigations and FCPA compliance.

12

Panama Papers: Panama Privacy Laws, Offshore Companies and the ID of Ultimate Beneficiary Owners

22

Third-Party Risk in 2016: Does Your Risk Management Program Measure Up to Today’s Threats?

26

Investigative Due Diligence: A Critical Step in Reducing Risk and Liability Ethics Brief...................................................................................................................6 News & Media........................................................................................................... 32 By the Numbers......................................................................................................... 35

ISSUE 1 2016 | Ethics Resource | 3

Ethics Resource Ethics Resource is created for business leaders, directors, investors and professionals who need

the latest information and best practices on ethics and compliance. Presenting practical tools, case studies and articles focused on ethics, compliance and due diligence, Ethics Resource provides an insightful look at the issues impacting businesses worldwide.

Ethics Resource is published by Corporate Research and Investigations, LLC. (CRI Group).

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Dubai CRI Group Headquarters Level 9, #917, Liberty House, DIFC P.O. Box 111794 Dubai, UAE Tel: +971-4-3589884 Fax: +971 4 3589094 Email: cridxb@CRIGroup.com Web: CRIGroup.com Abu Dhabi Office No: 3509, 35th Floor Al Maqam Tower, ADGM Square Al Maryah Island, Abu Dhabi, UAE Tel: +971 2 4187568 Email: abudhabi@CRIGroup.com Qatar QFC Branch Office No. 130, 1st Floor Al – Jaidah Square, 63 Airport Road P.O. Box 24369 Doha, Qatar Mobile: +974 7406 6572 Tel: +974 4426 7339 Email: doha@CRIGroup.com

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4 | Ethics Resource | ISSUE 1 2016

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ASIA

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Or contact one of our worldwide locations directly.

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EDITORIAL For editorial inquiries, questions and comments, please contact Ms. Arooj Mehmood at arooj.mehmood@CRIGroup.com.

Ethics Resource is published by Corporate Research and Investigations LLC: Global Headquarters Level 9, #917, Liberty House DIFC, P.O. Box 111794 Dubai, UAE Tel: +971-4-3589884 Fax: +971 4 3589094 © 2016 Corporate Research and Investigations, LLC. Copyright is reserved throughout. Although Ethics Resource may be quoted with proper attribution, no part of this publication may be reproduced without the express written permission of the publisher. Contributions are invited but copies of all work should be kept as Ethics Resource can accept no responsibility for loss. The views expressed in Ethics Resource are those of the authors and might not reflect the official policies of CRI Group.

About CRI Group Corporate Research and Investigations, LLC (CRI Group) is a global supplier of investigative, forensic accounting, business due diligence and employee background screening services for some of the world’s leading business organizations. A licensed and incorporated entity of the Dubai International Financial Centre (DIFC), CRI safeguards businesses by establishing the legal compliance, financial viability, and integrity levels of outside partners, suppliers and customers seeking to affiliate with your business.

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CERTIFICATIONS

ISSUE 1 2016 | Ethics Resource | 5

Ethics Brief Fraud in the Middle: Corruption Risk in Defense Contracts In the long history of business, use of a “middle man” has been a traditional, if somewhat shadowy, way of securing deals between parties. Unfortunately, the use of a middle man to

report defines the likely problems and how, and why, they arise, TI also offers several key recommendations for both companies (contractors) and military organizations doing business with them.

Companies

facilitate business can also increase the risk of

• Implement ethics and anti-corruption pro-

corruption through bribery and similar malfea-

grams that minimize the corruption risks

sance. Nowhere is this more true than in the

posed by agents.

military defense industry.

One recent example is the new investigation by the UK Serious Fraud Office (SFO) into allegations of fraud, bribery and corruption at Airbus. Katherine Dixon, Director of Transpar-

• Ensure that agent incentive structures are centralized, accountable, and transparent.

• Make greater demands of governments (for guidance, clarity and accountability).

ency International (TI) Defence and Security Programme, said: “The use of agents is one of the biggest corruption risks across the defence and aerospace sector, and Airbus is just one of a long line of companies that have run into trouble.

The failure of Airbus to declare its agents highlights the weakness of self-disclosure

Importing Governments • Increase clarity and transparency in procurement.

• Establish ethics and anticorruption requirements for all bidding companies • Strengthen oversight and enforcement.

requirements and why governments can and should use export policies to reduce the influence of corrupt middlemen.

“The Airbus case demonstrates the need for more consistent transparency requirements in export policies around the use and payment of agents.”

Exporting Governments • Review arms export strategies and strengthen export controls.

• Support companies facing demands for corrupt behavior.

TI, the global corruption watchdog organization, recently produced a report that examines

The above bullet points are elaborated on

this problem. “Licence to Bribe? Reducing

in greater detail in the report itself, which is

corruption risks around the use of agents in

downloadable at TI’s website. The report also

defence procurement” highlights the risk of

includes guidance for society on the whole, with

using middle men in defense deals. While the

useful advice such as:

6 | Ethics Resource | ISSUE 1 2016

• Demand more information from governments

companies must take, as working with third par-

on how public money is spent in the defense

ties is a necessary (and most often beneficial)

sector.

aspect of conducting business today.

• Monitor defense procurement and publish information on defense contracts.

• Conduct research into agent ethics and anticorruption programs.

• Discuss the risks around the use of agents with national defense establishments and export credit agencies, and provide advice for reducing these risks.

• Advocate for greater disclosure around the use of agents by defense companies.

• Advocate for governments to require companies to have ethics and anti-corruption programs that apply to their agents as a condition of bidding for MoD contracts.

• Establish independent reporting mechanisms to collect allegations of malfeasance.

Fraud will always exist, and high-dollar defense and other military contracts will always be targeted by fraudsters due to the sheer amounts of money that can be made through bribery and corruption. Use of a middle man only adds to this corruption threat. Following TI’s guidance, businesses, governments and the citizens they serve can help limit future cases of fraud and help reduce financial losses.

Rather than taking the unrealistic and unnecessary approach of cutting all ties with outside companies, business leaders should instead take proper steps to mitigate risk and vet the third parties as thoroughly as possible.

First, let’s look at the main risks posed by conducting business with third-party partners: 1. Harm to reputation. Adverse effects and negative opinions attached to a third party can damage the organization. Especially in high profile scandals involving a third-party partner, the effects might include disappointed clients and a loss of trust. Unfortunately, the lost confidence of your customer base is the kind of capital that is difficult, if not impossible, to restore or replace.

2. Non-compliance issues. If a third-party partner is skirting regulations or falling short of compliance standards, this can affect your business directly, especially if they are a supplier or a contractor conducting work for your business. Consider a construction firm that contracts electrical work to a firm that subsequently falls into non-compliance in the eyes of various regulating bodies. This can have a disastrous effect on your company’s projects — and your bottom line.

3. Negative financial impacts. A third party’s

Top 5 Risks of Conducting Business With Third Parties

system failures, human mistakes, fraud or an incapability to provide services as described, or in a timely manner, can

There are inherent risks involved for any orga-

directly impact your own ability to deliver

nization that does business with third-party

for clients. Improper due diligence and no

partners. Without a doubt, these are risks most

appropriate contingency plan for selecting

ISSUE 1 2016 | Ethics Resource | 7

third parties leads directly to a heightened business risk.

4. Cultural differences. Working with third parties located in foreign countries is often necessary for international corporations.

However, there can be unseen difficulties in conducting business with partners based in countries that have varying cultural values and beliefs. The social, political or cultural values could adversely affect activities of the foreign-based third-

Bribery Scandal: FIFA, a Victim?

The recent headlines regarding scandal-ridden FIFA, the governing body for international football, might surprise some, and they certainly provide an interesting twist to the saga. FIFA’s latest move is to petition the United States for “tens of millions of dollars” it claims — and admits — were lost through bribery, kickbacks and other corruption schemes.

