The Disputes and Investigations practice at Alvarez & Marsal (A&M) published Threatscape 2022, that examines three major fraud, compliance, regulatory risks and investigations trends the firm expects to see in Asia and provides mitigation strategies organisations can employ to safeguard business continuity.
Trend 1: President Biden’s aggressive FCPA enforcement to boost the number of cross-border investigations; multinationals, be prepared!
In December last year, the Biden administration unveiled the US’s first-ever national security strategy memorandum focused on corruption, designed to support “economic equity, global antipoverty and development efforts, and democracy”. This came after a 25 percent increase in whistleblowing reports regarding FCPA violations in 2021.
Keith Williamson, Managing Director and Head of A&M’s Disputes and Investigations practice in Asia, foresees a rise in the number of FCPA investigations worldwide. He said, “There is renewed focus in the US administration’s handling of corruption. President Biden has significantly increased resources to fight corruption and has appointed a record number of FCPA prosecutors. We foresee that the number of cross-border investigations and related sanctions will accelerate in 2022 and reach new peaks in the coming years.
“In Asia, the majority of investigations will focus on companies with operations in mainland China. Indonesia, Vietnam and Thailand are also expected to see an increased number of investigations. The most vulnerable industries will continue to be those that are government-regulated, including oil and gas, aerospace and defense, and healthcare.
“All organisations with international operations should expect heightened scrutiny this year and beyond. To prepare and avoid sanctions, it is vital that businesses assess the need to strengthen financial internal controls and compliance procedures, provide updated training to staff and review third party relationships and contracts. Performing regular risk assessments and monitoring to identify where the risks lie and how they might evolve over time is also essential.
“The pandemic has hindered multinationals’ compliance procedures, with limited to non-existent travel from US or European headquarters to oversee and test processes and controls in locations cut-off through travel restrictions. Instead, companies have had to rely on local management oversight or remote scrutiny creating gaps in compliance procedures and challenges for ongoing monitoring, internal audits and investigations.
“Increased enforcement of the FCPA and continued short-seller activity, in relation to financial statement manipulation, are also impacting M&A. Private equity and other acquirers are now demanding forensic due diligence from third parties to ensure that the companies they are courting are operating in a lawful and ethical manner. This is particularly an issue for cross-border transactions in China. As international travel to the country remains exceptionally challenging overseas acquirers are not afforded the opportunity to build their trust levels through traditional face-to-face meetings and their own in-country due diligence.”
TREND 2: Digital assets facing greater regulation, investigations and enforcement, driven by recent US policy developments and the war in Ukraine
The US Government has signalled that it is stepping up its fight against digital assets fraud. In early March 2022, President Biden officially directed federal agencies to implement a coordinated strategy for policies and regulations on digital assets in the US, marking the end of the fragmented regulatory framework in place to date. In 2021, the US Justice Department launched the National Cryptocurrency Enforcement Team, a taskforce designed to fight against criminal use of digital assets.
Commenting on the impact of US policy developments on the Asian digital assets landscape, Henry Chambers, Senior Director with A&M’s Disputes and Investigations practice, said, “In the long term, the new US regulations and enforcement taskforce are extremely positive for the digital assets market and essential to accelerate institutional adoption of the asset class.
“The US continues to be a digital asset regulation leader. We believe that US policy developments will lead to increased regulation globally and greater cross-border cooperation to stamp out crypto-related fraud and crime. As an example, the FBI has already been involved in a recent case related to fraud committed on a Hong Kong-based crypto exchange.
“The US’ $3.6 billion seizure of assets, allegedly stolen in the widely reported 2016 hack of Bitfinex, shows the effectiveness of the country’s newly formed crypto task force and indicates that the US government and regulators will continue to monitor the sector closely. It also demonstrates that enforcement and recovery actions against fraudulent activity can be achieved years after hacking operations. We expect more investigations and successful resolutions of past fraud cases in the coming twelve months.”
Discussing the new focus on digital assets brought on by the war in Ukraine, Mr. Chambers said: “This is the first digital asset war. For the first-time, digital currencies are playing a major role in geopolitics. Numerous regulators, including the EU, Japan and the US, have confirmed that sanctions on Russia will apply to cryptocurrencies. Increased focus on regulators’ interplay with digital asset market participants will generate a better understanding on the application of such sanctions. Major digital asset exchanges have stated that they will abide by sanctions set out by various regulators, but have stopped short of freezing Russian wallet addresses.”
“In view of this, all controls and screening tools for Asian digital assets should be in place and functioning effectively to best respond to the rapidly changing sanctions environment.”
TREND 3: New data security laws in China are increasing the cost of doing business in the country and making cross-border litigation more challenging
In November 2021, mainland China implemented the Personal Information Protection Law (PIPL), requiring international and domestic companies to re-evaluate how they handle Chinese personal data. The PIPL sits on top of the existing laws governing China State Secrets and the new Data Security Law (DSL) established in September 2021.
The PIPL sets how data is collected, stored and handled in mainland China. Additionally, it establishes data processing requirements and mandatory approval of data transfers by Chinese authorities if the data is requested by a foreign judiciary. For multinational companies, the law also demands certain data protection certifications.
Commenting on the ramifications for multinationals doing business in China, Davin Teo, Managing Director with A&M’s Disputes & Investigations practice in Hong Kong and the Head of the firm’s Forensic Technology team across Asia, said, “Both the PIPL and DSL give China more teeth to enforce its position that data cannot be transferred out of the country without expressed permission.’ “On a practical level, many multinationals are, for the first time, contending with a comprehensive data classification exercise. To ensure ongoing compliance, they will need to undertake regular monitoring and recertification. Together, with the need to appoint local governance staff, compliance costs are likely to rise steeply. However, these pale in comparison to the hefty penalties facing companies and individuals that violate the laws for non-compliance.” In the past 12 months, A&M’s Disputes and Investigations Forensic Technology team has seen a 20 percent increase of engagements around cross-border disputes involving China. Commenting on the implications of the new data security laws on investigations, the process of e-discovery and litigations, Mr. Teo said, “The new laws are more of a speed bump than a wall. More than half of the cross-border litigation cases we have worked on since the implementation of the new laws have secured relatively quick authorisation around the release of data. In other cases, while the approval process to move data outside of mainland China has proven to be more time-consuming or problematic, the challenges are not insurmountable.
“While the PIPL adds hoops to go through in dispute, investigation or litigation processes, our counsel is to provide timely and proactive communication with the relevant Chinese bodies as soon as possible. Additionally, the time for explaining the nature of the dispute and the type of data that might be potentially required for disclosure should be factored into planning.