1. Global
Fraud Report
Issue 13 May 2011
The strategic impact of fraud,
regulation, and compliance
An Altegrity Company

2. The information contained herein is based on currently available sources and analysis and
should be understood to be information of a general nature only. The information is not
intended to be taken as advice with respect to any individual situation and cannot be relied
upon as such. Statements concerning financial, regulatory or legal matters should be
understood to be general observations based solely on our experience as risk consultants and
may not be relied upon as financial, regulatory or legal advice, which we are not authorized
to provide. All such matters should be reviewed with appropriately qualified advisors in these
areas. This document is owned by Kroll, and its contents, or any portion thereof, may not be
copied or reproduced in any form without the permission of Kroll. Clients may distribute for
their own internal purposes only. Kroll is a business unit of the Altegrity family of companies.
II | Kroll Global Fraud Report

3. The strategic impact
of fraud, regulation,
and compliance
Fraud is an ever-evolving threat.
Its changing forms inevitably
spark new regulatory responses
in the ongoing battle between
fraudsters, their victims and
the authorities. Business must
adjust its own compliance
efforts to such new marching
orders, as part of its role in the
fight, even when new legislation
all too often is clearer about the
ultimate goal than the actual corruption in southern Italy’s renewable energy is inevitably shaped by local exigencies. These
sector, to be able to respond to the complex are seeing rapid change in major markets from
details of its requirements. levers of power within the societies of different the United States and United Kingdom to
Indian regions, or even to be aware of Brazil, as well as smaller ones such as
As companies know, however, the risks of surprising aspects of Chinese corporate law. Mongolia, which these articles help to explain.
fraud and falling afoul of anti-fraud regulation
permeate almost all business activity. Achieving such an understanding is never a We hope that this edition of the Global Fraud
Addressing them properly therefore affects finished task. Anti-fraud strategies and Report provides useful input as you shape
business strategy in numerous ways. This compliance programs need to be an integral a business strategy consistent with the ever
issue of the Global Fraud Report shines part of ongoing operations. Their specific form changing regulatory environment.
a spotlight on a series of fraud and
regulation-related issues both to illuminate
specific concerns and, collectively, to provide
Compliance: Why ‘by the book’
a better idea of the proper breadth of a is good for the books p2
strategic response to fraud.
From Barings to Madoff: “Events, dear boy, events”:
As many of the articles show, to Lessons learned p19 Paying attention to political risk p4
make such a response effective
l
requires action on several levels.
ona Pre
An essential start is the underlying Emerging regulatory risks rati Geopolitics in clean tech p5
e
in the United States p17
de
Op
attitude toward compliance: it
al
needs to be approached as a tool
to engineer a better-run, more
profitable company rather than “They can’t say that, can The complexities of
a burden to be endured. they?” Protecting your compliance in India p6
n/
name on the Internet p16
mpation
letio
This is likely to help with another
acqnve
o r
key to success: a willingness to
I
g
e ui
Resolving commercial int t c sti rimg Infrastructure and waste in
devote the time and resources s ng/
disputes in China: Po Brazil: Two lucrative but
needed to developing a detailed A case study p14 challenging investments p8
understanding of risks and
opportunities in existing, and
especially new markets. Depending Remember to breathe: Investing in Mongolia:
on the circumstance, for example, a Compliance and the United Opportunities and risks in
company may find it essential to Kingdom Bribery Act p12 the newest hot market p10
Private equity and the Foreign
know how to avoid the dangers of Corrupt Practices Act p11
Issue13 May 2011 | 1

4. Compliance:
Why ‘by the book’
is good for the books
By Tommy Helsby
A year ago, the Global Fraud Report
highlighted the return of the active
regulation of businesses. Tommy Helsby
argues that effective controls, far from
inhibiting growth, actually build better,
stronger business performance.
2 | Kroll Global Fraud Report

5. between prosecutors is now the norm rather
The past twelve months have brought not
than the exception.
only tougher regulation, including the
Dodd-Frank Act in the United States and the Inevitably there has been a backlash from the
Bribery Act in the United Kingdom, but also regulated. Most visible, from where I sit, is the
more active enforcement – notably increased response to the new UK Bribery Act, which will
resources devoted to corruption investigations take effect on July 1. The objections seem to me
in the US at the Department of Justice and either ill-informed or inappropriate. They are
the Securities and Exchange Commission as generally some variation of, “I could be arrested
well as a similar business crime focus in for taking my client to a football game” – that
Britain at the Serious Fraud Office. Meanwhile, won’t really happen unless you bribe the
emerged as an issue in an increasingly
storied magistrates elsewhere in Europe – referee to get your client’s preferred result.
complicated world; and you could add plenty
Joly in France, Garzon in Spain, DiPietro in People also still insist to me that paying bribes
more to the agenda.
