A year into Covid-19, financial crime continues its surge

04 February 2021 Consultancy.asia 5 min. read

As the first full-year financial reporting season since Covid-19 comes around, Alvarez & Marsal expects fraud, regulatory breaches, disputes and data violations to be key issues for businesses across Asia. 

When annual audits and reports were due in March last year, Covid-19 was still a new phenomenon – yet to fully grip the global economy. One economic crisis later, financial reports due in March 2021 might well reflect the financial and regulatory grey area that clouded all of last year.

For Keith Williamson, Managing Director & Head of Alvarez & Marsal Asia’s Disputes & Investigations team, many are likely to have bent the rules over this period. “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.” 

Keith Williamson, Trevor Dick, Chris Fordham and Davin Teo - Alvarez & Marsal

Based on current trends and a range of data sources, Williamson and three other Managing Directors at A&M Asia’s Dispute & Investigations team – Chris Fordham, Trevor Dick and Davin Teo – have laid out four patterns that can be expected in this year’s financial reports.

Surge in financial crime

The team cites an Association of Certified Fraud Examiners Benchmarking Report from December 2020. Nearly 80% of respondents – senior business and government officials – reported a jump in fraud through last year, while another 90% expect this to climb higher this year.

With the economy as it is, sheer desperation has driven businesses and individuals to bribery, corruption and fraud as means to survival. For others, distracted governance teams and organisations mark the perfect opportunity to slip under the radar. All this points to a probable surge in financial crime instance this reporting season.

“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,” said Williamson.

Higher compliance risks

Amid business continuity efforts, few had the time to navigate the ever-tightening regulatory landscape. According to Alvarez & Marsal, 2020 was a record year for regulatory fines and settlements as a result.

Nearly $3 billion was settled under the US Foreign Corrupt Practices Act, while 15 banks and financial institutions in Hong Kong were fined a cumulative $360 million for regulatory breaches by the Securities and Futures Commission. The Bank of China, meanwhile, was slapped with a fine of nearly $8 million by the China Banking and Insurance regulatory Commission for poor risk management.

Regulatory breaches will undoubtedly affect this year’s numbers, all while regulators in Asia and around the world are upping the ante to tackle new waves of Covid-induced breaches.

Escalated M&A disputes

“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,” explained Trevor Dick.

There is no stable valuation or projection in a volatile economy, which makes due diligence all the more challenging and the risk of transaction failure all the more pertinent. Disrupted due diligence also ups the scope for post-deal inconsistencies and surprises. According to the experts, several cross-border disputes will likely be settled this year in Hong Kong – an international arbitration centre.

Digital and cyber risks

Per United Nations estimates, cyber crime has jumped by 600% since the pandemic began. At the same time, stretched IT infrastructure and insufficient protocols have upped the risk of data and privacy breaches. Regulators are taking charge, which poses another set of risks.

“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,” noted Davin Teo.

Steadying the ship

The risk profile is expansive, and each can be devastating in its own right. “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,” said Williamson.

Per the experts, the strategy going forward should be to re-evaluate effectiveness of compliance controls in the new normal; put compliance at par with survival on the priority list; reinforce data management and security in line with new data regulations; and take an investigative, thorough and careful approach to due diligence. Combining these factors could help Asian businesses come out of the new risk paradigm intact, or even stronger than before.