Tracking the warning signs of fraud
As a result of the fraud scandals that have made regular headlines over the past two years, everyone has become much more aware of the risks presented by business partners, clients and employees. Many companies have responded to the threat with comprehensive, risk-based due diligence screening programmes, although others have been slower to understand their legal obligations and lag behind the best practice approach taken by their competitors.
However, the companies taking an “it won’t happen to me” approach are becoming an exception rather than the norm. Developments such as an increase in prosecutions launched by the US Department of Justice and the introduction of new anti-bribery legislation in the UK are clear indications that scrutiny from regulators has moved up a gear and that it is incumbent upon companies to take appropriate steps to screen the backgrounds of their clients, business partners and employees.
As one might expect, World-Check has seen demand for its due diligence services grow overall as a result of the financial crisis. Whereas certain sectors such as investment banks have seen less activity as a result of constraints on their business, overall demand for due diligence services has continued to grow, for example through the implementation of screening programmes by large groups. The swift recovery in some emerging markets, especially Asia, has also resulted in increased flows of new business.
Through its IntegraScreen subsidiary, World-Check has offered expertise in enhanced due diligence research since 2000 to clients including hedge fund firms and other asset managers, large US and European banks and other financial institutions, and accountancy firms. One of the world’s largest specialist providers of due diligence services, the firm provides clients with background screening of individuals and companies through nine international offices with more than 200 researchers.
During the past decade there has been a strong trend toward outsourcing of due diligence research that began in Asia and North America but is gaining ground in Europe as companies increasingly recognise the cost and efficiency gains of using external specialists, rather than having to build up and maintain resources in-house. The impact of the economic downturn and the market fluctuations affecting investment firms have added weight to these calculations.
The stakes involved in getting due diligence right are becoming higher. The aggressive enforcement of the Foreign Corrupt Practises Act in the US and the general acceptance of background screening as an important risk mitigation tool has helped make the country the world’s largest market for due diligence services.
Europe has trailed the US market but is catching up, and the UK anti-bribery law has the potential to be as important to the industry as the US legislation. Asia is a growing market as multinationals pour resources into the region looking for business opportunities, convinced that the continent will be their main growth engine in the coming years. Based in Hong Kong for the past decade, I have seen a corresponding growth in demand for due diligence services.
Due diligence is not a panacea – it may not find everything, but it’s much better than doing nothing. Many of the people implicated in recent fraud cases had previously faced litigation, investigations by regulators or allegations of wrongdoing by former business partners. It’s a rare occasion when the perpetrator of a major fraud hasn’t left a trail of less serious problems that could serve as a warning.
Doug Nairne is head of enhanced due diligence operations at World-Check
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