Italy – have been succeeded by a new is the only way business gets done in some
parts of the world, so aggressive extraterritorial Although I prefer to leave forecasting to
generation
policing of corruption will be a serious economists and astrologers, I see two other
of officials keen to make their names.
disadvantage to British companies operating specific issues that should be added to the
Prosecutors in Germany, often in cooperation
there. The same argument was voiced by list. Globalization and communication
with their counterparts in the United States
American businesses when the Foreign Corrupt technology have together changed the game
and elsewhere, have successfully targeted
Practices Act (FCPA) was passed forty years for privacy issues. Regulation, though, is still
a series of major domestic businesses.
ago, yet US companies have remained effective very inconsistent and local, and compliance is
In emerging markets, institutional competitors in all those difficult markets. similarly variable. After all, why comply with
developments may be slower, but public laws that don’t exist? But sensitive data may
‘Good business’ – meaning fully compliant –
attention to fraud issues, especially relate to individuals in one country, be
turns out to mean good business in terms of
corruption, is intense. Looking only at the controlled in a second, and accessible in a
commercial and financial performance. Siemens,
BRIC countries in just the last few months: in third: prudence dictates that the highest
following a massive bribery scandal several
Brazil, both Vivendi and Credit Suisse paid regulatory standard should apply.
years ago, changed its culture (along with
multi-million dollar settlements – without many of its senior management), established a The second issue may be a surprise: human
acknowledging wrongdoing – in relation to dynamic compliance operation, and has been rights governance. This generally sits in the
allegations of investment fraud and insider more commercially successful ever since. Even corporate social responsibility agenda, if
trading, respectively; in Russia, President in the most challenging markets, business anywhere, and is often viewed as important
Medvedev has proposed that fines in can be conducted legitimately, and both the but not business-critical. There are, however,
corruption cases should equal up to 100 times deal and the market will be better for it. movements towards making corporations
the size of the bribe; in India, the Prime legally responsible for direct and indirect
Minister, Manmohan Singh, recently bowed to There is a broader conclusion to draw from violations of human rights, such as use of
this. Procedures for ensuring that business child labor, tacit support for unsavory regimes
demands to initiate an investigation of
practices are compliant with the UK Bribery through trade or investment, or sale of
corruption in the award of third-generation
Act or the FCPA should already be in place: equipment used in repression. The UN’s
mobile telecom licenses; and in China, the
a well-run business is already operating initiatives have been taken up by the OECD,
two top executives of the country’s largest
comfortably within the requirements of these and it may be recalled that the OECD’s
e-commerce firm, Alibaba.com, resigned after
laws and the only additional requirement the initiatives on anti-corruption measures have
acknowledging that the company had failed
laws bring may be the need to document that spurred much of the new legislation on bribery.
to respond to external fraud issues. Further
fact. The enterprise should operate that way
afield in Asia, 28 governments have now A well-run business should engage in
because it is better for the business, not just
signed up to the Anti-Corruption Action Plan forward-planning to make sure that the
because the law requires it: opportunities
for Asia and the Pacific, overseen by the OECD necessary resources and relationships are in
won without corruption are more secure and
and the Asian Development Bank. competitive, and likely to lead to more of the place before a problem emerges. By doing so,
same; corrupt deals are risky, expensive, and companies will be less likely to allow current
The exposure for companies operating in
vulnerable to further bribe demands or a preoccupations to distract them from the wide
emerging markets is not just to local
change of regime. range of regulatory risks.
regulators but also to their home regulators
acting extraterritorially: corrupt operators For the past few years, bribery issues have
cannot rely on lax or venal local prosecutors Tommy Helsby is Chairman of Kroll
dominated seminar and conference agendas,
Eurasia based in London. Since joining
to turn a blind eye. Indeed, United States in the way that money laundering concerns Kroll in 1981, Tommy has helped found
prosecutors have successfully pursued did for the five years before that. If you and develop the firm’s core due
non-US companies for alleged offenses diligence business, and managed many
measure by the size of the fines, though,
of the corporate contest projects for
committed outside that country when they competition issues need to be on the list of which Kroll became well known in the
have been able to show some US nexus or a company’s compliance concerns. If you 1980s. Tommy plays a strategic role both for the firm and
interest. Law enforcement agencies elsewhere consider overall cost, in terms of both money for many of its major clients in complex transactions and
disputes. He has a particular interest in emerging
have told Kroll that they intend to follow the and reputation, then environmental regulation markets, especially Russia and India.
same path and cross-border cooperation remains paramount; trade sanctions have
Issue13 May 2011 | 3

6. “Events, dear boy, events”
Paying attention to political risk
By Jason Wright
In 1914 Henry Noel Brailsford, a
prominent British journalist, noted
confidently: “The frontiers of our
national states are finally drawn.
My own belief is that there will be
no more wars among the six great
powers.” A few months later, those
same powers were engaged in World
War I, perhaps the most devastating
war ever fought between them.
This is but one example of the hubris
involved in prediction.
Recently, numerous commentators spoke of it is also about less dramatic matters, such reputational due diligence from different sets
the security and stability of Hosni Mubarak’s as understanding the role of local politicians of consultants. These categories, however, do
regime in Egypt mere weeks before a national in authorizing a new plant or the expense not exist in isolation. A better approach is to
uprising drove him from power. By some imposed by a corrupt political culture in examine them together, a service Kroll provides
criteria, such as the risk of default on which bribes are commonplace. The link in its integrated due diligence offering.
