Inflation, geopolitical tensions and a lingering pandemic environment all contributed to increased challenges for companies navigating regulatory risk and compliance in 2022. Many of these factors will continue to impact the investigations landscape into 2023 and will lead to sustained risks of fraud and corruption.

We polled our senior Investigations & Compliance leaders from across North America, Europe, the Middle East and Asia on the key global and regional trends and developments expected in 2023. Below are their expert insights into the investigations and compliance landscape in 2023.

Global Investigations Review recognized A&M in the GIR 100 of top cross-border investigations firms in 2022. Read more here.
 

Steve Spiegelhalter, United States
Heightened U.S. regulator activity underscores the need for effective compliance programs

DOJ, SEC and CFTC continue to be active in the FCPA, FCA and market-manipulation space, with several recent high-profile resolutions. U.S. regulators have publicly touted continued cooperation with foreign and domestic law enforcement; this reality significantly complicates how companies scope their investigations and report to prosecutors in the U.S. and abroad.

DOJ continues to delve more deeply into preexisting and point-of-resolution corporate compliance. The emergence of DOJ’s CECP Unit and new CCO certification underscore the importance of a root-cause assessment early in an investigation. Companies should then quickly orient themselves around remediating controls that failed. Using corporate data to home in on key risk areas, it’s essential to evaluate the adequacy of existing controls, test the adequacy of compliance and internal audit programs, and evaluate themselves in relation to evolving DOJ guidance, including new guidance on corporate use of data and the use of compliance KPIs to incentivize corporate executives to follow the law.

Demonstrating that the company maintains an independent, effective compliance program that is capable of identifying and remediating issues on its own is a critical component of any resolution discussion — particularly if seeking to avoid a guilty plea or the imposition of a monitor. 
 

Dhruv Phophalia, India
Focus on risk monitoring and corporate compliance

In 2023, we will continue to see an increased focus on risk mitigation and corporate compliance practices. Countries are enhancing regulations in the areas of corporate governance, bribery, unfair competition, insider trading, fraud and data privacy. Organizations are demanding an agile fraud risk monitoring and investigation framework that covers changing risk scenarios and their complexity- heightening policies and controls, including protecting and enabling whistleblowers, increasing compliance monitoring, strengthening anti-money laundering practices, maintaining fair competition and safeguarding interests of investors and stakeholders.

Amidst the heightened geopolitical tensions, companies are increasing the monitoring of cross-border transactions, sanctions and the ultimate beneficial ownership of entities.

The COVID-19 pandemic accelerated the pace of digital transformation, thereby placing greater reliance on technology solutions and platforms. Active identification of critical internal and external interfaces susceptible to fraud — with near real-time monitoring and countermeasures — is becoming the norm. The need to balance compliance, data security, efficiency and agility while redesigning and digitalizing these risk management practices will be a key focus area for corporates in 2023.
 

Frankie Leung, China
Procurement fraud on the rise in China

The strict COVID curbs on travel and lockdowns in China have finally come to an end in early 2023. The economy seems to be back to normal, but some companies are still suffering from supply chain disruptions caused by the long-lasting pandemic.

The supply chain deficiencies and shortage of “genuine” suppliers have led to a rapid increase of reported procurement fraud due to the weakening of internal controls, lack of original document verification and increased reliance on technology-enabled approval processes. These have created more opportunities for employees to collude with family members and connected third parties or other bad actors to take advantage of the company. We expect this trend will continue in China until the issues are discovered and rectified.
 

Henry Chambers, Hong Kong
ESG compliance remains a top focus in Asia

As environmental, social and governance (ESG) frameworks are increasingly adopted by companies across Asia, the need for companies to also monitor and accurately report on ESG will continue to be a top focus. We expect to see more regulations and obligations introduced for companies, including the need for additional disclosure and, as a result, we expect to see regulators increase their focus on ESG noncompliance. In view of this, some areas we could see an increase in ESG-related disputes and investigations include:

• Greenwashing claims by consumers/customers
• Publication of fraudulent or otherwise unsupported claims of ESG compliance
• Claims by shareholders/investors of relying on misleading ESG information that resulted in investment losses
• Claims against companies for misrepresentation of their ESG compliance
• Claims of breach of fiduciary duties against directors for noncompliance or for providing misleading ESG information

Keith Williamson, United Kingdom
Expectation for increased financial statement fraud being uncovered in 2023

As many of the major central banks and governments around the world respond to the highest levels of inflation in a generation, combined with the highest interest rates for the same period, many individuals and businesses are going to face financial pressures not experienced since the global financial crisis of 2008, which precipitated the last global recession. While government handouts and bailouts financially shielded many individuals and businesses from the economic ravages of COVID, such assistance is unlikely to be forthcoming now if inflation is to be brought under control.