The move signals a new chapter in the scandal, which is now more than a year old. It

party service providers, creating

is the most official acknowledgment

challenging situations that may

yet from FIFA that the widespread

harm the organization.

corruption did indeed occur, and

5. Changes in your supply line.

Many third-party partners are essential suppliers of goods and/or services for large, multinational companies.

But what happens if those suppliers go out of business suddenly? Or are faced with financial hardship, causing unreliable supply or gaps in delivery? Your own business could suffer. It’s enough to keep a supply chain manager awake at night.

vote selling and other payoffs directly impacted bidding processes — in particular, the winning bid for South Africa to host the 2010 World Cup.

Millions at Stake According to BBC Sports Editor Dan Roan, the move shouldn’t be seen as a surprise: “FIFA’s survival depends on it retaining the victim status afforded it by the US Department of Justice and this helps reinforce the narrative that it was the injured party in football’s corruption scandal, rather than the perpetrator,” Roan

The aforementioned risks will always be pres-

wrote. “With millions of dollars being spent

ent for any company doing business with third

each month on lawyers to clean up the scandal,

parties, and the best way to address them is by

as well as the loss of key sponsors, FIFA could

conducting thorough due diligence on each and

do with the money.”

every partner in your business. A formalized vetting process should be initiated for every new or prospective partner, and regular checks should also be applied to existing (even long-

Many media outlets, especially those in the U.S., weren’t very charitable about the move from FIFA. NBC News, for example, ran with the following headline: “FIFA Demands Millions in Restitution From U.S. — for Its Own Misdeeds.”

time) partners. To cut corners on due diligence

The tenor of the article itself mostly matches

is to invite risk, and possible disaster, for your

the irony-laden headline:

business future.

8 | Ethics Resource | ISSUE 1 2016

“FIFA, the disgraced governing body of world

soccer, is demanding tens of millions of dollars from the U.S. government as restitution for bribes and benefits paid to its own former leaders, according to court documents.”

Since a joint U.S.-Swiss raid on FIFA of-

Background Checks: 4 Red Flags Trying to land a new job can be a challenge. But what is often overlooked is how difficult the employment arena can be from the other side of

fices in Switzerland, and the arrests of several

the interview desk. Companies looking to hire

highly placed FIFA officials, nearly a year ago,

additional staff face risks and pitfalls in trying

the breadth of the scandal has only continued

to find the perfect new team member.

to grow. Most recently, on February 19, Sepp Blatter insisted that Qattar won bidding for the 2022 World Cup fairly.

Among those risks is the threat of a dishonest job candidate. Some prospective employees will exaggerate their credentials or, in extreme cases, make things up

Ethics Proceedings Ongoing Only two months earlier, in December, Blatter was banned for eight years from all football-related activities.

The ban comes from FIFA’s ethics committee. UEFA President Michel Platini was also banned for eight years.

Also, on February 23, Prince Ali appealed to

entirely to give themselves an edge in a competitive job market. For employers who fall victim and don’t discover the truth, they risk hiring unqualified, untrained and dishonest new staff members — which can be a dangerous proposition.

This is why it is absolutely crucial for any organization to include thorough background

have FIFA elections suspended in the name of

checks as an integral part of their hiring

establishing better transparency for the voting

process. Whether conducted in-house or by a

process (his request for transparent voting

qualified third party, the pre- and post-employ-

booths was refused). His appeal was rejected.

ment screening process (background checks)

And on February 25, FIFA’s ethics committee

should cover all the bases to verify a candi-

opened proceedings against CONMEBOL vice

date’s information.

presidents Luis Bedoya and Sergio Jadue. Both are expected to be banned, no surprise considering each pleaded guilty to charges of rack-

The following are just a few of the things that will raise red flags in a background check.

1. Employment gaps. Recent gaps in employ-

eteering conspiracy and wire fraud conspiracy.

ment on a resume are fairly common, but

At the same time, Blatter and Platini’s bans

the candidate should be able to provide a

were reduced to six years. But anyone who has

sound explanation, such as being off work

followed Sepp Blatter over the years knows

for illness. Frequent employment gaps can

that we haven’t heard the last of him ... even

signal a problem and may warrant caution

if he is relegated to media interviews in which he continues to plead innocence or ignorance

on the part of the employer.

2. Educational “fluffing.” Educational

— ignorance of rampant corruption within the

degrees, certifications and other achieve-

organization he led for nearly 20 years.

ments should be verified directly with the

ISSUE 1 2016 | Ethics Resource | 9

college, university or sanctioning body. Any discrepancies require an explanation from the candidate, but be aware: claiming a degree that was not earned is a common scenario, unfortunately; and it is unlikely to end up on a resume by mistake. Such claims are an indication of dishonesty.

3. Poor financial history. Credit checks should be conducted (as allowed by law),

• Credit checks • Background information on former employers • Analytic research of credential breaches • Bankruptcy checks • Criminal record checks • Civil litigation checks • Financial regulatory checks

and a poor credit history can indicate

• Directorships & significant shareholdings

a risk factor for any employee. While it

• Professional qualifications & memberships

might not reflect dishonesty, at the least it could signal irresponsible financial behavior. The candidate should be given the

• Criminal watch lists • Employment references

opportunity to explain the problem, but the organization might see fit

Hiring new employees doesn’t have to

to avoid placing the individual

feel like a walk through a minefield.

in a position where they would

By conducting comprehensive pre-

handle financial matters for

employment screening, any company

the organization.

can increase their protection from

4. Criminal history. Every pre-employment screening process should include a background check of the individual’s criminal history, and serious crimes are an obvious red flag. Many fraudsters have been caught committing the same financial crime they perpetrated at a previous job just months or years before. Any criminal acts involving theft or fraud, in particular, should be weighed heavily in the background screening process.

At CRI Group, our experts know that the most effective pre-employment screening includes as many of the following checks as permitted by law in your jurisdiction:

fraud and unethical behavior.

The Right Fraud Prevention Program: Key Elements What company can afford to lose 5 percent or more of their revenues to fraud? If business leaders considered how much they are losing that is unrecoverable, the first question would be: “How can we stop this?”

The best answer is: prevention. Every organization, large or small, should have a plan in place for preventing and detecting fraud. In this article, we will discuss the critical elements of a fraud prevention program and how they help companies protect themselves and lessen their risk.

• Verify current & former address

Code of Conduct

• Verify name, date-of-birth, national ID number

It is not enough to just expect employees to

10 | Ethics Resource | ISSUE 1 2016

know that fraud won’t be tolerated at any level.

ings from an audit can be provided for follow-

An ethical code of conduct should spell out in

up to fraud investigators, whether external

plain language the company’s expectations and

or in-house, who can determine if intentional

zero-tolerance policy toward unethical behavior. Furthermore, every employee, from the top to the bottom of the organization, should be required to read and sign it. It can stand alone or be included in an employee manual, and

wrongdoing has occurred.

Provide a Hotline Studies show that most frauds are still uncov-

it should be discussed at orientation and/or

ered by tips. The tips come from employees,

employee training events.

contractors and even clients/customers. The

Background Checks A robust fraud prevention program should include pre- and post-employment background screening. Such checks should be conducted as a matter of policy, and should include a thorough investigation of employment, credit, licensing and criminal history for all new hires.

key is that any reporting system should be anonymous, alleviating fear of retribution or other consequences for the person reporting the potential fraud. Make it easy for people to make a report, whether through a hotline, an online reporting system, or both.

References should be checked and verified,

Review Your Progress

as well.

Once a fraud prevention program has been

Segregation of Duties Roles and responsibilities should be divided so that no single employee has too much control over finances or assets. Accounting functions, in particular, should be separated and owners or managers should review bank statements

implemented, the company should make sure to review the program’s effectiveness over the coming weeks, months, and years. Consider it like any other key business function — in fact, it is arguably one of the most important, as it helps safeguard the business and invest-

and payroll checks. Check-signing authority

ments from fraud. Schedule regular assess-

should be reserved for an employee who does

ment periods to track how much fraud has

not have regular access to checks. Transactions

been uncovered, what systemic weaknesses

should require proper authorization in all cases.

were found and what actions were taken to

Audits and Other Checks Frequent, surprise audits can help uncover even small problems before they develop into something worse. Audits alone can’t protect a company from fraud — nor are they designed to do so. But they can expose accounting irregular-

follow up on them.

