Friday, April 27, 2018

Opaque ownership worries risk managers

Third parties represent a significant and growing risk for companies doing business in Asia, and particularly in China.

Compliance costs in the region have increased significantly during the past decade, but there are still significant problems when it comes to dealing with external companies due to reputational issues and opaque ownership.

Indeed, less than a quarter of risk managers say they are highly confident in their ability to address such risks, according to an anti-bribery and corruption study conducted jointly by Kroll and the Ethisphere Institute, released this week at Ethisphere’s Annual Global Ethics Summit in New York.

China tops the list of markets for sleepless risk managers, even surpassing Africa, with 27% of respondents there reporting that they had experiences in legal, ethical or compliance issues with a third party after initial due diligence had been conducted.

“Beneficial ownership has become more of a concern across Asia in recent years from the continued impact of 1MDB [Malaysia’s state development fund] to Xi Jinping’s continued anti-corruption campaign,” said David Liu, head of Asia-Pacific compliance at Kroll. “Ultimate beneficial ownership will continue to be a concern for all involved from governments, firms being considered for investments by foreign companies, as well as firms looking to invest in foreign companies.”

This issue has been highlighted in China’s financial sector with regulators planning several new measures to limit ownership by single shareholders in banks and insurers. The merger this week of regulators for those sectors will at least partly attempt to address the problems of opaque ownership.

To be sure, spending more money on regulatory compliance has not yet solved the problem. In the Asia-Pacific region, according Oliver Wyman research, 86% of companies said that compliance costs grew significantly between 2005 and 2016, with a couple of Singaporean banks’ executives saying that costs have been increasing at an incredible rate of between 20% and 35% a year.

These higher compliance costs in Asia are driven by new regulations, specialised functions, a widening risk remit and the region’s fragmented market.

Meanwhile, the Kroll/Ethisphere report shows that 36% of respondents said their organisation dedicated more resources to anti-bribery and corruption issues in 2017 than in 2016. But despite all this spending, 93% of respondents say their anti-bribery and corruption risks will either remain the same or worsen in 2018.

This rise is mostly attributed to increased enforcement of existing regulations.

“In today’s hypersensitive business environment where a company’s hard-earned reputation can be easily lost through a lapse of judgment by a third party, the job of a conscientious compliance professional has never been tougher or more central to the success or failure of a business,” said Steven Bock, global head of operations with Kroll’s compliance practice.

While reputational and integrity concerns are the number-one reason why a third party fails to meet an organisation’s standards, more than half of respondents reported that they were “concerned” or “very concerned” with beneficial ownership risks associated with their third parties.

This is a particular issue with regards to mergers and acquisitions. While activity remains high among companies in the region, the data continues to show that they are not conducting appropriate levels of pre-acquisition due diligence.

As regulators start to take enforcement more seriously, risk managers are coming under greater pressure than ever to control their exposure to third parties.

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