As a result, we can expect more individuals and companies to be facing challenges that may result in them rationalizing that fraudulently manipulating financial results — to maintain investor, customer, supplier and employee confidence, to avoid breaching bank covenants, or to ensure bonuses or earn-outs are paid — may preserve their and others’ jobs and standards of living. Such rationalizations and resulting manipulation may also have taken place during the economic trough of the early months of COVID. However, detection may have been avoided as the world’s governments and regulators understandably focused their attention elsewhere and businesses and owners were focused on economic survival rather than compliance and strong corporate governance.

Investors, short sellers, regulators and auditors know the history of accounting scandals that have been perpetrated and/or uncovered during previous financial crises. Accordingly, depending on their position, they will be seeking to protect themselves and stakeholders or to capitalize on this inevitability by uncovering wrongdoing. We therefore expect more financial statement fraud to be uncovered in 2023.
 

Penelope Lepeudry, Switzerland
Financial fraud impacted by the increased cost of servicing debt

The world of cheap money is over as central banks tightened their monetary policies and raised interest rates to tame inflation in 2022. Even though there are signs here and there that inflation may be stabilizing, we continue to see costs rising in response to inflation and also due to continued shortages in workforce and supplies. As a result, companies are forecasting an increased cost of servicing debt and lower profits because costs are rising faster than sales. Now that money is expensive and profitability dropping, an environment of heightened tension could likely include:

• Acquirers looking at their highly leveraged investment, made at high prices (high EBITDA multiple)
• Reduced expected returns for investors in private markets as the value of startups has decreased before entering public markets
• Highly leveraged companies facing difficulties servicing debt
• Impatient investors as the present value of future income streams falls because of high interest rates

Historically, in times of high interest rates with compressed margins, we have seen two examples of the impact on financial fraud. On the one hand, such an environment makes it harder to hide existing financial statement fraud, and Ponzi schemes have been difficult to sustain in such an ecosystem. On the other hand, companies will find it harder to meet profitability targets, with some tempted to cross the ethical line. High pressure combined with low ethics and weak internal controls are key ingredients for fraud, with questionable transactions made “for the good of the company.”
 

James Daniell, United Arab Emirates
Post-M&A disputes on the rise in the Middle East

2021 and 2022 saw a surge in M&A activity in the Middle East as the region emerged from COVID, fueled by a recovery in oil and gas prices. Strong deal activity was seen in the UAE, Saudi Arabia and Egypt. Although deals are likely to continue in Saudi Arabia as the country advances implementation of its ambitious Vision 2030 plans, we expect an increase in post-M&A disputes and investigations as the rest of the market cools. As deal-makers seek to capitalize on market conditions and complete deals quickly, the risk of missing material issues in the due diligence process and negotiation of share purchase agreements gives rise to an increased likelihood of disputes.

Breaches of representations and warranties, which set the boundaries of the seller’s liability for the condition of the company after completion, are likely to be the most common bases of claims. Claims for fraud and failure to make accurate disclosures are also common, which may allow the claimant to seek damages in excess of liability caps. Claims for fraud also allow the buyer a way to completely unwind the transaction and be restored to a pre-purchase position. The challenge with a fraud claim is to prove dishonest intent, thus requiring robust investigations and evidence gathering.
 

Phil Beckett, United Kingdom
Use of AI/machine learning to play an important role in investigations

Irrespective of the type of fraud, money laundering or other alleged crime, data continues to play a key role in how we undertake investigations. In recent years, the growing number of data sources to be considered forensically in an investigation has expanded beyond emails and documents and now regularly includes structured data sources such as financial transactions, collaborative platform messages and data housed in sector-specific applications.

In 2023, we will see an increased use of AI/machine learning technologies to improve the efficiency and effectiveness of investigations as relevant data sources continue to expand. These technologies can help investigators and lawyers identify key messages more quickly and recognize potentially relevant themes across data, and use analytics to mark similar documents together. We expect these technologies to be a pivotal element in any investigator’s toolbox regardless of the context of the investigation.