Insights & Reports > Kroll Global Fraud Report

Southeast Asian markets have received billions of dollars of foreign investment since the 1997 Asian financial crisis. For the first time, the region witnessed the launch of global alternative asset funds, some with billions to invest exclusively into Asian assets. This flood of foreign capital coupled with the growing firepower of domestic funds increased competition for assets, pushed valuations to all-time highs, and led to some deals that look, at best, ill-considered in today’s harsh economic climate.

As expectations have evaporated, disputes between parties have increased. The sources of these disagreements are as varied as the deals, but include poor trading performance, structuring difficulties and, in certain cases, fraudulent activities. Prompt remedial action to protect value and assist recovery can involve global asset tracing, background intelligence into transaction execution and documentation, and preparative support for potential litigation. Kroll has been increasingly active in this space. For example, we recently conducted global asset tracing searches to help an investor group with their recovery strategies after a private equity investment in the Philippines had soured, and in Singapore we undertook an investigation for a global brand in preparation for potential litigation against a license partner in a dispute over alleged patent and copyright infringements.

Transaction disputes are also of increasing concern to clients in Southeast Asia as deteriorating economic conditions affect business performance and erode valuations. Kroll has recently assisted a number of local and international clients in negotiation and dispute strategies in Australia, Indonesia, the Philippines, Singapore, Thailand, and Vietnam with respect to troubled joint venture agreements, contract disputes, and hostile takeovers.

While much of the fallout within Asia from the global economic crisis has involved such disagreements and disputes between partners over deals struck during better economic times, the incidence of fraudulent activity is also on the rise, especially within Southeast Asia.

Declining revenues and the need to husband cash amid difficult credit conditions are leading to renewed scrutiny on operating expenses and, in particular, the management of cash flow. Suspect payables are now cause for alarm and they, along with more vigorous pursuit of receivables, are giving rise to greater incidences of suspected fraud within companies.

So-called “red flags” that are cause for concern include increasing levels of accounts payable and receivable, unusual movements in inventory, staff deviating from standard procedures to settle sums due, and lifestyle concerns about employees who may have financial, gambling, or addiction problems. Common areas to look for these red flags within an organization include purchasing, logistics, accounts, and sales and marketing. This list is by no means exhaustive: fraud can hit a company anywhere and at any time.

Red flags also do not necessarily indicate exactly where the fraud is taking place. Kroll recently assisted a multinational company with operations in Malaysia that suspected fraud within its purchasing department after receiving a whistle-blower tip-off. Our investigation quickly narrowed down the possible suspects to a senior employee within sales and marketing.

With the party now over, Southeast Asia will be cleaning up for some time. Companies need to tidy up the fallout of the crash, but also make sure that they are not hit by the new risks.

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Chris Leahy is a managing director at Kroll based in the Singapore office with a particular focus on the financial services industry, following a successful 23 year career as an investment banker, CFO, consultant and journalist. Chris began his career in the UK as a stockbroker before joining Peregrine/BNP Paribas and later Crosby, based in Hong Kong, where he was managing director with responsibility for the firm’s regional investment banking business.

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