With a robust fraud prevention system in place, business owners and executives can sleep a little easier knowing their organization has reduced risk and increased their ability to prevent and detect fraud. 

ities and reveal weakness in an organization’s accounting systems and processes. And find-

— Compiled by CRI Group Staff

ISSUE 1 2016 | Ethics Resource | 11

I N F O C U S : The Panama Papers

Panama Privacy Laws, Offshore Companies and the ID of Ultimate Beneficiary Owners

By CRI Group Staff

T

he leak of a set of confidential

ca, operating out of Panama. Panama provides

documents providing detailed

a constitutionally guaranteed privacy for both

information about hundreds

citizens and foreigners under its jurisdiction,

of offshore companies listed

thus allowing Mossack Fonseca to be protected

by the Panamian corporate

by Panama privacy laws that provide complete

service provider Mossack Fonseca

anonymous ownership of business interest and

resulted in the scandalous release of the identities of owners, shareholders and directors of several offshore companies.

The documents, which were first made

ventures.

Article 29 of its constitution specifically prohibits the violation of private documents and correspondence and states that these docu-

available in 2015 by an anonymous source,

ments may not be held or examined by a third

were analyzed and investigated by the Interna-

party except for legal or judicial purposes. Also,

tional Consortium of Investigative Journalists.

Law 6 (2002) of the Panama privacy codes

Earlier this year, the enormous leak revealed

establishes that personal information can only

several wealthy individuals, including public of-

be shown to an interested party, and makes it

fice holders and celebrities, to be the Ultimate

a crime if the confidentiality is violated. These

Beneficial Owners of the offshore companies. It

laws allow Mossack Fonseca to choose not to

has been intimated that the dealings of these

make public the Ultimate Beneficial Owners of

individuals with Mossack Fonseca were part of

the offshore companies it controls, and thus

a bid to carry out illegal activities such as tax

making the EDD process difficult.

evasion, fraud, bribery and corruption.

Enhanced Due Diligence

Layers of Deception To make matters worse, Mossack Fonseca

Financial institutions are typically required to

operates in such a way that they stand in or

carry out an Enhanced Due Diligence (EDD)

provide stand-ins to serve as the owner(s) of a

procedure to find out the Ultimate Beneficial

company. They register the company, open bank

Owner of an offshore company seeking to do

accounts and even provide directors to sit on

business with them. The EDD is carried out

the company’s board. They also provide several

to reduce high risk situations, such as money

layers of ownership in a bid to hide the Ultimate

laundering and financing terrorism, that may

Beneficial Owner, so that an individual listed

be associated with dealing with an individual

or found to be the legal owner of the offshore

or company. The EDD involves the gathering of

company may simply be holding the position for

additional information to verify the identity of

another individual who prefers anonymity.

customers, as well as their source of income.

Thus it is important that a thorough En-

An EDD is also especially required where the

hanced Due Diligence process, along with

customer is not available in person, or the cus-

forensic analysis, be carried out even after the

tomer is a politically exposed person.

identity of a stated Ultimate Beneficial Owner

However, the Enhanced Due Diligence pro-

has been discovered. For instance, EDD and fo-

cess may become a tedious task with a corpo-

rensic analysis should be used to find out if the

rate service provider, such as Mossack Fonse-

stated individual has a financial profile which

ISSUE 1 2016 | Ethics Resource | 13

Panama Papers Drive New Rules, But Are They Enough?

Among government reactions to the incendiary Panama Papers, the U.S. Departments of Treasury and Justice rolled out new measures in an effort to fix gaps requirements to identify the Ultimate Beneficiary Owners (aka “beneficial owners”) of companies. Such owners are the main subjects of the Panama Papers, sheltering funds in overseas entities that are described, in

The case of the Panama Papers, an international exposé of corruption, continues to drive discussions about ethics and transparency. What lessons can we take from this outrageous scandal?

Download CRI Group’s “Panama Papers: Critical Lessons for Government, Corporate Leaders” at CRIGroup.com/whitepapers.

many cases, as shell companies.

The problem, according to critics, is that the new measures don’t go far enough. According to Global Financial Integrity (GFI), a non-profit, Washington, D.C.-based research and advisory organization, the rules being implemented by Treasury and Justice “fail to ensure that beneficial owners are identified.”

Who is a ‘Beneficial Owner’?

As GFI asserts in a news release, one sticking point is that the final rule “requires banks to

corresponds with the activities of the offshore

identify one individual who has significant re-

account, and/or if the individual is related to or

sponsibility to control or manage the company,

is an associate of a wealthy or famous individu-

defined to be a manager, as well as individu-

al, or a politically exposed person. 

als — if any — who have a 25 percent or greater

CONTACT INFORMATION Corporate Research and Investigations LLC 917, Liberty House, DIFC P.O. Box 111794 Dubai, U.A.E.

ownership interest in a company. Where no individual with a 25 percent interest is identified, the only person named will be the manager.”

GFI’s Policy Counsel Liz Confalone notes:

Tel: +971-50-9038184

“Treasury has muddled the concept of

Fax: +971-4-3589094

control in their definition of ‘beneficial owner.’

Toll Free: +971 800- CRI LLC (274-552)

Managers — as persons who conduct the

Email: cridxb@CRIGroup.com

day-to-day operations of a company — are not

14 | Ethics Resource | ISSUE 1 2016

beneficial owners. There is a difference between the control that someone exerts over a company despite not having an ownership interest, such as rights to veto board decisions and to appoint directors and the day-to-day management control of the company.

“When we talk about control in the beneficial owner context, we’re talking about the former.

That is the distinction missing in Treasury’s definition. This means that banks can fulfill their due diligence requirement without identifying any actual beneficial owner. This is a problem for everyone, but Congress has the power to adopt new legislation to fix it and should not hesitate to do so.”

Vulnerabilities Exposed More than 30 U.S. citizens are linked to the offshore companies exposed by the docu-

More than 30 U.S. citizens are linked to the offshore companies exposed by the documents leak, a fact that has upped the pressure on the U.S. government to shore up vulnerabilities that make such skirting the law and regulations possible.

ments leak, a fact that has upped the pressure on the U.S. government to shore up vulnerabilities that make such skirting the law and regulations possible.

As guidance for governments goes, worldwide anti-corruption group Transparency International (TI) has proposed several courses of action:

property to disclose on whose behalf they are operating.

1. All countries should require much higher levels of transparency around who owns

TI expands on the above points on its website.

and controls companies registered in their

One thing is for sure: the Panama Papers will

territories.

continue to drive discussion and the need for

2. Professional enablers that are found to be complicit in corruption must be sanctioned.

3. All countries should require any company bidding for public contracts or purchasing

new rules and legislation for the foreseeable future. Both governments and business leaders need to get on the right side of transparency — and help combat corruption — before a widening scandal worsens. 

ISSUE 1 2016 | Ethics Resource | 15

THE WORLD

IS WATCHING

CORPORATE ETHICS & TRANSPARENCY

BY Z AFAR AN J U M, M SC , CFE, CII, M ICA , I NT. D IP. ( FIN. CRIM E)

Business ethics is a commit-

publicity and embarrassing

ment. It is an action. Before

scandals are not just major

an organization can consider

red flags for consumers look-

its governance a strength, it

ing for secure investments.

needs clearly defined values

They discourage customers,

that guide decision making

drive out talented employ-

and behavior at every level. It

ees, and with top-tier talent

needs a mechanism in place

eager to work for companies

to measure ethical perfor-

dedicated to transparency

mance. It needs a plan for

and ethical operations, they

continually identifying, inves-

make recruitment an impos-

tigating and managing risk.

sible task.

