PwC Risk Management Seminar...PwC Seminar - Reputational Due Diligence Private & confidential 4 At...
Transcript of PwC Risk Management Seminar...PwC Seminar - Reputational Due Diligence Private & confidential 4 At...
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PwCRiskManagementSeminar
ReputationalDueDiligence:AqualitativelookatChinesestakeholders
28February2017
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Agreed–thereareriskstoaddressinChina
ThankyouforattendingPwCIsrael’sRiskManagementseminar.Iamhappytosharethesedetailednotesforyourreference.
Yourbeingattheseminarisatestamentofthegrowingawareness(orperhapsacceptance)thatthereareriskstoaddressinChinadespitethesometimesoverwhelmingurgencytojumprightintothe“potofgold”thatsomeconsidertheChinesemarket.OneoftheriskstoconsiderisChinesebusinesspartners.
WhileChinacontinuestoopenuptotheworld,still,inmanycasesforeigncompaniesarerequiredbyChineselawtopartnerwithaChinesecompanyinordertodobusinessthere.Inothercases,itmaynotbelegallyrequired,butitmightbesmart.
Theterm“businesspartner”asusedthroughoutthesenotesandthepresentationslidesreferstoacompanyorindividualsomehowworkingonaforeigncompany’sbehalfinChina.
ThepresentationgaveabriefoverviewofthehistoryanddynamicsofChinesebusinesspartnership,thendiscussedthedetailsofbusinesspartnerassessmentusingReputationalDueDiligence.
BusinessPartner
Manufacturer
Distributor
Agent
Investor
GeneralManager
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Inthe1970sthen-leaderDengXiaopingstated,“Socialismdoesnotmeansharedpoverty”.ThisisarguablythestartofthechangethatmadeChinaasweknowittoday.
Sincethen,China’seconomyhasundergoneanintensetransformationinthespanofroughlyageneration.Naturally,thenatureofChineseandforeigncompaniespartneringanddoingbusinesstogetherinChinahasalsoundergonetransformation.
Chinahasevolvedintoadifferentera
Socialismdoesnotmeansharedpoverty.
–DengXiaoping
“
“
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AtthebeginningofChina’sintenseeconomicgrowth,foreigncompaniescamein,theirpocketsfullofmoney,builtfactories,hiredChineseworkerstomaketheirproducts,andwasessentiallyacatalystforChina’shugeeconomicgrowth.
Inthetimeupuntiltoday,therewasachangefromworkingforforeigncompaniestoworkingwithforeigncompanies.
Today,Chinaistheonewithitspocketsfullofmoneyanditislookingtoinvestbackintoitsowneconomicgrowth,mainlybypurchasingforeigntechnology.
Atthestart• Foreignershavemoney• Catalystforeconomicgrowth
Today• Chinahasmoney• Investsinforeigntechnologyforeconomicgrowth
Chinahasevolvedintoadifferentera
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IsraelandChinaareaperfectbusinessmatch.Israelhasahugeamountofinnovationandtechnology,andChinahasahugeamountofmoneyandmarketsize.
JustlastyeartheChineseVicePremierLiuYandongcametoIsraelandexpressedthat“[China]hopesthatmoreIsraelientrepreneurswillundertakeprojectsinChina”inavarietyofindustries(TimesofIsrael).
HerstatementillustratesthetransformationthatbusinesspartnershiphasseeninChina;Israelicompanies(oranyothernationality)arenotgoingtoChinatouseacheapworkforcefortheirowngains.TheyaregoingtoChinatopartnerwithaChinesecompanytomakemoneyandbettertheChinesesocietytogether.
Asbusinesspartners,Chinesecompaniestodaygenerallyhavesophisticatedbusinessacumen.Actingasthe“Chinaside”ofyourbusiness,theyhavethelocalresourcesandimportantly,culturalunderstanding,whichtheycaninterpretforyouorjusttakecareof.
Intermsofriskmanagementthough,keepinmindthatnotallChinesebusinesspartnersarecreatedequal.
Aperfectmatch
:)
ChinaandIsrael
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InparallelwiththesheernumberofpeopleinChina,thenumberofpotentialbusinesspartnersthereisalmostastronomical.
Likeinallcountries,inChinathereare“goodguys”whoarehonestandtrustworthy,andthereare“badguys”whohaveasagoaltotakeyourmoney(orIP)anddisappear.
The“goodguys”willmakeyousuccessful.Theywilltakeyoutothepotofgold.TheywillallowyoutheluxuryofconductingyourbusinessinChinawithoutworryingaboutmicrodetailsthatyoumightnotevenbeawareofthere.
