Hong Kong – The Disputes and Investigations team at leading global professional services firm Alvarez & Marsal (A&M) today shared insights on the major 2021 trends it expects related to fraud, regulatory risks, cyber-crime and M&A disputes, while also providing a guide for mitigating risks and safeguarding business continuity as companies face the full effects of COVID-19.  

Trend 1: Expected surge in fraud, bribery and corruption, with the first financial reporting season since the pandemic likely to uncover misconduct

COVID-19 has created significant volatility in markets and economies, leading to unprecedented financial pressure on industries and businesses, which in turn has resulted in an increasing number of companies and individuals resorting to desperate measures, including financial statement manipulation, and bribery and corruption, to keep their businesses afloat and maintain their standards of living. According to the latest Association of Certified Fraud Examiners’ (ACFE) Benchmarking Report published in December 2020, 79 percent of business leaders and government officials said they have seen an increase in the overall level of fraud in 2020 and 90 percent anticipate a further increase in the overall level of fraud over the next 12 months.

Keith Williamson, Managing Director and Head of A&M’s Disputes and Investigations practice in Asia, said, “March 2021 will mark the first full year audit and financial reporting season since the pandemic began, with the financial services, retail and services sectors in particular likely to see the greatest impact on their results.  The potential for unscrupulous individuals or businesses to have manipulated the books is very real. We expect a sizeable swathe of companies to announce profit warnings and market watchers should be on the lookout for delayed reporting of results, which could signify irregularities or issues that auditors are trying to resolve.”

“It is important for companies in a post-COVID-19 world to refocus on better management of compliance risks and thoroughly investigate any misconduct across all levels of the business over the past year. This is critical as we expect investigations of Chinese entities by U.S. regulators and law enforcement to increase this year and moving forward.”

Trend 2:   Businesses unprepared for heightened regulatory enforcement and increased compliance risks

2020 was a record-breaking year for regulatory fines and settlements around the world. Recent penalties indicate that the costs of non-compliance will only continue to grow alongside an anticipated increase in criminal charges as regulators implement stronger enforcement measures to drive their message home.

U.S. Foreign Corrupt Practices Act (FCPA) actions reached a record U.S.$2.9 billion in total settlements in 2020. In Hong Kong, 15 banks and financial institutions were fined by the Securities and Futures Commission (SFC) for regulatory breaches and non-compliance, with total regulatory fines amounting to approximately U.S.$360 million. In China, as widely reported, regulators also imposed large penalties and fines, including Bank of China which was fined the equivalent of U.S.$7.7 million by China Banking and Insurance Regulatory Commission (CBIRC) for risk management transgressions. These recent sizeable breaches have made regulators hyper-vigilant, subjecting all businesses to tighter scrutiny in 2021.

Combating compliance risks is a distraction and burden that is sometimes overlooked.  But, if anything, global regulators are introducing stronger enforcement measures in response to the perceived risks. Businesses may therefore be underprepared for a tougher year of regulatory enforcement than anticipated.

 “At a time when many businesses may feel that their survival depends on returning revenues and profitability to pre-COVID levels, such thinking is myopic.  Businesses would be wiser to adopt a more multi-dimensional approach to success and ensure that they continue to prioritise compliance if they are to weather a tough regulatory environment and a difficult economic year,” said Chris Fordham, Managing Director, A&M’s Disputes and Investigations in Asia. 

Trend 3: Potential escalation in M&A disputes

The pandemic’s significant disruption to the world economy and the ensuing uncertainty has increased the risk of M&A transaction failures and disputes, as  projections and valuations made prior to or during the pandemic could be upended. Despite due diligence, buyers may encounter unwelcome post-acquisition surprises as they discover that the purchased assets are not consistent with the agreed assets, or liabilities emerge of which the buyers were not aware prior to the purchase.

These problems may be uncovered at a later stage and can lead to contractual disputes. Hong Kong, as an international arbitration centre, could see a plethora of cross-border arbitrations involving China-foreign M&A transactions.

“While deal flow was interrupted in the first half of last year, transaction volumes subsequently increased. Deals agreed prior to and during the pandemic, often with imprecise terms unsupported by forward looking analysis of risk, could encounter difficulties,” said Trevor Dick, Managing Director, A&M’s Disputes and Investigations in Asia. “As COVID-19 has demonstrated, black swan events have the potential to reshape markets, economies and industries. It is imperative that businesses mitigate transaction dispute risks by conducting comprehensive due diligence, planning and risk mapping, prior to the signing of sale and purchase agreements.” 

Trend 4: Continued rise in digital forensic investigations and cyber-risks

Since the onset of the pandemic, remote working has accelerated digitisation and subsequently produced more opportunities for cyber-criminals, with cyber-crime soaring by 600 percent according to United Nations estimates. Cyber-fraud will continue to be one of the greatest risks for corporates in 2021.

Along with the rise in cross-border investigations and disputes, COVID-19 has created new implications for businesses across the globe and Asia facing electronic document disclosure (e-Discovery) pressures. Cross border litigation and arbitration cases, travel bans, quarantine measures and work-from-home policies have brought challenges for the forensic acquisition of electronic evidence and document review process for dispute matters.

“The tightening of data privacy and cybersecurity laws across Asia will affect companies in the way they handle data and conduct investigations. The new personal data protection law introduced in China will impact how companies handle data and investigations. Companies across the region need to understand how to handle data privacy matters, to ensure compliance and avoid breaching any new or existing laws whilst working to grow their business in an ever-changing economy,” said Davin Teo, Managing Director, A&M’s Disputes and Investigations in Asia. 

Companies should adopt four core strategies to navigate continuing headwinds in 2021:

1. Reassess the effectiveness of compliance and internal controls in relation to  COVID-19.
2. Prioritise compliance instead of viewing it as an inhibitor to growth.
3. Reinforce data management and security in preparation for digital investigations and cyber-attacks.
4. Approach M&A due diligence with a forensic mindset and increased levels of caution towards all engaging parties.

“A perfect storm of unprecedented personal and corporate financial pressure, and increased legal and regulatory scrutiny is brewing across Asia, resulting in heightened levels of incidence and detection of unethical business activities. Businesses need to increase their focus on monitoring, preventing, and tackling unethical behaviour that could result in unforeseen financial losses, reputational damage and regulatory censure,” concluded Williamson.

About Alvarez & Marsal

Companies, investors and government entities around the world turn to Alvarez & Marsal (A&M) for leadership, action and results. Privately held since its founding in 1983, A&M is a leading global professional services firm that provides advisory, business performance improvement and turnaround management services. When conventional approaches are not enough to create transformation and drive change, clients seek our deep expertise and ability to deliver practical solutions to their unique problems.

With over 5,000 people across four continents, we deliver tangible results for corporates, boards, private equity firms, law firms and government agencies facing complex challenges. Our senior leaders, and their teams, leverage A&M’s restructuring heritage to help companies act decisively, catapult growth and accelerate results. We are experienced operators, world-class consultants, former regulators and industry authorities with a shared commitment to telling clients what’s really needed for turning change into a strategic business asset, managing risk and unlocking value at every stage of growth.

To learn more, visit: AlvarezandMarsal.com. Follow A&M on LinkedIn, Twitter and Facebook.

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Candise Tang, Associate Partner, Newgate Communications, +852 6375-3675, candise.tang@newgate.asia

Jeffrey Chow, Senior Consultant , Newgate Communications, +852 9812-0662, jeffrey.chow@newgate.asia

Sandra Sokoloff, Senior Director of Global Public Relations, Alvarez & Marsal, +1 212-763-9853, ssokoloff@alvarezandmarsal.com