The strongest organizations

Still, it seems that every

hold their guiding values so

day brings news of bribery

closely that they are known

scandals, corporate leaks,

not only by leadership and

human trafficking investiga-

employees, but also by share-

tions and corruption of all

holders and customers.

sorts. The constant stream of

Companies thrive on

stories involving organizations

healthy relationships with

behaving badly has fed public

shareholders, customers and

cynicism and distrust — senti-

employees. Unethical prac-

ments that recent trends sug-

tices destroy relationships.

gest have reached a tipping

A lack of solid, well-planned

point. Simply put, people have

corporate governance is a

had enough of corruption and

vulnerability that inevitably

unethical behavior. Demand

becomes public. Constant

for transparency and account-

court battles, penalties, bad

ability is strong.

ISSUE 1 2016 | Ethics Resource | 17

a revelation. Corruption in

is a development worth cel-

Third-Party Risk Management

business and government has

ebrating. As cultures around

At CRI Group, we tell our

always been despised. But

the world commit to demand-

clients that when it comes

for years, corruption in some

ing a higher standard of trans-

to third-party anti-corruption

industries has been perceived

parency, integrity, and respon-

management, a strong initial

as unavoidable and too costly

sibility from businesses and

to eliminate. Essentially, par-

risk assessment is key. Know-

governments, we move closer

ticipants have chosen to pass

ing what risks third-party ven-

to an undeniably better, safer

unethical practices off as ‘the

dors present drives a broader

environment for everyone. We

strategy based on constant

move toward more stable eco-

assessment, analysis, train-

nomic, political and regulatory

ing and monitoring.

In one sense, this is not

cost of doing business’ or ‘business as usual’ to justify looking the other way.

But in another sense, it’s worth considering that

We can all agree that this

environments.

Societies connect in new

This is not a simple task, as companies evolve over

ways every day. Information

time. A vendor that repre-

today is shared at lightning

sents a low risk one year

speed and judgments are

may become a major vulner-

made just as quickly. So,

ability the next, becoming an

when damaging news or alle-

unknown threat. Similarly,

gations regarding a company

a vendor considered high

is leaked, it is instantly shared

risk one year may drastically

around the world and a story-

improve its risk profile the

line is developed. A reputation

next and no longer demand

for integrity and transparency

the time and effort neces-

is the best defense. But it can

sary for heightened scrutiny.

only be earned. In a world

With a strong program in

have shown that passive

where secrets no longer stay

place to continually monitor

acceptance of corruption as

secrets for long, transparency

and evaluate vendor relation-

an unfortunate but necessary

is crucial.

ships, organizations can be

as consumer expectations of service have changed, so have expectations of corporate responsibility. Just as any organization cannot afford to ignore changing economic conditions, organizations cannot ignore changing social conditions. Recent global trends in popular demonstrations, media scrutiny, government action and judicial focus

evil is rapidly disappearing.

Now, more than ever, orga-

assured that resources are

nizations must be relentlessly

being properly appropriated to

A Time for Transparency

focused on managing third

reduce risk.

For many countries, the road

value on transparency. One

dal involving Alcoa Inc., the

from adopting anti-corruption

incident in an inadequately

largest U.S. manufacturer

regulations to actively enforc-

managed and monitored sup-

of aluminum, resulted in a

ing them has been long. But

ply chain can have destructive

penalty of $384 million. The

without question the pace

consequences that could tie

charges stated that a closely

has quickened dramatically in

an organization up legally and

held subsidiary of Alcoa

recent years.

financially for years.

bribed officials of a Bahraini

18 | Ethics Resource | ISSUE 1 2016

party risks with a heightened

A recent bribery scan-

state-controlled aluminum

Bribery act, the Modern Slav-

management program, but

smelter. This incident, and

ery Act, and the FCPA that call

person-to-person interaction

its resulting consequences,

for careful consideration. This

is invariably the best path to

could have been prevented

makes compliance challeng-

meaningful insight into a third

had a comprehensive pro-

ing for companies with broad

party’s reputation, practices

gram been in place to detect

supply chains.

and ethics.

and prevent unethical action.

A comprehensive third par-

The Securities and Exchange

ty risk management program,

Commission released a

administered responsibly, is

Ethical Companies are Strong Companies

statement that read, in part:

the only way to ensure gover-

The benefits of a company’s

“It is critical that companies

nance standards are upheld

strong commitment to eth-

assess their supply chains

throughout an organization’s

ics and social responsibility

and determine that their

supply chain. Automated due

go beyond the immediate

business relationships have

diligence processes based

gratification of simply doing

legitimate purposes.”

on public records, with the

the right thing. Certainly, a

promise of low cost efficiency,

commitment to profitability is

cracking down on corruption

is alluring. But relying on

a central tenet of any suc-

is worldwide, regulations

public records for identifying

cessful business. But the cost

vary greatly from country to

vulnerabilities across multi-

of pursuing profit blindly —

country, and from industry to

national vendor relationships

without giving concern to the

industry. Recent years have

is a half-measure. Certainly,

means of pursuit — must be

seen major changes to, or

public records-based com-

reckoned with.

introductions of, far-reaching

pliance will always be a

legislation, including the UK

basic component of a risk

While the trend toward

A reputation for ethical behavior is a crucial compo-

ISSUE 1 2016 | Ethics Resource | 19

nent for any organization’s

at an individual level, become

and participate in constant di-

long-term success. Securing

‘why’ a company operates.

alogue around their organization’s ethics. Annual retreats

such a reputation requires

and frequent webinars simply

toward building, maintaining

A Matter of Leadership

and protecting values that

An organization’s ethical per-

discussions about transpar-

guide decisions through-

formance rises and falls with

ency and ethics belong in

out the organization. It also

leadership. To truly instill an

every level and in every facet

requires a diligent effort to

ethical culture, the leaders of

of an operation. The commit-

remain capable of adapting to

the organization must define

ment to social responsibility

an ever-changing environment.

guiding principles and values,

should be embraced as one

clearly communicate them,

that must evolve and grow

strong commitment to social

and, most importantly, live

with its surrounding culture.

responsibility are great,

them. Leadership must serve

building and maintaining high

as daily examples of execut-

leadership publicly and

ethical standards is not easy.

ing goals with integrity.

internally puts their dedica-

a constant, deliberate effort

Though the benefits of a

Even for companies with long-

Employees will not em-

standing result-driven compli-

brace a proactive culture of

ance programs, performance

responsibility without trusting

according to these standards

that the organization’s leader-

can fluctuate. Ethisphere and

ship is uncompromising in its

similar corporate ethics insti-

dedication to doing the right

tutions reflect this reality in

thing every time, regardless

annual indexes and rankings.

the cost. Hotlines and surveys

A strong culture of social

are common tools organiza-

responsibility adds value

tions use to gauge perfor-

to every interaction. When

mance in these areas. At

principles guiding ethical

many companies, they are the

behavior become part of a

only tools. We know well the

company’s culture, the risk

flaws associated with relying

of focus shifting away from

only on the results gained from

responsibility disappears.

them. Ironically, the tendency

Principles handed down from

for skewed results can largely

the top become reminders —

be traced back to leadership.

they become ‘how’ a company

How likely would it be for an

operates. We should hold our-

employee to report unethical

selves to a higher standard.

behavior if leadership had not

The principles guiding an

demonstrated a willingness to

organization, when truly part

take it seriously?

of the culture and embraced

20 | Ethics Resource | ISSUE 1 2016

Leaders should encourage

are not enough. Meaningful

When a company’s

tion to ethical practices at the forefront of the organization’s priorities, it sends a powerful message to employees and customers. For some companies a commitment to guiding principles becomes a valuable component of their brand’s identity.

The World is Watching Corruption is an ongoing storyline. It is now a narrative with which the public is constantly engaged. From Alcoa and Petrobras to the Panama Papers and FIFA, allegations catch fire quick and judgement from the court of public opinion is handed down just as fast.

These conditions lead to one unavoidable truth: It is time for all companies to step up the commitment to transparency and ethical practices.