Ontheotherhand,the“badguys”willgiveyouthesamesenseofcomfortandsecuritybutintheendwillleaveyouwithyourpocketsemptyandyourheadspinning,wonderingwhatwentwrongandwhen.
Goodguys
Badguys
Notallbusinesspartnersarecreatedequal
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Traditionally,foreigncompanieshaveconductedduediligencerelyingsolelyuponpaperworkstatingfactsandfigures,sometimescoupledwithvisitstoChinaandgoodold-fashionedgutfeelings.
WhilefactsandfiguresmaybegoodindicatorsofaChinesebusinesspartner’son-paperprofile,thefactsandfiguresalonerarelyuncovermorequalitativethings,likehowthecompanyactuallyconductsbusiness,reportsofunethicalbehavior,concealedbusinessinterests,orthatapotentialinvestoractuallydoesn’thavethecapitaltobackuptheiroffer.
NowadayssomethingcalledReputationalDueDiligence(“RepDD”)canbeusedtoreasonablyunderstandwhetherabusinesspartnerisa“goodguy”ora“badguy”.“Reasonably”,becausenomatterhowmuchresearchyoudo,youcan’tpredictthefuturebehaviorofhumanbeings.
Traditionally
Factsandfigures
Possiblevisits
Gutfeelings
Nowadays
RepDD
Qualitativelook
“On-paper”profilevsactual
Separa&ngthe“good”fromthe“bad”
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WhatisRepDD?
RepDDgoesbymanynames:“reputational”,“integrity”,“enhanced”,or“qualitative”duediligence,orevensometypeof“intelligence”.UltimatelyRepDDidentifiesindicationsofredflagsthatthebusinesspartnerisoneofthe“badguys”.
RepDDsupportsothertypesofduediligenceinthatitcomparesthebusinesspartner’son-paperprofilewithitsreal-lifeactivity.Itidentifiesanycontradictionsbetweenhowthebusinesspartnerhaspresenteditselfonpaperandhowitactuallybehavesandexistsintherealworld.It’salsothedifferencebetweenwhattheyhavetoldyoutheydoandwhattheyreallydo.
RepDDcanfocusoneithercompaniesorindividualsbutusuallyblendsthetwo.Intheendpeopleareultimatelybehindcompanies.InChinaspecificallythereisapositioncalledLegalRepresentative,whichmustbeanaturalperson.Thispersonisthepersonificationofsortsofacompanyandispresenttorepresentthecompanyduringanylegal-relatedmatters.
RepDDisariskmanagementtool.
• Whatifyourbusinesspartnerhasalabyrinthofrelatedcompaniesthatyoudidn’tknowabout?WithoutRepDDyoulikelywillnotfindoutaboutthesecompaniesandthereisariskthat,forexample,yourIPmaybepassedaroundtherelatedcompanies.WithRepDD,youwilllikelyfindoutabouttherelatedcompaniesandyouwillhaveanopportunitytoprotect
What• IDredflagsfor“badguys”
• Riskmanagement
• Unearths“truestory”
• Strengthensnegotiations
When/Why• Preventive-On-boarding-Monitoring-Papertrail
• Reactive-Suspectedwrongdoing-Litigation
How• Investigativemindset
• “Manual”work
• Publicallyavailableinfo
Who• Chinaspecialists• Nativeunderstandingofculture
• Publicallyavailableinfo
Reputa'onalDueDiligence
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yourIP.Itmightjustbeaquestionoftighteningyourcontract’sconfidentialityclause.• WhatifthebusinesspartnertoldyoutheyareatopdistributorofyourproductinChina?
Yousawtheirbigshinyofficesandluxurycars,butwithRepDDyoufindouttheyarea3-personintermediaryagency.
• Whatifthebusinesspartner’scompanychopdoesn’tmatchthecompanyregistrationinfo?Thissoundssimple,butitcouldhavelegalimplicationsdowntheroad.
RepDDlooksbeyondthesurfacetounearthabusinesspartner’s“truestory.”
Inadditiontobeingariskmanagementtool,RepDDtendstoalsostrengthennegotiationswithChinesebusinesspartnerswiththeknowledgeyouobtain.
WhenandWhydoyouconductRepDD?
TherearetwogeneralpointsintimethatyouwoulddoRepDD:beforebadthingshappen,asapreventivemeasure;andafterbadthingshappen,asareactivemeasure.