Egyptian bonds as measured in the credit between high levels of political instability and
Due diligence is only a step toward a greater
default swaps market, Egypt was even rated fraud is no coincidence. The same phenomena
understanding of political risk. Companies,
as a more stable investment than Portugal – such as poor governance, inadequate legal
for example, will also need to consider a wider
prior to this revolt. structures, and elites that condone or expect
range of extreme scenarios in their planning.
illicit gain – can often induce both.
The consequences of poor foresight apply to No commentator or consultant can predict with
businesspeople as well as politicians. World A second, equally important truth is that certainty what will happen in world affairs,
War I brought extensive economic dislocation. political risk cannot be dealt with independently but they can give investors better information
Now some foreign investors, particularly of commercial, legal, or reputational risk. Often and comprehensive analysis to help them deal
those who partnered with businessmen close a political event has an economic impact. with the changing environment. The trick for
to the Egyptian or Tunisian regimes, are The unrest in Libya, for example, led to a executives will be using this information to
uncomfortably exposed in North Africa. sharp increase in the oil price, creating an adjust as history unfolds around them.
economic risk even for countries and
The financial crisis was an object lesson in Harold Macmillan, British Prime Minister from
companies with limited or no direct exposure
the perils of incorrectly valuing investment 1957 to 1963, when asked what might blow
to Libya. On a smaller scale, a company
his government off course, supposedly replied,
risk. As the developed world cleans up the competing in an emerging market against a
“Events, dear boy, events.” Companies will have
resultant mess, recent events in North Africa business controlled by the son-in-law of the
to learn to adjust to surprising political events
provide a warning to investors turning their president may suddenly find that it is subject
in order to prosper in an uncertain world.
attention to booming emerging markets to to new legislation, or that its customers are
avoid similarly mispricing political risk. Even being “encouraged” to go elsewhere. In such
in some European countries, political risk has circumstances, any purely commercial Jason Wright is a senior director in
become a significant factor; sparked by issues Kroll’s London office. He originally
analysis of the business that does not take
joined Kroll’s Italian Business
such as protectionist policies in Italy and into account these political factors will not Intelligence and Investigations practice
abrupt regulatory change in the renewable provide an adequate model of future earnings. and has recently focused on multi-
energy sector in several EU countries. How jurisdictional transactions, particularly
In fact, companies are increasingly realizing where there are significant political
should investors incorporate this risk into risks and corruption issues. Jason is a key point of contact
that commercial due diligence projects which
their pre-transaction assessments of for Kroll’s private equity clients; he works extensively
fail to take into account political risk, both with clients in the sector throughout the deal cycle,
businesses and into their ongoing
geopolitical and local, will be an unreliable managing projects such as pre-transaction due diligence
understanding of operational risk? and risk analysis. He has particular expertise in deals
guide. In the past, investors have tended to
involving the alternative energy sector, major
A key point one must recognize is that political commission commercial due diligence, infrastructure projects and central bank contracts.
risk is not just about revolutions and uprisings; political risk assessments, and integrity or
4 | Kroll Global Fraud Report

7. issued an unexpected new legislative decree
on tariffs in the renewable energy sector,
leading to concern and uncertainty among
investors, contractors and developers.
Meanwhile, local regulatory frameworks
can also create significant risks for investors.
In Italy, risk arises from lengthy and
bureaucratic regulatory and authorization
procedures, as well as from divergent clean
technology policies at the national, regional,
and local levels. These all create delays in
obtaining licenses and putting plants into
operation. This has led in the south of the
country, where solar and wind plants are
concentrated, to the rise of intermediaries
who claim to be able to obtain all the
necessary authorizations for investors and to
sell them what are essentially turnkey
projects. Clearly, this heightens the risk to
investors of becoming involved in corruption
or even of infiltration by organized crime.
Several factors make the renewable energy
sector particularly attractive to organized
crime in Italy, including: advantageous
Geopolitics
feed-in tariffs; the central role of potentially
corruptible local politicians; the opportunities
for laundering money; the trading of plots of
land; and the opportunity to use illegal
workers. In Sicily, Calabria, Apulia, and other
regions, a number of investigations – such as
in clean tech
the “Via col vento” and “Eolo” inquiries – have
led to the arrest of entrepreneurs, developers,
city mayors, and public officials on charges of
corruption and often of criminal association.
Many domestic and foreign investors who had
dealings with such dubious counterparties
subsequently had their authorization
applications delayed or blocked, or even had
plants already in operation seized. Moreover,
By Marco Tavolieri they saw their names in Italian and
international media reports alongside those of
The latest developments in Europe’s clean technology sector figures allegedly connected to the Mafia,
causing serious embarrassment and
show how investors can be subject to significant political and reputational damage.
regulatory risks even within developed countries such as Spain, As the Italian example shows, political risk
the Czech Republic, and Italy. Where these risks are present, and fraud often go hand in hand. Investors
need to be as aware of these twin dangers in
fraud is often not far behind. Europe as anywhere else in the world.
