As a business, we have seen a growing demand for risk management services in Asia-Pacific (APAC) over the last three years. And it is no wonder when you analyze APAC risk management trends. Global economic dislocations, trade wars, and geopolitical upheavals have created complex and unprecedented risk challenges for businesses that operate in the region. Corruption is still a significant problem for many countries, and doing business in the right way with the right people can be difficult. Regulatory change is on the horizon across APAC, but until then, businesses must tread with caution.
Here we review some of the most recent high-profile governance failures from the region and examine the main risk areas that business must successfully navigate.
APAC and Breakdowns in Corporate Governance
The results of lapses in risk management have been jaw-dropping in scale. In recent years, we have seen cases that exposed weak internal processes all the way to massive state-level corruption.
- Westpac, an Australian bank, was accused of breaching anti-money laundering laws in more than 23 million breaches involving $11 billion in transactions. Massive failures in customer due diligence led to transfers potentially linked to child exploitation. In addition, Westpac failed to assess the risk in dealing with a number of correspondent banks who themselves had relationships with high-risk or sanctioned countries, including Iraq, Lebanon, Zimbabwe, and the Democratic Republic of Congo.
- The 1Malaysia Development Berhad (1MDB) fund scandal shook the country to its core. This state investment fund came under scrutiny for suspicious transactions as probes pointed to money laundering, fraud, and theft amounting to $4.5 billion. The case eventually led to then Prime Minister Najib Razak’s defeat in the 2018 elections and shortly thereafter his arrest for his involvement in money laundering.
- The former head of PT Garuda Indonesia, the country’s flag carrier, was suspected of money laundering following a long running probe into corruption. The CEO stands accused of taking bribes relating to the purchase of planes and machines from Airbus and Rolls Royce.
Applying Lessons Learned
The list of case studies could go on, showing how significant the challenges of risk management are across APAC. For businesses just dipping their toe in the market, understanding the risks helps them to stay on the right side of regulators while meeting business objectives. And for companies already operating there, ongoing assessments of risk will counterbalance the fast pace of change.
Bribery, corruption & financial crime risks
Bribery and corruption remain widespread at all levels of society in APAC, and political connections are major red flags. The latest Corruption Perceptions Index by Transparency International states that “the Asia Pacific region hasn’t witnessed substantial progress in anti-corruption efforts or results.” China, in particular, is one country where corruption continues to be found in the highest ranks of government bodies.
In a recent case, China’s Meng Hongwei, a former head of Interpol, was sentenced to 13½ years in jail for accepting bribes. And recently in Hong Kong, former Secretary for Home Affairs, Patrick Ho Chi-Ping, exposed his role in bribing African leaders through contacts made at the United Nations. Ho was sentenced to three years imprisonment with a $400,000 fine.
But it is not just China; there are many other examples. You only need to look at the recent cases of fraud at India’s Punjab National Bank to see what can happen when thorough onboarding checks do not happen. Verifying the assets of customers being onboarded and getting to the bottom of sources of wealth may not be as simple as a database check. But with the right information sources, it is possible. Onboarding vendors and entering into joint ventures will require specialized due diligence to identify issues of concern.
Knowing who you are working with is vital wherever you work in the world, and APAC is no different. Identifying where your local partner’s business practices can expose your organization to unnecessary risk is the first step. Take the case of Juniper Networks: The cybersecurity solution provider’s third-party business practices in China were one of the reasons for their $11.7 million settlement with the Securities and Exchange Commission (SEC) for FCPA violations.
The scale of vendors can vary from large corporations through to small scale agents, but the issues are often the same. Political connections, human rights abuses, conflicts of interests, and falsifying experience can all be major issues. Getting your third-party risk management procedures right will expose any hidden issues and protect your business.
Issues affecting your reputation can have a major influence on the value of your business and can be difficult to fix quickly. Having the right people at the helm is an important step to safeguarding your business and reducing your reputational risk. But bringing in the wrong senior people can be a sure-fire way of damaging your reputation, especially in a region where bribery and corruption are widespread. Conducting executive due diligence will make sure you are able to make informed recruitment decisions.
For existing staff, having a strong ABAC program that is well-communicated and easy to understand ensures that staff are trained not to make or accept bribes. It is not just overseas staff who need training; employees at all levels should be made aware of the impact of their actions. For example, clear policies and oversight may have helped at Canadian energy firm Westport. The company’s Chief Executive Officer has been accused of bribing a Chinese government official for her company’s financial gain.
Helping Clients in the Region
We opened our Hong Kong office in 2019, having seen a need for expert due diligence services in the region. We work closely with our clients to determine their focus, and then add context with source-based inquiries that provide the clarity required to make the right business decisions. Our approach is not to check off boxes on a compliance list, but to provide a 360 degree approach, examining an issue from all sides. When your business can confidently identify conflicts of interest, examine political links, and navigate emerging regulations in APAC, you’ll be well on the way to successful, and compliant, business ventures.