RepDDasapreventivemeasure
• Businesspartneron-boardingCheckingoutthebusinesspartnerbeforeyouenteringintocontract.
• BusinesspartnermonitoringMakingsurethebusinesspartnerhasn’tchangedsinceyouenteredintocontractwiththem.
PreventiveRepDDanswersquestionslike:
• Whatistheownershipstructure/whoistheultimateowner?• Doesthecompanyshowsignsofactuallyoperating?
• Doesitlegallyexist?
• Doesanythingcontradictwhatthebusinesspartnerhastoldyou?
• Doesthebusinesspartnerreallyhaveexperienceinmyindustry?
• Arethereanyoutsidebusinessintereststhatwouldberiskytome?• Doestheinvestorreallyhavethemoney?
• Doesmyfuturegeneralmanagerhaveacriminalhistory?
PreventiveRepDDisalsousefulformakingapapertrail,eitherforyourcompany’sinternalpolicies,orforlegalreasons.Somecompaniesmaybesubjecttocertainregulationsintheirhomecountry,suchasanti-bribery/corruptionlaws,antimoneylaunderinglawsoreventaxlaws.Dependingonyourcompany’shomecountrytheselawsmayreachyouinChina.Forexample,severalcountrieshaveanti-briberylawsthatrequireyouto“reasonably”understandyourChinesebusinesspartner’sactivityandhowitpertainstorisksofbribery.WhenagovernmentagencycomesknockingatyourdoorsayingyouareengaginginbriberyviayourChinesebusinesspartner,incertainjurisdictionsitmaybeastrongdefenseargumenttopresentarecentRepDDreportstatingthatatthetimeofresearchtherewerenoindicationsthatthebusinesspartnerwasofhighrisk.(Basedonmy
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observations,pleasedonottakeaslegaladvice).
RepDDasareactivemeasure.
Unfortunately,sometimesunpleasantsurprisesdohappenwithChinesebusinesspartners.
ReactiveRepDDmaybeconductedtocometotermswithwhathappenedorunderstandingwhy,orperhapsitmightbeastartingpointfordevelopinginternalpoliciestolowerriskofthesamethinghappeningagain.
PerhapsthebiggestreasonforreactiveRepDDissuspectedwrongdoing.Thisismyprimaryexperience,andthemostcommonthemeis“undisclosedbusinessinterests”.Theseareextremelyeasytomissinothertypesofduediligence,onChinesecompaniesspecifically.TherearenumerouscaseswhereownersofChinesecompanieshaveregisteredrelatedcompaniesinfamilymembers’names.Chinesehusbandsandwivestypicallydonothavethesamelastnames.Sothroughoutafamilythisleavesmuchopportunitytoestablishagroupofcompaniesthatappearunrelatedbutthatareactuallyquiteclose-knit.ThisisanexampleofwherethequalitativeaspectofRepDDcomesin.
Peopletendtoleavetracesofthemselveseverywhere,especiallyintheageoftheInternet.RepDDpractitionerswillusethesetracestoconnectthedotsandfindfact-basedinformationconnectingrelatedindividualsandcompanies.
ReactiveRepDDmayalsobeusefulinprovidinginformationinlitigationproceedings.Generallyspeakinganddependingonmanyfactors,RepDDfindingsmayserveassomesortofsupportforalegalargumentintheformofacharacterprofileofthebusinesspartnerorrelatedindividuals.(Basedonmyobservations,pleasedonottakeaslegaladvice).
HowdoyouconductRepDD?
RepDDisaqualitativelookatacompany,sousinganinvestigativemindsetwhiledoingtheworkiskey.
RepDDinChinaisconducteddifferentlythanitwouldbeinotherpartsoftheworld.Thereasonsarebothpracticalandlegal.
Practicallyspeaking,RepDDinChinaislargely“manual”work,meaningthereisnosoftwarethatwilleffectivelyrunasimplesearchwiththecompanyorindividual’snameandbringupallrelevantinformation.ThisworksinsomeplacesintheWestbutnotinChina.“Manualwork”requiresfirstfindingpuzzlepiecesthenputtingthepiecestogether.
Alsopracticallyspeaking,whateverinformationisavailableinChinamaybeprovideddifferentlythaninotherpartsoftheworld.InformationtendsnottobecentralizedinChinabutisorganizedonacityorprovincialbasis.Evenwithinofficialcorporateorlegalrecords,acertaincategoryofinformationavailableinoneprovincemaynotbeavailableinanotherprovince.