In order to reach the European Union’s (EU) decrease the level of these feed-in tariffs.
target of obtaining 20% of energy from Certain jurisdictions made major amendments Marco Tavolieri is a director in
renewable sources by 2020, member to existing regulations retroactively with Kroll’s Milan office. He specializes in
business intelligence projects ranging
countries had guaranteed favorable feed-in devastating effects on investor confidence. from reputational due diligence to
tariffs to investors in the renewable energy In the photovoltaic sector in Spain and the competitive intelligence and hostile
sector for periods of 10 to 20 years. The Czech Republic, for example, recent tariff takeover cases. Marco also has
anti-fraud expertise including
sovereign debt crisis, however, as well as changes have affected some plants that are multi-jurisdictional matters and international tax haven
technological improvements that have already in operation; it comes as no surprise investigations. He works across a wide range of
decreased the cost of equipment such as solar that this has led to a substantial decline in sectors including private equity, renewable energy,
waste management and gaming.
panels, have pushed some EU countries to investment. In March of this year Italy too
Issue13 May 2011 | 5

8. The complexities of
compliance in India
By Richard Dailly
First consider how India got to where it is:
the sub-continent was unified in the third
century BC and over the next 1,500 years
As the breadth and depth of the globalized economy expands, created one of the world’s most advanced
multinational corporations and investors find themselves societies. Islam arrived from the West, leading
to the establishment of the Mughal Empire
assessing new opportunities in unfamiliar regions. alongside the Hindu Maratha and Rajput
International business norms suffused in the legal practices Empires. Thousands of years of interplay and
of the West, where they largely evolved, are increasingly overlap between competing Asian cultures
and religions, followed by colonization by the
coming into conflict with how business has traditionally been British, created a multifaceted society which
conducted in developing parts of the world. varies dramatically from region to region.
6 | Kroll Global Fraud Report

9. reduce such emigration and give the company
Some notable risks boycotted the democratic process and admit to
leading an “armed struggle” in states which a real voice in the local society. Maintaining a
A particular legacy of the British Raj is the rank among India’s poorest. Investors may be culture of anti-corruption might initially seem
all-pervasive nature of bureaucracy. Some local pressured to pay these insurgents to operate impossible, but if a local official’s vote bank is
laws might seem archaic to outsiders and locals in the area and, if a bribe is not forthcoming, dependent on jobs in the community, then
alike: the need, for instance, for companies to the rebels might use their influence to disrupt the threat of pulling out would turn popular
keep a book of attendance. The truth is that a company’s operations. It may be tempting opinion against the bribe-seeking politician.
these mechanisms can allow poorly paid to capitulate, but investors need to be aware that
officials to ask for under the table payments. A culture of anti-corruption is essential from
this would be a high-risk strategy, potentially
Unwittingly, businesspeople can find a legal and compliance point of view, but
exposing them to India’s terrorist financing laws.
themselves open to requests for bribery. simply ignoring the problem is unlikely to
Many Maoist groups are proscribed under Indian
be an effective strategy. Knowledge of the
In the same way but on a larger scale; the anti-terrorism legislation and so payments to
local community should lead to broad
size of India’s bureaucracy has created an them could constitute a serious offense.
engagement with it in which researchers,
army of retirees, many of whom become
Kroll has learned through numerous analysts, trusted community liaison staff,
consultants or join the boards of companies
investigations in challenging parts of India corporate communications, and CSR
as independent directors. While these
that these risks often overlap and interact professionals work seamlessly.
individuals are able to open doors and facilitate
with one another, though how this happens
introductions, their use requires extreme Kroll suggests that elements of this strategy
is unique to every location.
caution. It is not uncommon for a former might include the following:
official to be seen as a breadwinner among a A company, for example, might experience K Commission independent consultants to
team of current civil servants. “Commissions” hostile pressure from the media and labor provide an in-depth analysis of the
paid by a company to a former official-turned- unions. Further investigation may then geography, local culture, and historic
consultant are often no more than bribes. reveal that these critics are being issues in the region;
manipulated by a local official attempting to
Cash payments in order to make things happen, K Make contact with the media, academics,
to both officials and non-officials, are normal; use his influence for personal gain –
environmental groups, local officials,
in many sectors it is not seen as unethical blackmail, essentially. If the business agrees
unions, lobbyists, NGOs, and others in
and simply seen as a price attached to doing to pay the official, the hostility will cease.
order to better understand the fault lines;
business. Firms committed to high standards The official may even justify his actions by
saying that the money will be partially fed K Consider recruiting a well vetted local
of corporate integrity need to think seriously
back to the community or aid development liaison officer;
about how these issues could affect them.
and alleviate poverty in the region, thereby K Make tough policies on compliance and
India’s democracy is often well intentioned increasing his political influence. Bowing to governance well-known in the local
toward the poor. The combination of a extortion of this nature will leave a foreign community. This might include a well
politically enfranchised lower class and company exposed to breaching business publicized policy of non-payment of
poverty, however, can produce unintended
compliance and governance laws, not just commissions, whistleblower hotlines, well
results, such as the predominance of single-
in India but potentially in its home country. advertised compliance and anti-corruption
issue politicians. Occasionally, these individuals
It also gives the corrupt official and his policies, even “open door” policies, to nurture
wield inordinate amounts of power in local
accomplices the “green light” to continue a culture of transparency and accountability
coalitions. For example, a representative
extorting in such a way.
elected by slum dwellers might see as a K Consider meaningful contributions to
threat infrastructure development which could the local community, not a “name-only”
lead to the re-housing, and therefore loss, of
Mitigating the risks CSR program;
his constituents. It could When operating in such a complex culture, a K Consider ways of using the local community
be in his interests to oppose redevelopment sophisticated understanding of the local area in the operation, making them stakeholders.