The due diligence requirements mandated by regulators must be considered a baseline. Companies must be vigilant in implementing strong anti-corruption programs that extend to vendors.

The world is watching, and expectations have never been higher.  ABOUT THE AUTHOR Zafar I. Anjum, CFE, is chief execu-

The World is Watching: Recent Case Studies in the News Telia to Pay $1.4 Billion in Bribery Probe U.S. and Dutch authorities are asking Swedish telecom carrier Telia Company AB to pay $1.4 billion to settle allegations it distributed hundreds of millions of dollars in bribes to secure business in Uzbekistan — the latest move

by U.S. prosecutors to target corrupt practices overseas.

Telia, which is partly owned by the Swedish govern-

tive officer of CRI Group, a global

ment, has said it was cooperating with the probes and

supplier of investigative, forensic

has acknowledged shortcomings. Chairwoman Marie Eh-

accounting, business due diligence

rling said the company’s entry into Uzbekistan “was done

and employee background screen-

in an unethical and wrongful way, and we are prepared to

ing services for some of the world’s

take full responsibility.”

leading business organizations. A member of the Dubai International Financial Centre, CRI Group safeguards businesses by establishing the legal compliance, financial viability, and integrity levels of outside partners, suppliers and customers seeking to affiliate with your

Trial Begins for Maurice Greenberg, Ex-A.I.G. Chief Accused of Fraud The 11-year-old accounting fraud case against the former American International Group (A.I.G.) chief executive Maurice R. Greenberg finally came to trial on September 13.

A senior New York State trial counsel, David N. Ellen-

business. CRI Group maintains

horn, said that while defense lawyers had used “delaying

offices in UAE, Pakistan, Qatar,

tactics,” including seven pretrial appeals, “the day of

Singapore, Hong Kong, Malaysia,

reckoning” had finally arrived for Greenberg, and A.I.G.’s

USA and the United Kingdom.

former chief financial officer, Howard I. Smith.

CONTACT INFORMATION

Three Charged Over Tesco Accounts Fraud

Zafar Anjum, MSc, CFE, CII, MICA, Int. Dip. (Fin. Crime) CRI Group Chief Executive Officer 917, Liberty House, DIFC PO Box 111794, Dubai, UAE

Three former Tesco executives have been charged as part of a continuing investigation into accounting irregularities at the supermarket giant in 2014.

Carl Rogberg, Christopher Bush and John Scouler

Phone: +971 4 3589884

have been charged with fraud and false accounting, the

Fax: +971 4 3589094

Serious Fraud Office (SFO) said. Tesco said there had

Cell: +971 50 9038184

been “an extensive programme of change” since 2014.

Email: zanjum@CRIGroup.com

ISSUE 1 2016 | Ethics Resource | 21

I N F O C U S : Third-Party Risk in 2016

Does Your Risk Management Program Measure Up to Today’s Threats?

Speed. For today’s consumer, it isn’t a benefit

inadequate due diligence cannot be overesti-

or feature — it is an expectation. Thanks to

mated. With a strong third-party risk manage-

rapid innovation across an expanding land-

ment program, your organization’s network of

scape of service providers, manufacturers and

third-party service providers can be part of a

supply chain partners, companies today are

successful path to industry leadership. Without

better positioned to meet this expectation than

a good program to identify and remediate risks,

ever before. Convenience is now a commodity.

you may someday find yourself scrambling to

However, the convenience of calling upon a global network of vendor support comes with considerable risk. The consequences of

BY ZAFAR I. ANJUM, MSC, CFE, CIS, MICA, INT. DIP.

22 | Ethics Resource | ISSUE 1 2016

pick up the pieces of everything you built while your hard-earned customers jump ship.

Recent years have seen a number of

(FIN. CRIME), CII, MIPI

large scale data breaches attracting massive

regulatory penalties. Perhaps the most damag-

amounts of attention. Individual breaches

ing effect, and certainly the hardest to reme-

are now seen by the public as part of a trend.

diate, is the hit to your organization’s reputa-

This has resulted in tighter regulation, greater

tion and perceived trustworthiness. Building

consumer skepticism and a stronger-than-ever

customer confidence is a long term process in

need for organizations to identify third-party risk

which one negative experience can spoil years

management as a primary focus area.

of hard work.

The Stakes Are Higher Than Ever Companies that do not rely on third-party ven-

Be Deliberate in Protecting Your Business

dors for at least part of their operation today

Your organization is only as safe as the least-

are few and far in between. The practice is com-

protected component of your third-party vendor

monplace globally across nearly all industries.

network. It is up to you to ensure adequate

Though the trend reached maturation some

protection against risks like the loss of sensitive

time ago, third-party vendor services remain

data or changing regulations.

high in demand. This continues to drive innova-

Many companies do not have a formal third-

tion across markets. Explosive growth is pos-

party risk management program. Some have a

sible today in ways we couldn’t have imagined

program that was sufficient when put in place,

even 20 years ago.

but is no longer relevant to today’s risks. If your

Of course, with growth comes vulnerability.

risk management processes do not grow and

Every day customers are trusting companies

adapt with evolving threats and regulations, you

with more sensitive information, companies are

are vulnerable. This is an area where assump-

utilizing new capabilities for storing informa-

tions are simply not enough.

tion, and bad actors are developing new ways to target systems.

A breach of data security for your organiza-

Developing and implementing a third-party risk management program is essential, but not easy. It is a deliberate process with many

tion means a breach of trust for your customers.

considerations. Organizations grapple with

A security breach resulting in the exposure of

decisions at every point in the risk-management

sensitive customer information is a red flag for

process, from identifying what risks call for

everyone watching, including current and po-

increased oversight to efficiently addressing

tential customers. A vendor may be at fault, but

issues when they are discovered.

your customers will ultimately hold the principal not care which one of your vendors caused you

Know Your Needs and Modernize How They Are Addressed

to fall short of their expectations. This means an

The key to effective risk management in 2016

immediate negative impact on your bottom line.

is proactivity. Asking difficult questions now can

organization accountable. Customers simply will

Beyond the financial risk, a breach in data se-

save you from answering accusatory questions

curity can mean litigation, loss of market value,

later. An honest self assessment is imperative.

a decrease in share price and any number of

Questions you might consider include:

ISSUE 1 2016 | Ethics Resource | 23

Depending on the complexity of your vendor network and the nature of your organization, you might consider hiring a firm that specializes in due diligence services.

• Are your vendors equipped to protect your sensitive information against today’s risks?

• How sophisticated is your cloud and social

• Can you identify warning signs with vendors?

• Do you have a well-communicated reporting process?

media security?

• Are your vendors capable of adapting to regulatory compliance changes?

• Are proper redundancies in place to ensure your information is protected against acts of nature?

• Who owns the process internally?

• Do you have a set methodology for addressing incidents?

• Do you maintain an accurate and complete interactive inventory of your vendors?

24 | Ethics Resource | ISSUE 1 2016

Considerations change from company to company and from industry to industry. Financial institutions have a set of concerns far different from food service companies. Universities have a set of concerns far different from construction companies. And certainly the size of an organization will shape the necessary functions of a risk management program as well. A five-person start-up will require a much different program than a 5,000-person corporation in order to be adequately protected.

That said, modern risk management pro-

automated actions. At its core, a thought-

grams all have a number of things in common.

ful third-party risk management program

While organizations can take many shapes and

protects your most valuable asset — the trust

sizes, the principles of responsible risk manage-

of your customers — in a manner that saves

ment are one-size-fits-all:

both time and money.

• Not all risks are created equal. What risks are

• Stay focused. It’s common sense: Companies

organizations in your industry most suscep-

that identify third-party risk management as

tible to? Prioritize your focus. Know which

a primary focus area are in the best position

vendors carry a greater risk and require a

to succeed. Whether your company is build-

more active risk management strategy. Not all

ing a program for risk management for the

vendors require on-site review. A vendor with

first time, refreshing a program built previ-

no history of security concerns and with little

ously or conducting a scheduled review of

access to sensitive information does not call

your processes, it is important to establish

for the same level of scrutiny as a vendor man-

and effectively communicate the purpose of

aging large amounts of transactions through a

the program. Maintaining an effective risk

web of multinational compliance procedures.

management program cannot be a passive

• If you fail to plan, plan to fail. Maintain standards and policies for compliance across your organization. Depending on the complexity of your vendor network and the nature of your organization, you might consider hiring a firm that specializes in due diligence services.