Further,theapproachtoRepDDonindividualsinChinaisdifferent.Thisisbecausethereare
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relativelyfewnamesfortherelativelylargepopulation.Toquantifyit,therearearound1.5billionChinesepeople.Around22%ofthepopulationhasoneofthreelastnames:Li,Wang,orZhang.That’s330millionpeople(aboutthepopulationoftheUS),andthat’sonlymainlandChinese.AddtothatHongKong,TaiwanandotherSoutheastAsianChinesenames.SearchingaChineseperson’snamealonereturnsliterallymillionsandmillionsoffalsepositivesthathavenothingtodowiththeindividualbeingresearched.Ittakesculturalunderstandingandinvestigativeskillstonarrowdownthefalsepositivestogetanykindofmeaningfulinformation.
Legallyspeaking,RepDDinChinaisconducteddifferentlybecauseoflawsprotectingwhatiscalled“personalinformation”andwhatiscalled“statesecrets”.IntermsofRepDD,informationshouldcomefrompublicallyavailableinformationsources.ThereareRepDDfirmsthatobtainwhatisconsiderednon-publicallyavailableinformation,andthatisillegalandextremelyriskytoallpartiesinvolved.
ItmayseemthatusingonlypublicallyavailableinformationsourceswouldlimittheeffectivenessofRepDDandtheresultsyoumightfind.Idisagree.Thisiswherefindingthepuzzlepiecesandthenputtingthemtogethercomesin.RepDDpractitionersfilterthroughhugeamountsofinformation,andconnectthedotstoidentifythingslikecriminalorcivillitigation,misuseofgovernmentsubsidies,outsidebusinessinterests,andanyotherreputational“redflags”.
InthatwayRepDDuncoversratherinterestinginformationdespitewhatmaybeperceivedasobstaclesorlimitations.
Frombothapracticalandlegalperspective,keepinmindthatinChina,informationnotavailabletodaymaybeavailabletomorrow,ormoreoftenvice-versa.
WhoshouldconductRepDD?
Whythetopicofwhoshoulddothework?SothatyourRepDDriskmanagementtooliseffective,andnotanexpensivewasteoftime.
MoreandmoreforeigncompaniesarerequestingRepDDfromserviceproviders,becausetheworkisnoteasy.Companieswantthemostvaluableinformation,quickly.IfyoudoconsiderengagingaRepDDserviceprovider,whatshouldyoulookfor?
• SpecialistsinChinaRepDDoratleastaRepDDfirmwithadesignatedChinaRepDDteam.RepDDisdifferentinChina.
• WithintheChinaRepDDteam,thereshouldbeexperiencedpractitionerswhounderstandtheenvironmentinChinaandwhocanintegratenativeunderstandingoftheculture(notjustlanguage).It’snotaboutthelanguagebutaboutlookingattheinformationinfrontofyouandanalyzingwhatitreallymeanswithregardstoaparticularcase.
• UnderstandhowtheRepDDserviceproviderconductsresearchintermsofusingpublicallyavailableinformationsources.Takingphotosorobtainingcorporateinformationfromathirdpartyareinsomecasesnotpublicallyavailableinformationsources.
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Disclaimer: The informationsetout in thisdocument is foreducationalpurposesonlyanddoesnotconstitutelegaladvice.Lohtsmanacceptsno liability–whether in contract, tort (includingnegligence),orotherwise– toanypersonorentitywithrespectoftheinformation.
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Thankyou!IammorethanhappytodiscussanyquestionsonRepDDoritemsrelatingtoyourparticularChinagoals.Feelfreetocontactmeatmydetailsbelow.
LauraisFounderofLohtsmanwheresheassistsclientswithBusinessPartnerReputationalDueDiligenceandChinaMarketPre-EntryStrategy.
AForensicAccountantbytraining,Laura’sbackgroundisinfraudinvestigation,havingspecializedinreputationalduediligenceonChinesebusinesspartners.ShehasoverseenhundredsofcasesfromFCPAcompliancetoinvestigatingundisclosedChinesebusinessinterests,havingidentifiedimportant"redflags"whichotherwisewouldhavegoneunnoticed.
LaurawasbornandraisedinNashville,Tennessee,USA.Shespent10yearsinFranceandover5yearsinChinabeforemovingtoIsraelinAugust2016.ShehasaMastersdegreeinForensicAccountingfromFloridaAtlanticUniversityandisaCertifiedFraudExaminer.
LauraOtterpohl,CFE|FounderLohtsman|ChinaDueDiligenceEmail:[email protected]+972-50-649-5990TelUS+1-615-208-5791TelHK+852-8191-5932