unless other incentives – notably bribes – is essential. For example, in cases such as the
come into play. Similarly, land acquisition is a Entering a new, unfamiliar culture does not
corrupt local official above, in Kroll’s
contentious and opaque issue in India, rife with mean a company has to compromise its
experience companies usually have more
corruption. Any major infrastructure project will governance standards but it does need to
leverage than they realize. A sophisticated
almost certainly encounter problems – from the learn how best to maintain them in these
analysis of wealth, demographics, movement
unethical removal of local residents to insider unfamiliar conditions.
of people, and other societal factors can add
dealing on the value of land – which can have significantly to a company or investor’s
clear and serious compliance consequences. understanding of the environment in which Richard Dailly is a managing director
and head of Kroll’s operations in India.
Mining and power generation companies they are operating. A thorough He has over 20 years of experience in
looking to invest in India’s central eastern states understanding, for instance, that the global risk for the British government
and Kroll. Richard has a deep
will face the added difficulty of working in areas population of an area is diminishing through
understanding of investigative and
which are subject to a Maoist insurgency. These economic emigration, leading to a lessening intelligence gathering techniques, and
groups, professing an agrarian communist of support for a corrupt local official, could assessment and analysis, in support of corporate
investigations, political risk, litigation support, and multi-
ideology, could be seen to present a sovereign influence an investor’s decisions. Meanwhile, jurisdictional cases.
threat to the national government. They have meaningful investment into poor areas could
Issue13 May 2011 | 7

10. Infrastructure and
waste in Brazil:
Two lucrative but challenging investments
The vast opportunities related to the
By Vander Giordano and Eduardo Gomide
rebuilding and expansion of Brazilian
infrastructure are attracting foreign investors.
In November 2009, The Economist noted that “Brazil has been Some estimates put the likely cost of the
planning and construction of Olympic sports
democratic before, it has had economic growth before and it has venues alone at $15 billion. The costs of
had low inflation before. But it has never before sustained all rehabilitation or building of stadia for the
three at the same time. If current trends hold (which is a big if), World Cup, along with improvements in ports,
upgrading of public transport and roads, and
Brazil, with a population of 192 million and growing fast, could the expansion of airports necessary for both
be one of the world’s five biggest economies by the middle of events will involve at least another $18 billion.
These figures may even be underestimates.
this century, along with China, America, India and Japan.”
Taking part in the infrastructure boom in
Brazil will almost always involve a public
Brazilians as well, in recent years, have arising from new environmental legislation
bid. The major infrastructure projects, such as
begun to call the country “a bola da vez” – – show that a lack of such care can be costly.
hydroelectric plants and enhanced power
the cue ball. The media has reported
grids, as well as new ports, highways, and
extensively on how Brazil is finally tapping Playing the game cleanly airports are largely backed by agencies with
into opportunities in a changing world
Brazil is about to host two major international full or partial government ownership,
economy and fulfilling all the potential of its
sporting events. In 2014, the World Cup will including the Brazilian Development Bank.
large population, fertile lands, vast mineral
be played in Rio de Janeiro and 12 other The second phase of the national Growth
resources, and now huge deepwater oil
leading cities. Two years later, Rio will Acceleration Program (PAC), the largest
reserves discovered in the last decade.
welcome the Olympic Games. Analysts are public sector investment program of the past
However, economic growth and prosperity predicting an enormous impact on the 20 years, will open up US$220.2 billion in
– Brazil’s GDP rose roughly 7% in 2010 – also economy, with infrastructure investment as opportunities for foreign investment in Brazil
bring the risks associated with excessive the driving force. A study by Brazil’s Sports over the period 2011 to 2014. The State has
optimism and a gold-rush mentality. On top Ministry estimates the potential economic also established the Olympic Public Authority
of the “big ifs” listed above, investors and impact from the World Cup alone to be near to coordinate the works for the Olympic and
companies need to pay careful attention to $100 billion between 2010 and 2014, of Paralympic Games. Companies must be aware
details when it comes to where they put their which 73% will be indirect – and cites an of the risk of getting caught up in bribery
money. A consideration of just two areas – the expected $5.13 billion in incremental tourism, or corruption schemes in violation of Brazil’s
potential pitfalls of Brazil’s rapidly growing $9.18 billion in tax collection and the creation own laws as well as the US Foreign Corrupt
infrastructure sector and compliance issues of 330,000 permanent jobs1. Practices Act and the UK Bribery Act.
