Nearly half of Chinese, HK companies have gone ahead with deals despite compliance concerns, survey says

22-Jan-2019 Intellasia | South China Morning Post | 6:00 AM Print This Post

Almost half of companies in Hong Kong and China have acquired or made investments in firms with serious compliance issues, according to a new survey by the law firm Baker McKenzie.

But, that makes them much more cautious than their counterparts in the United States and other parts of the world.

About 48 per cent of Hong Kong and China-based companies that responded said they acquired or made investments in firms they knew to have serious compliance issues, according to the survey.

About 68 per cent of US companies who responded said that they knew from the beginning that there were significant compliance issues, but made investments or purchases anyway, according to the survey. That compared to a 60 per cent average among companies who responded worldwide.

The survey interviewed more than 1,300 business leaders in Brazil, Canada, China, Germany, Hong Kong, Spain, the United Kingdom and the US. All of the companies had a global turnover of $1.3 billion (HK$10.2 billion) or more.

“Failing to adequately assess compliance liabilities exposes the business to additional risk, but it also removes potential leverage for negotiating on the price or terms of a deal,” said Mini vandePol, Baker McKenzie’s Asia-Pacific regional head for its compliance and investigations group. “In today’s business environment, companies cannot afford to ignore the significant strategic contribution that compliance functions can offer.”

Overall, only 43 per cent of the companies surveyed said that they involved their compliance functions when planning large-scale deals, according to the report. In Hong Kong and China, 48 per cent of firms said they involved compliance in deal planning.

The report comes just days after Goldman Sachs chief executive David Solomon was forced to apologise to Malaysia for the role that Tim Leissner, one of its former partners, played in the 1Malaysia Development Berhad, or 1MDB, scandal.

As part of his guilty plea to bribery and money laundering charges in New York last year, Leissner said that it was “very much in line” with the culture of Goldman Sachs to keep certain members of the firm’s compliance and legal departments in the dark.

Malaysia filed criminal charges against several Goldman subsidiaries, Leissner and another former bank employee in December, accusing them of misappropriating $2.7 billion and bribing officials in connection with 1MDB bonds.

According to the Baker McKenzie survey, 70 per cent of compliance leaders said they felt stretched by their firms’ attempts to expand into new markets or adopt new business models.

In Hong Kong and China, 77 per cent of business leaders said they believed that compliance was the sole responsibility of the company’s compliance department and 42 per cent said they were reluctant to speak openly about compliance challenges for fear of potential issues being highlighted, according to the survey.

Among Hong Kong and Chinese companies, 60 per cent said that they relied on their supply chain partners to police themselves.

About 57 per cent of companies surveyed worldwide said they expect compliance breaches to rise, citing the potential risk of exposure and volume of new regulations, according to the Baker McKenzie report.

The rising compliance risks come as companies are spending more than ever to keep up with a more aggressive and varied approach by regulators around the world.

The RegTech Council, a not-for-profit think tank, said in a report last year that the annual cost of compliance is expected to more than double from 4 per cent of revenue to 10 per cent of revenue by 2022 at many companies. For global systemically important banks, that cost can be as much as $4 billion a year, according to the council.

“By failing to involve compliance teams in business-critical decisions, organisations are inflicting considerable self-harm and are significantly increasing their risk exposure,” said William Devaney, co-chair of Baker McKenzie’s global compliance and investigations group. “Rather than viewing compliance as a necessary evil, businesses should realise the benefits of involving compliance teams at the outset as well as having a strong culture of disclosure.”


Category: Hong Kong

Print This Post