Even if this is the correct route for your company, it is still crucial — perhaps even more so — to identify an internal point person to own the process and to maintain the principles of risk management within your culture.

• Keep it evolving. Your program should be

task. It must become part of your company’s culture.  ABOUT THE AUTHOR Zafar I. Anjum, CFE, is chief executive officer of CRI Group, a global supplier of investigative, forensic accounting, business due diligence and employee background screening services for some of the world’s leading business organizations. A member of the Dubai International Financial Centre, CRI Group safeguards businesses by establishing the legal compliance, financial viability, and integrity levels of outside partners, suppliers and customers seeking to affiliate with your business. CRI

subject to frequent adjustments and regular

Group maintains offices in UAE, Pakistan, Qatar, Singa-

review and ongoing evaluation. Your ability to

pore, Hong Kong, Malaysia, USA and the United Kingdom.

respond to changing regulations and adjust accordingly is crucial. Keep a close partner-

CONTACT INFORMATION

ship with regulators. Know what changes

Zafar Anjum, MSc, CFE, CII, MICA, Int. Dip. (Fin. Crime)

to anticipate. Additionally, the tools at your

CRI Group Chief Executive Officer

disposal for risk management continue to

917, Liberty House, DIFC PO Box 111794, Dubai, UAE

strengthen in cost-efficient ways. Organi-

Phone: +971 4 3589884

zations are relying less on passive, time-

Fax: +971 4 3589094

consuming and costly manual assessment

Cell: +971 50 9038184

of vendors, and more on analytic-focused,

Email: zanjum@CRIGroup.com

ISSUE 1 2016 | Ethics Resource | 25

I N F O C U S : Investigative Due Diligence

A Critical Step in Reducing Risk and Liability

By CRI Group Staff

Due diligence refers, in a broad sense, to the

tion agreements, compensation arrangements,

level of judgment, care, prudence, determina-

and so forth.

tion and activity that a person would reason-

This article focuses on investigative due dili-

ably be expected to exercise under particular

gence versus inadequate due diligence. Legal

circumstances. In corporate law, due diligence

and financial due diligence will not be entirely

is the process of conducting an intensive

excluded, as all three of these specialties can

investigation of a corporation as one of the

interrelate, depending on circumstances —

first steps in a pending merger or acquisition.

which in part include the objective(s) of the

In a company acquisition, due diligence would

client. The expertise of legal counsel or accoun-

include fully understanding all of the obligations

tants may be necessary components in some

of the company: debts, pending and potential

situations, requiring a team approach.

lawsuits, leases, warranties, long-term customer agreements, employment contracts, distribu-

26 | Ethics Resource | ISSUE 1 2016

Oftentimes, clients have their own in-house lawyers, accountants and auditors. They may

also have their own security and investigative

are some of the areas potentially affecting the

personnel. However, in global transactions

outcome of any business decision. Evaluating

knowledge of and the ability to operate in

the personal and business reputation of po-

foreign countries may be less than adequate

tential business partners, associates, agents,

to cope with the complexities of gathering reli-

representatives, and consultants is a critical

able information in unfamiliar places. Corpo-

piece in determining not only the soundness of

rate Research and Investigations LLC (here-

a business relationship, but the reputation and

inafter called “CRI Group”) is an investigative

standing of the client as well. The three classic

research firm well positioned in the Asian and

elements of investigative due diligence are busi-

Middle Eastern regions specifically to provide

ness and media data research, public records

investigative due diligence services and to

search, and direct contact with government and

also serve as an advisor to clients in locating

private sources.

competent “local” expertise on the legal and financial side, if necessary.

The Purpose of Due Diligence Investigations

An optional fourth element — often overlooked, but extremely useful in certain situations — is a detailed written disclosure and background questionnaire. Voluntary questionnaire responses can provide important leads,

In essence, due diligence investigations are

as well as providing benchmarks that can be

about reducing risk and successor liability and

used in assessing the credibility of a subject.

should be a major consideration in any transac-

The questionnaire also serves as a means to

tion. Since it is impossible to eliminate all risk,

document due diligence efforts. Not all of these

the purpose of exercising due diligence is to cut

elements can be used in every due diligence

the risk down to a manageable and acceptable

inquiry — a limited amount of foreign media,

level. A considerable measure of judgment is

business and public records may be available

involved, not only in deciding what action to

online for a particular locale — but this can be

take, but in determining the level of investiga-

inadequate for remote locations, specifically

tion that matches the importance of the matter

the Middle East and Asian regions. Investiga-

to the client.

tive due diligence is an information-gathering

Due diligence investigations can allow the

discipline that is both distinct from and comple-

buyer of a property (company, trademark,

mentary to traditional legal and accounting due

license, etc.) to make an informed investment

diligence inquiries. It focuses on in-depth back-

decision with respect to the proposed acquisi-

ground investigation, vulnerability analysis and

tion. Lenders of money for all types of business

assessment, corporate personality and culture,

purposes need to know the level of risk and

and business intelligence.

security associated with a loan. The aforementioned are only two examples in which a due

Increased Mergers & Acquisitions

diligence investigation seeks to anticipate,

Merger and acquisition activity has been boom-

identify, avoid or minimize the risks before a cli-

ing, a trend that started in the 1990s. The total

ent makes a commitment. Political, economic,

value of mergers and acquisitions increased

legal, regulatory and security considerations

from $178 billion in 1990 to more than $1.7

ISSUE 1 2016 | Ethics Resource | 27

trillion in 1998. Today, as major industries like

Other U.S. legislation is either pending or

banking, insurance and telecommunications

contemplated in regard to increasing transpar-

continue to consolidate, mergers and acquisi-

ency and accountability in the foreign market-

tions should grow at an even faster rate. The

place. The expansion of U.S. business into new

increase of foreign investments by the world’s

markets has prompted law firms to brief corpo-

major economic powers, the emergence of

rate clients about the FCPA and to encourage

previously closed markets such as the former

them to establish compliance programs. The

Soviet Union and Eastern Europe, the recent

U.S. Department of Justice is beginning to use

opening of major markets such as China and India, the increase in major infrastructure projects worldwide, and the privatization of government entities have created a need for accurate, timely and reliable information that has become identified as added value in transactions.

International terrorism is on the rise and will undoubtedly present increasing challenges in the future for corporations and other business interests seeking stability for their operations.

Major law firms require litigation support. Loan underwriting and the secondary mortgage market are growing components of the commercial real estate industry.

more aggressive tactics to investigate alleged violations of the Act; these tactics include consensually monitored telephone conversations and search warrants. U.S. companies cannot escape the act by conducting business through a foreign subsidiary or joint venture that makes illegal payments.

U.S. companies must also be concerned about whether a joint-venture partner is owned, in whole or in part, by a foreign official or an official’s relatives. FCPA exposure is greatest in areas where corruption is common and in industries in which foreign government involvement is greatest. While corruption may seem to

The Impact of Legislation

be omnipresent in international business, grow-

With extensive enforcement of the Foreign Cor-

ing pressure for change can be seen in the form

rupt Practices Act (FCPA) after 9/11 and most

of domestic political backlash that has recently

recently legislation of UK Bribery Act 2010, it is

occurred in Indonesia, Pakistan, and South

mandatory for companies to undertake integrity

Korea, to cite a few examples. This increasing

due diligence before taking any decision with

intolerance of corruption has caused some po-

potential business deals/joint ventures and es-

litical leaders to be humiliated and sometimes

tablishing working relationships with third party

driven from power.

services providers.