8 | Kroll Global Fraud Report

11. Once such cautionary tale involves a
European company which came under TOP FRAUD RISKS
scrutiny by both European and Brazilian Buyer beware. Maybe the local partner K Look into the complex Brazilian labor
authorities in 2009. The company had appears to be the right one with the right regulations and find out how your business
subcontracted a European engineering firm connections. But a closer look can often partners are dealing with it, including its
for their infrastructure projects. Authorities reveal problems. If a foreign investor doesn’t subcontractors. In a joint venture, every
began to suspect that a $6.8 million expense do their homework, they could wind up with: member is responsible for the fulfillment
they had on their books was, in fact, made to of all legal labor obligations arising from
Unqualified partners that contractual relationship. A group
local public officials in order to win a
K Check out reputation and integrity history of investors in a São Paulo construction
$45 million subway project in Brazil. – carry out extensive analysis of your company learned that the hard way.
partner’s past contracts and legal history, Much to their surprise, a few months
Further investigation revealed that this same
especially involving the government and after completing their transaction, they
company made close to $200 million in state controlled agencies. were informed at a board meeting that the
suspicious payments in connection with a construction company was now liable for
K Know your suppliers – in the waste
hydroelectric project in Brazil. The scheme labor claims filed against a subcontractor
treatment case, the company chosen to
allegedly involved a consultancy contract treat the waste had neither the credentials who had worked on one of the company’s
with a Panamanian company. nor the organizational structure necessary projects in northern Brazil. Because the
to meet the contractor’s disposal needs. subcontractor was unable to meet those
The consultant was hired to provide information A check of the supplier’s background and claims, the responsibility was now theirs.
to help in the bidding process for the history, searching for references or perhaps
even some on-the-ground investigation
Corruption and bribery risk
hydroelectric power plant. But both Brazilian
and European investigators are convinced could have reduced the risk exposure. K Watch out for conflicting business
that the Panamanian company never provided relationships through shareholders or
Regulatory and compliance breaches contractors. And consider some background
any consulting services and that their sole
K Pay attention to compliance. Foreign checking on key employees. In the waste
purpose was to act as a go-between to management case highlighted, there were
companies need appropriate advisors who
deliver bribes to secure the contract. understand local laws and regulations and discrepancies in the company’s records.
Meanwhile, the European engineering can help make sure compliance structures Much was due to the fact that one of the
company is prohibited from participating in are in place. The consequences of non- employees responsible for the process –
contract bids in Brazil until the investigation compliance can be great, as with the example the weigh scale operator – was receiving
of the European engineering company who kickbacks from the waste collection
concludes, effectively barred from the
cannot enter into any new business until company, who received more resources for
infrastructure boom. their Brazilian legal process is concluded. a lower actual amount of garbage removed.
An investment gone to waste?
Brazil produces 150,000 tons of garbage The company, along with others which Kroll’s reports supported efforts by the foreign
annually. Its comprehensive National Policy outsourced waste management to a particular acquirer’s lawyers to prove that the new
on Solid Waste, passed into law last July, is garbage treatment and disposal business, shareholders of the petrochemical company
the culmination of a long line of policies was being included in a civil action. The had acted in good faith. The responsibility for
strongly emphasizing the use of recycled waste treatment company was not compliant the violations of the waste law was therefore
materials. Nevertheless, despite the efforts of with the new law in some of its processes: assigned to the former owners.
the national government, states, municipalities, waste, for example, was being discarded Brazil’s economy provides substantial
agencies, and industry organizations, up to without treatment. This left the petrochemical opportunities for foreign investors. To fully
43% of waste collected in Brazil may not be company also in violation of the law and profit from them, however, companies need to
adequately treated. subject to heavy fines. learn about the risks.
Compliance with the new law’s regulations Kroll was hired to investigate the matter and 1. Global Finance Magazine, September 2010
on business will require many companies to found that the risk could have been managed
invest in new technology and procedures, as during the due diligence process had the
well as spend considerable amounts on auditors at the time done a more thorough Vander Giordano, a managing director
monitoring and auditing activity. For investors review and spent more time looking at the in Kroll’s São Paulo office, has
in the country, meanwhile, due diligence extensive experience in investigative
waste disposal company’s record. Evidence and business intelligence matters,
should now go beyond assessing the already existed about its failings as did including fraud investigations, asset
background, reputation and integrity of a searches and competitive intelligence.
complaints about operational activities. Kroll’s
business to include compliance with the new He is a member of the Brazilian and
evaluation of waste disposal documentation International Bar Associations.
waste management regulations. Otherwise,
also found large discrepancies in weight and
buyers risk inheriting liabilities that might
outright falsifications. In some cases, the
eventually jeopardize their entire investment.
waste management truck did not even enter
Eduardo Gomide is a managing director and based in
Recently a foreign group acquired a Brazilian company premises, although the contractor São Paulo. With over 10 years of financial and risk
petrochemical company. Eight months later, had a record of trash removal. Similarly, field consulting experience, Eduardo has managed a wide
variety of complex assignments with special emphasis
the firm’s legal department received a interviews indicated that some of the waste on financial investigations and forensic auditing.
subpoena from the State District Attorney. was simply thrown in the city’s public dump.
Issue13 May 2011 | 9

12. Investing in Mongolia
Moreover, lines between the public and
private sector remain blurry, with conflicts of
interest being common. Complicating matters
further, investigators in Mongolia cannot rely
Opportunities and risks on the official public record to identify
ownership and control of locally-registered
businesses. Instead, Kroll uses human source
in the newest hot market inquiries and knowledge about Mongolia’s
elite to understand who actually controls a
company. Sometimes these inquiries lead to
prominent political families, at which point
risks arising from the United States Foreign
Corrupt Practices Act need to be thoroughly
evaluated as well. It is also common to find
that company control is quietly exercised by
powerful, sometimes controversial, individuals
from Mongolia’s neighbors, Russia and China.
