Disclaimers & Disclosures

by Li Haohan
22 Apr 2019

Corporate investigation is an inescapable requirement for companies seeking to do business or merge with another

Knowing everything about a company is very difficult particularly when, as common practice, their public image is carefully calibrated to burnish their reputation. Laws may be in place, but so are devious ways of representing corporate information, and mergers and acquisitions quickly turn into risky situations when at least one party is denied full disclosure. As a risk consulting and corporate investigation firm, Kroll offers a range of services in ascertaining corporate due diligence, providing clients with highly reliable information on which they can base their next moves.

“We conduct a range of investigations, which includes investigating the background and track record of companies and individuals with which you may be considering a transaction such as a JV or M&A,” says Ms. Reshmi Khurana, who runs the firm’s Business Intelligence & Investigations. This includes fraud and corruption investigations inside companies and of third parties, she adds.

Kroll also investigates and prepares clients for cyber threats, which have been impacting global companies for several years now. “We investigate physical security and political risks that impact the sustainability of businesses both in their existing markets and in new markets.” 

Kroll is the world’s oldest and best-known corporate investigations firm, and while it has grown to add many more services to its portfolio, the demand for its investigation services is growing significantly each year. The company is a division of Duff & Phelps, a group that is focused on providing services that help clients improve the governance of their businesses which ultimately protects and grows the value of these assets.

To illustrate when a pre-transaction investigation may be useful, take the example of a regional or global multinational company (MNC) that is considering acquiring or investing in a business, Ms. Khurana says. Such a company will typically conduct detailed financial and legal due diligence on the target company ahead of the acquisition or investment.

“Increasingly, sophisticated investors understand that traditional due diligence methods do not provide a full picture of the true financial health, governance and risks associated with a target company.” Meanwhile, they understand that the success of a M&A, equity or debt transaction depends significantly on the business practices of the target company, the reputation and track record of its founders and management, their political connections, corporate governance practices and culture, amongst various other factors, that are not fully captured in traditional pre-transaction due diligence.

Ms. Reshmi Khurana, managing director & head of SEA, Business Intelligence & Investigations at Kroll

Without this full knowledge about a target company, investors may end up making poor investments and exposing themselves to regulatory issues including the US Foreign Corrupt Practices Act (FCPA), Ms. Khurana cites. “On the other hand, good deals may not get done due to insufficient or conflicting information from various due diligence providers on the ethics of the management of the company. These are the gaps in information that we help potential investors investigate.

“In our experience, traditional due diligence methods that simply focus on financial and legal due diligence are even less effective in emerging markets like Southeast Asia and India, where corporate governance standards, accounting and audit practices and regulatory oversight mechanisms are still evolving. Most companies are still owned and controlled by local founders and their families, and there continues to be a close nexus between business, politics and bureaucracy.” These factors, she cites, combined with the fact that there is intense competition for investments in this region means that companies and founders can manipulate their financial performance, which may not be detected with the level of due diligence conducted in the past or effective in a more developed market.

“I believe another reason that the demand for investigation services is growing is because of the overall increase in geo-political risk and volatility in many markets, which has led to shorter economic cycles. Issues such as fraud, corruption, and disputes come to the fore quicker in such an environment. Investors appreciate that as these risks increase, it is important for them to pick the right partners and management teams in local markets where they intend to expand and this requires in-depth and independent investigation and due diligence. Despite the challenges, emerging markets are too attractive to ignore for investors. We find that the successful investors in emerging markets are hands on, and spend significant time understanding the full dynamics of the local business environment.”

The entire process of rendering such service is meticulous and, although it follows a protocol, is conducted according to the particular requirements of the case.

“We have extensive experience conducting due diligence on companies and individuals before a transaction and conducting investigations in fraud situations to determine what happened, identify the perpetrators, and search assets, often for the purpose of gathering evidence,” Ms. Khurana elaborates. “While there is no ‘one size fits all’ strategy for an investigation, we follow certain best practices that set us apart from our competitors whether it is in the area of pre-investment due diligence or fraud investigations.”

The company conducts investigations on a ‘no compromise basis’ to ensure that it is truly independent. “As a specialized investigations firm that does not provide tax or audit services, we do not have real or perceived conflicts of interest.”

There is also seamless cooperation and synchronization between different elements of an investigation so that problems can be fully unraveled and investigated. This includes various investigative methodologies, Ms. Khurana highlights, including review of internal financial records, external evidence gathering through review of public records and discreet interviews, forensic analysis of company owned computers and phones, and overt interviews of suspects. “These methodologies are used closely and simultaneously, which is more beneficial for clients than relying on stand-alone analyses that are often not conclusive.”

Kroll also brings rigor to the investigation by asking for greater access to management and internal information of the target company. “Wider access to management brings out conflicts and issues that are otherwise not uncovered.” They keep an eye for ‘red flags’ or other symptoms of poor performance in pre-investment investigations, and fully investigate FCPA risks in the context of the market. 

Although Ms. Khurana acknowledges Singapore’s reputation for strict corporate governance and regulatory environment, she sees the relevance of their work here.

“Greed is human nature, so it is difficult to eliminate fraud totally from the business environment,” she says. “That said, Singapore has strong regulators across sectors, and a history of enforcement actions against perpetrators of corporate fraud. This acts as a deterrent to bad behaviour. Secondly, the scale of the relatively recent 1MDB fraud in Malaysia, and the recent data breaches in the healthcare sector are a good reminder that both private and public sector players must continuously strive to stay ahead of these risks.”

Moreover, there are instances where existing practice can be exploited. “As an innovation hub, Singapore attracts innovative companies in disruptive sectors ranging from biotech, artificial intelligence, fintech, e-commerce, and education to name a few. Technological disruption naturally brings disruption is other areas impacting that sector including corporate governance, regulation and competition. So as the technology and the sector evolve, companies and regulators have to learn the risks related to corporate governance more rapidly than in traditional sectors.

“Secondly, many Singaporean companies have a large and growing international presence including in emerging markets, where corporate governance standards may not be the same as those in Singapore.” These companies face pressures from the local environment and often must work with local partners to succeed, which may expose them to fraud, corruption, money laundering, and reputation risks. “We work with a number of Singaporean companies to help them assess these risks before they enter into new relationships and markets, and to investigate issues if they arise in local markets.”