The FCPA prohibits American businesses

The most effective way to minimize the risk of FCPA prosecution is to perform adequate in-

from paying bribes to foreign officials, even in

vestigative due diligence before hiring a foreign

countries where it is considered standard prac-

agent, consultant or representative, or enter-

tice. The Act requires companies to undertake

ing into a foreign merger, acquisition or joint

due diligence efforts to determine if business

venture. Where traditional investigative due

contacts are tainted. Due to its enforcement

diligence is typically performed to evaluate the

measures, the FCPA has emerged as a hot topic

quality and reputation of targeted businesses

in corporate board rooms across the U.S.

and individuals, investigative due diligence for

28 | Ethics Resource | ISSUE 1 2016

FCPA compliance seeks to determine whether

jurisdictions, and the practice by the rest of the

foreign business partners or consultants are

world. Under the common law practice, clients

government officials as defined by the Act.

usually expect due diligence to be conducted

Aggressive enforcement of the UK Bribery Act

before a transaction is closed or completed.

marks a similar approach.

However, this raises two issues with cross-cultural overtones — the scope and timing of a due

Cross-Cultural Considerations

diligence investigation. In common law circles,

International acquisitions are becoming more

the shared belief is that one can never do

and more attractive to foreign companies

enough due diligence. Such a comprehensive

whose strategy is to gain instant goodwill,

approach is grounded on the doctrine of caveat

distribution and/or management expertise

emptor, or buyer beware.

in a particular local market. This investment

In this type of atmosphere, the burden of

strategy will become more popular as devel-

investigation is placed on the client’s (buyer’s)

oping countries continue to relax their foreign

shoulders. By contrast, due diligence in other

investment controls to allow more opportu-

countries may be somewhat more abbreviated.

nities for 100 percent foreign ownership of

The matters normally covered by a common

domestic companies. Properly conducted

law type due diligence investigation may not be

due diligence takes on a greater role with the

necessary because in civil law countries many

prospects of having to deal with multi-jurisdic-

of those issues are covered by more specific

tional entities. This role will require a client to

rules. In some countries, comprehensive due

be concerned with both country-specific and

diligence may be interpreted as intrusive at

target-specific investigations.

best and at worst a sign of mistrust or bad

Whether an investment is a joint venture,

faith on the buyer’s part.

corporate acquisition or a strategic alliance, a foreign investor must be up to speed in matters

Cultural Differences in Due Diligence

such as the cultural, geographic, and legal envi-

For example, in Japan there is a hesitation to

ronment of the host country or countries of the

conduct a full investigation in order to pre-

proposed business venture. With this in mind,

serve the spirit of mutual trust between buyer

the client must be advised to carefully consider

and seller. The Japanese system places the

the “big picture.” Attitudes toward due diligence

burden of diligence on the seller, not the buyer.

may vary from country to country. A good first

The seller has a good faith duty to satisfy the

step is to consult a regional or country special-

buyer’s reasonable and good faith expecta-

ist who understands the area, if such a person

tions in a business transaction. This belief

is not already on staff.

is grounded in a strong Japanese tradition of honesty in business dealings, and by the

U.K., U.S. and the World

desire of Japanese businessmen to maintain

Practically speaking, global due diligence can

long-term relationships.

be separated into two schools: the practice

It is important to note that doing busi-

from the U.K., U.S., and other common law

ness on the basis of long-term relationships

ISSUE 1 2016 | Ethics Resource | 29

is common throughout all of Asia, as well as

the aforementioned business cultures is to

in Latin America. Saudi business executives

be aggressive. This approach can destroy any

prefer to feel comfortable with their business

chance of achieving success in consummat-

partners before any agreements or contracts

ing a deal in the short term, and developing a

are signed. Hence, a number of leisurely paced

long standing relationship in the long run. In

meetings can be expected where no substan-

most parts of Asia, the deal is embodied in the

tive business is discussed and interruptions

harmonious relationship between the parties.

The Japanese system places the burden of diligence on the seller, not the buyer. The seller has a good faith duty to satisfy the buyer’s reasonable and good faith expectations in a business transaction. This belief is grounded in a strong Japanese tradition of honesty in business dealings, and by the desire of Japanese businessmen to maintain longterm relationships.

(phone calls and visitors) and lack of privacy is

For Westerners, the deal is typically embodied

not uncommon. As the time comes to actually

in the documents. Thus the stage is set for a

finalize an agreement, confidentiality is most

clash of cultures which can usually be avoided

likely to increase. From the Saudi point of view,

with proper planning and forethought.

due diligence through social interaction actually becomes an important aspect of the process.

The worst step anyone can take in any of

30 | Ethics Resource | ISSUE 1 2016

The timing of a due diligence investigation should be handled with this view towards cultural sensitivity. Due diligence in common

law situations is generally conducted before any definitive agreement is signed. At the very least, the client’s satisfaction with its due diligence is made a condition precedent to the client’s obligation to complete the transaction.

In many countries, it is not uncommon for due diligence to completed as condition subsequent to closing a deal. As with the scope of due diligence, timing of the investigation may result in a culture clash where one party views such a demand as a sign of mistrust or bad faith.

However, conducting discreet or even covert investigative due diligence investigations may be necessary. The utmost care and planning must be undertaken in investigations of this type.

Top 5 Due Diligence Pitfalls That Proper Investigations Help You Avoid Proper due diligence investigations expose security issues that could have potentially disastrous impacts on your organization’s business operations, were they to remain uncovered. Such investigations conducted by experts can unearth critical information that enables business leaders to avoid: 1. Merging with an international busi-

Conclusion

ness embroiled in several behind-

Reducing risk and successor liability should be

the-scenes legal battles.

critical focus areas for any company conducting business in our global economy. It will never be possible to eliminate risk entirely. But the purpose of proper due diligence is to reduce risk to a manageable and acceptable level. There is no “one size fits all” solution to due diligence for each client; it must be tailored to each sce-

2. Getting caught up in making procurement decisions involving the inappropriate influence of government officials who were slated to receive kickbacks.

3. Partnering with organizations that

nario. And to be successful, the due diligence

are potential credit risks, have

process must be thorough — and conducted by

claimed bankruptcy, have dissolved

proven experts. 

stated companies or are faced with debtor filings.

CONTACT INFORMATION Corporate Research and Investigations LLC 917, Liberty House, DIFC P.O. Box 111794 Dubai, U.A.E. Tel: +971-50-9038184

4. Awarding work to an overseas contractor with absolutely no prior experience.

5. Affiliating with a contracting com-

Fax: +971-4-3589094

pany owned by a politician with sig-

Toll Free: +971 800- CRI LLC (274-552)

nificant influence on future awards.

Email: cridxb@CRIGroup.com

ISSUE 1 2016 | Ethics Resource | 31

News & Media Upcoming Events Find CRI Group at the following events around the globe in 2016:

CRI Group: Official Supporter of International Fraud Awareness Week Fraud costs organizations worldwide an es-

2016 ACC Annual Meeting October 16-19, 2016 San Francisco, CA

timated 5 percent of their annual revenues.

The seriousness of the global fraud problem is

Abu Dhabi International Petroleum Exhibition and Conference 2016 (ADIPEC) November 7-10, 2016 Abu Dhabi, UAE

why CRI Group has announced that it will once again be participating in International Fraud Awareness Week, Nov. 13-19, 2016, as an official supporter to promote anti-fraud awareness and education.

ASIS China Conference November 14-15, 2016 Crowne Plaza Shanghai Shanghai, China

The movement, coordinated by the Association of Certified Fraud Examiners (ACFE) and

4th Annual Asia Ethics Summit December 6, 2016 The Fullerton Hotel Singapore

OFFICIAL SUPPORTER known commonly as Fraud Week, champions the need to proactively fight fraud and help safeguard business and investments from the growing fraud problem.

This will be the sixth year in a row that CRI Group has been at the front of the yearly campaign, joined by hundreds of organizations who have partnered with the ACFE for the Fraud Abu Dhabi, UAE

32 | Ethics Resource | ISSUE 1 2016

Week movement.