Information on Mongolian individuals is also
hard to obtain, making it difficult for foreign
companies to understand the track record,
reputation, and liabilities of potential business
partners. Currently, litigation, bankruptcy,
or criminal record databases do not exist,
and Mongolian news research is a tool of
limited value. Many domestic news outlets are
quietly controlled by politicians who inevitably
have a particular agenda. Allegations of
corruption against businesspeople or politicians
often appear in print with no further mention
anywhere in the public record. Those
interested have to dig deeper in order to
Policy and regulatory changes that have determine which allegations of corruption are
By Jack Clode
opened up Mongolia to foreign investors and grounded in fact and whether any such claims
businesses have helped bring about its rapid in the press resulted in legal sanctions.
Mongolia is an enticing investment growth. Now, however, the government faces
serious challenges, such as creating a mature, Due diligence in such an environment is
location. In 2010, its economy was exciting work. Interesting intelligence often
transparent, and stable regulatory environment
the world’s second-fastest growing1, and establishing controls and enforcement comes to light which help our clients negotiate
and it is expected to be among the mechanisms to minimize corruption. the restructuring of financial terms or
management structure, and sometimes leads
top three in 2011. Its equity market is The country is gradually strengthening and to an exit from the proposed transaction.
acting accordingly, with the Mongolia empowering its control institutions. In 2006, Such research is essential in a rapidly growing,
Stock Exchange Top 20 Index more for example, the government passed an
imperfectly regulated economy, and because
anti-corruption law and formed a specialized
than doubling in 2010, and has again the country is small, with a powerful business
Anti-Corruption Agency.
doubled since the start of this year and political elite, we frequently see the same
Nevertheless, efforts to create the necessary names reappearing in our investigations.
Mongolia’s primary driver of growth, the environment remain far from complete. Our extensive experience and deep expertise
The application of laws and regulations is in Mongolia therefore helps us to advise our
mining sector, is attracting substantial
unpredictable. In November 2010, the clients quickly on a deal’s prospects.
foreign investment. Companies from government surprised the international
North America, Russia, China, and community by suddenly suspending 254 gold 1. Eurasia Capital: Mongolia Outlook 2011
elsewhere are developing significant mining licenses, citing a 2009 law which
protects Mongolia’s forests and river basins. Jack Clode is a managing director in
and profitable operations out of the
Some international companies have appealed Kroll’s Business Intelligence &
country’s massive deposits of coal, and had their licenses reinstated; others have Investigations division in Hong Kong.
With over 12 years at Kroll as a front
gold, copper, rare earths, and other not yet been successful. These types of
line investigator, case manager and
minerals. Private equity funds, incidents damage investor confidence and are office head, Jack supports clients
not limited to the mining industry. More than across the broad range of Kroll’s
commodity traders, and other services, including due diligence, business intelligence,
one large hotel project in Ulan Bator has been
investors are also rushing to the country competitive intelligence, security, internal investigations
suspended because of disputes over the and external investigations.
in search of the right opportunities. interpretation of real estate regulations.
10 | Kroll Global Fraud Report

13. Private equity and the
methodology of due diligence can help avoid
surprises later in the investment lifecycle.
Foreign Corrupt Practices Act
As investment discussions continue, any
evidence or rumor of suspicious behavior or
governmental contacts should be thoroughly
investigated. These are the situations in which
By Peter J. Turecek and Michael E. Varnum enhanced due diligence or actual investigative
efforts may help provide deeper factual
More private equity firms are investing internationally. In doing so, they are encountering a understanding or context around a rumor or
evidence of behavior. The PE firm and portfolio
regulatory environment shaped by increasingly aggressive enforcement of the United States
companies should review all of the deal-related
Foreign Corrupt Practices Act. In particular, regulators at the Department of Justice and the
documentation available for accuracy, detail
Securities and Exchange Commission have beefed up their investigative teams and are now and adherence to standard internal codes of
looking more carefully at majority investors in entities alleged to have violated the law. conduct and accounting procedures, including
sufficient record of gifts, contributions,
While no private equity (PE) firm has to date top that corruption and related practices will
reimbursements, travel and entertainment.
been charged for Foreign Corrupt Practices Act not be tolerated, either at the parent company
(FCPA) violations by a foreign portfolio company, or within portfolio businesses. Appointing a The Department of Justice (DOJ) has
the threat is real. Exposure to penalties compliance officer, creating a thorough set of demonstrated leniency in some FCPA cases
arising from such violations depend on, policies and procedures for employees and because of mitigating factors, including
among other things, the level of management agents, and conducting regular staff training self-reporting, past and continuing cooperation
and oversight provided by the PE firm. The and audits reinforce an appropriate tone to with the investigation, implementation of
greater its involvement in the portfolio business, guide the firm’s behavior. These steps should remedial measures (including an FCPA
the deeper regulators will probably look up the support a corporate ethic rather than force an compliance program), and the absence of
ownership structure in assessing culpability. aversion to risk. It is important to understand prior similar conduct. However, the failure
Simple ignorance will not serve as an adequate that regulators will look for documentation of to carry out adequate due diligence can have
defense. PE companies that are currently active these policies and consistent adherence to a devastating impact. Consider eLandia
or expanding abroad therefore need to enhance, them, should an FCPA issue be identified. International, which acquired Latin Node in
or where necessary establish, effective 2007 only to learn afterwards of potential
Before entering a transaction, PE firms need
compliance and due diligence procedures. FCPA violations. The company self-reported to
to undertake appropriate due diligence,
The difficulty facing PE firms and other which includes looking at all local third party the appropriate authorities, but the ensuing
investment vehicles is that the nature and participants, agents, representatives, investigation, fines, penalties, and termination
extent of “appropriate” due diligence are not consultants, and joint venture partners. Are of employees decreased the value of the
clearly defined by regulators. At a minimum, the agents exclusive? What connections, if any, purchase by over $20 million, according to
both PE firms and their portfolio businesses exist with the local government or state- reports at the time. Eventually, eLandia wrote
should have well-documented internal FCPA sponsored agencies? Who are the beneficiaries off the entire business.
compliance policies as well as evidence of an of the joint venture partners? An inability to Self-reporting to regulators – after receiving
appropriate level of due diligence investigation answer these questions may indicate that the appropriate legal counsel – is nevertheless
for transactions. This level will vary by PE firm or portfolio company doesn’t sufficiently usually the best policy for PE firms that identify
jurisdiction, with locales known for corruption understand the relationships of their business possible FCPA violations, either in the course
requiring enhanced due diligence measures partners and activities, leaving them of acquisition due diligence or in a portfolio
before entering deals or engaging agents. vulnerable to potential FCPA violations and company’s ongoing operations. To receive
Private equity companies also need to ensure regulatory attention. While it is often the benefit of such action, though, companies
that these FCPA policies are rigorously followed. impossible to investigate every thread to its need to have policies and procedures in place
This begins with a clear message from the conclusion, a consistent, documented and adhere to them. Failure to do so could
prove disastrous.
10
Perceived to have Figure 1: CPI vs FDI Note: Kroll analysis based upon
Forecast of Stock of FDI in 2014
low levels of corruption information as provided by the IMF
9 and UNCTAD; Kroll compared Peter J. Turecek is a senior managing director in the New
$10B - $100B
countries in the EMEA regions with
Public Sector Corruption Perceptions Index 2009
FDI stock greater than $10 billion to
York office. He is an authority in due diligence, multinational
$100B -$500B
8
G-7 and BRIC countries. investigations, and hedge fund related business intelligence
$500B - $1,000B
7 Size of circle represents projected services. He also conducts a variety of other investigations
G7 Country Average
FDI. Sources: Transparency related to asset searches, corporate contests, employee
>$1,000B
International, IMF, UNCTAD
6 United Arab Emirates integrity, securities fraud, business intelligence, and crisis
management. He has appeared on MSNBC, CNBC, Fox News,
5 and NPR and has served as a guest speaker on a number of
Turkey
United Kingdom for various investment and professional groups.
topics
4 Italy
Brazil Romania
China
3 Egypt India
Michael E. Varnum, CFE is managing director in the
Azerbaijan
2
Nigeria Algeria Reston, Virginia office. He is a former senior executive of the
Ukraine
FBI with specialized experience in anti-corruption, economic
Russia
1 Angola crimes and fraud. He has become an authority in FCPA
related business intelligence, third party compliance screening
Perceived to be 0 and international anti-corruption and fraud investigations.
highly corrupt 0% 5% 10% 15% 20% 25% He has also developed, conducted and managed bespoke
Stock of inward FDI CAGR 2009 to 2014 investigations and security risk assignments.
Issue13 May 2011 | 11

14. Remember to breathe
Compliance By Melvin Glapion
“Remember to breathe” is good advice for someone
and the experiencing acute stress. It is, in essence, what I am
telling many clients in anticipation of the UK Bribery Act.
United Admittedly, though, this is hard to do when, at every
seminar they attend, the speakers serve fear with canapés.
Kingdom Some of the bribery law’s unique provisions
certainly should give businesses pause, in
particular: i) strict corporate liability for failing
organizations are now thoroughly
investigating, on an annual basis, every
current and prospective associated third
Bribery Act to prevent bribery, whether by employees or
third parties; ii) disallowance of facilitation
payments; and iii) extra-jurisdictional
party vendor, agent, or supplier – a
prohibitively expensive and logistically
arduous practice which is neither practical,
enforcement. Most large or medium-sized economic nor commercially-savvy.
companies, though, already have the
Businesses will benefit by taking a structured
infrastructure, policies, and procedures to
and considered approach to conducting
meet this compliance challenge. Despite the
reputational due diligence which takes into
stringency, the United States Foreign Corrupt
account the conditions that exist in the real
Practices Act (FCPA) has made us better
world. As described below, a company should:
equipped to recognize, prevent, investigate,
prioritize due diligence on third parties;
and report incidences of corruption.
establish a process for third-party compliance
The change in corporate liability and with anti-corruption policies; manage the
increased exposure to third party activity has costs of diligence; and use the findings to
sparked panic among businesses. In order to gain competitive advantage. Take a deep
achieve Bribery Act compliance, some breath and let’s begin.
12 | Kroll Global Fraud Report