During Fraud Week, official supporters will

engage in various activities, including: hosting

said. “At CRI Group, we encourage organizations

fraud awareness training for employees and/or

of all shapes and sizes to conduct proper due

the community, conducting employee surveys

diligence and minimize risk. Only by addressing

to assess levels of fraud awareness within their

fraud and corruption proactively can we make

organization, posting articles on company web-

progress in preventing and detecting it.”

sites and in newsletters, and teaming with local media to highlight the problem of fraud.

CRI Group CEO Zafar I. Anjum, CFE, said his organization is proud to be a supporter of such an important initiative, helping to spread aware-

stand how serious and pervasive fraud is, and how critical fraud prevention is to their overall business success.

For more information about increasing awareness and reducing the risk of fraud dur-

ness and education about fraud.

“Fraud is a serious issue for companies worldwide, and it is only getting worse,” Anjum

Advertise With Us

It is important that business leaders under-

ing International Fraud Awareness Week, visit FraudWeek.com.

To advertise with us, please send an email to PR@CRIGroup.com.

Space is available for Fraud360 and Ethics Resource magazines as well as our monthly email newsletter, Fraud360 News Brief International.

CRI Group Plays Key Role at First-Ever ACFE Middle East Fraud Conference More than 300 anti-fraud professionals

security and loss prevention professionals, and

gathered in Dubai in February under the kind

governance, risk and compliance professionals.

patronage of His Highness Sheikh Maktoum

CRI Group’s CEO Zafar I. Anjum, CFE, said

Bin Mohammed Bin Rashid Al Maktoum, the

that his company eagerly embraced the oppor-

Deputy Ruler of Dubai and Chairman of FAD, at

tunity to be a Platinum Sponsor at the Middle

the 2016 ACFE Middle East Fraud Conference.

East Fraud Conference. CRI Group’s world head-

CRI Group was proud to be a Platinum Sponsor

quarters is located in Dubai.

“The conference provided an unmatched

for the event.

Hosted by the Financial Audit Department

opportunity for training and sharing best prac-

of Dubai and held at Atlantis, the Palm, the

tices for fighting fraud in the Middle East,” An-

event was the first of its kind in the Middle East.

jum said. CRI Group’s representatives met face-

Attendees included Certified Fraud Examin-

to-face with many of the attendees, discussing

ers (CFEs), anti-fraud specialists, internal and

their challenges in fraud fighting — and sharing

independent auditors, forensic accountants, in-

“ways we can all work together to prevent and

formation technology and IT security profession-

detect more fraud — not just in the Middle East,

als, law enforcement and private investigators,

but around the world,” Anjum said.

Join the Conversation

ISSUE 1 2016 | Ethics Resource | 33

Fraud fighters from around the region learned the latest trends in fraud prevention, detection and deterrence during interactive sessions, educational workshops and an informative panel discussion.

Attendees also met high-ranking and reputable speakers from leading organizations in the Middle East; gained insights into best prac-

CRI Group Adds Investigative Services to List of BSI Certifications CRI Group recently became the first investigative research company in the Middle East to receive the BS 7858:2012 certification – Security Screening of Individuals Employed in a Security Environment, from internationally recognized

tices and cutting-edge tools and techniques

training and certification body BSI. The certifica-

to detect fraud; and forged alliances with new

tion recognizes CRI Group’s expertise in screen-

and existing contacts who share similar chal-

ing services including identity checks, financial

lenges and goals.

checks, employment checks and criminal

Featured speakers included Bruce Dorris, J.D., CFE, CVA, vice president and program

records checks.

This week, CRI Group added to its expanding list of expert credentials by also earning the BS 102000:2013 certification – Code of Practice for the Provision of Investigative Services. The BSI certification is provided based upon CRI Group’s proficiency in providing services regarding: • Fraud risk assessment and investigations

Attendees at the 2016 ACFE Middle East Fraud Conference in Dubai, UAE.

director for the Association of Certified Fraud Examiners (ACFE); Prof. Dr. Marco Gercke, director, Cybercrime Research Institute; Jeffrey Robinson, author and international expert on organized crime and fraud; and Hamed Kazim, CEO, HK Consulting (United Arab Emirates).

The host of the conference, the FAD, conducts regular financial audits, information systems audits and performance audits for

• Forensic accounting • Intellectual property (IP) investigations • Due diligence and background investigations • Debt collections • Corporate security consulting and investigation • Pre- and post-employment screening (on request to BS 7858:2012) • Fraud and crime investigations (all investigations to the requirements of BS 10200:2013 All of the above functions are part of CRI

ascertaining the extent of legality, adequacy of

Group’s core competency in safeguarding

financial prudency and management of finan-

businesses worldwide from fraud and corrup-

cial operations. The objectives include review-

tion, and providing due diligence, pre- and

ing of efficiency, effectiveness and economy in

post-employment background screening, risk

planning, directing, execution, controlling and

management, compliance and other profes-

monitoring of operations.

sional services.

34 | Ethics Resource | ISSUE 1 2016

Zafar I. Anjum, CRI Group’s president and

Founded in 1901, BSI (also known as British Standards Institution) is the UK national

CEO, said that earning multiple certifications

standards body that works with thousands of

from a distinguished standards body like BSI is

organizations in more than 150 countries. BSI is

a mark of pride for the company. In December

accredited by 20 local and international bodies.

of 2014, Anjum announced that CRI Group

CRI Group now holds the following certifica-

would be engaging BSI for training and certification on many levels, and the recent certifica-

tions from BSI: • BS 7858:2012 – Security Screening of Individuals Employed in a Security Environment • BS 102000:2013 – Code of Practice for the

tions are direct results of that initiative.

“CRI Group has always provided the highest level of professional security checks, investigative services, information security and other critical services for clients all over the world,”

Provision of Investigative Services • ISO/IEC 27001:2013 – Information Security Management System

Anjum said. “We are pleased to have our competence in these areas recognized by BSI, and we will continue to strive to provide the highest

• ISO 9001:2008 – Quality Management

level of expertise for businesses to help them

System

prevent and detect fraud.”

Ethics & Compliance by the Numbers Corruption and Fraud in Resource Development

The Impact of Bribery in the Workplace

Integrity Violations in Business

Number of preliminary

of bribery cases

of integrity violations

inquiries related to

involved payments

investigated by Asian

fraud, corruption and

through intermediaries.

Development Bank (OAI)

collusion received by

1 3

were fraud-related. Half

323 75% 60% World Bank Group in 2015.

88

Percent of external

in

Bribery cases were instigated by selfreporting.

of integrity complaints received by OAI were from external parties.

970

tions of corruption.

53%

72% of corruption

involved corporate man-

of 102% from 2014.

cases also included

agement or CEOs.

Sources: The World Bank Group Integrity Vice Presidency; OECD Foreign Bribery Report; Office of Anticorruption and Integrity (OAI), Asian Development Bank.

cases under investigation at the end of 2015 involving allega-

elements of fraud

of bribery cases

Number of investigative due diligence requests handled by CRI Group this year, an increase

and/or collusion.

ISSUE 1 2016 | Ethics Resource | 35

What Third-Party Ethics and Compliance Risks Threaten Your Business?

Third-party relationships are critical in business today. While such affiliations are

essential to the success of your organization, the negative consequences of inadequate due diligence cannot be underestimated.

Our Third-Party Risk Management (3PRM™) experts will work with you to develop a proactive approach to mitigating risks from third-party relationships. Our 3PRM strategy focuses on providing ethical risk assessments, conducting investigative due diligence, identifying fraud risks, investigating cases of unethical behavior, measuring effectiveness and results, and more.

Top Risks Posed by Third-Party Partners: Harm to Reputation Non-Compliance Issues Negative Financial Impacts Supply Chain Risk Security Threats

Visit us online at CRIGroup.com cridxb@CRIGroup.com / +971 4 358 9884 / +44 207 8681415

UAE / Qatar / Pakistan / Saudi Arabia / Singapore / Malaysia / United Kingdom / USA