When growing economic uncertainty meets heightened regulatory demands, how should companies protect themselves? Alvarez & Marsal (A&M) Disputes and Investigations team in Asia provides analysis of trends in Asia in 2020 to guide businesses in identifying and navigating potential risks in a year of expected growing economic uncertainty and heightened regulatory demands.

Core strategies companies should pursue include:

• Perform risk assessments to identify current and emerging risks, and test and enhance risk mitigation strategies
• Raise awareness of risks throughout the organisation and improve prevention and detection
• Combine know-how and technology to effectively combat risks

“2020 is the beginning of a new decade that foretells more headwinds for businesses in Asia than ever before. Global trade conflict, U.S. elections, Brexit, recessions in multiple regions and technology disruption have created a web of risks for businesses operating in and out of Asia. With growing economic uncertainty coupled with heightened regulatory scrutiny and demands, companies must be proactive and dynamic in identifying and mitigating risks to their business and be more prudent than before,” said Keith Williamson, Managing Director and Head of A&M’s Disputes and Investigations practice in Asia.

Trend 1: Geopolitical risks and difficult economic conditions heighten risks

Global finance ministers, central bank governors and the United Nations have warned that weaker growth in both advanced and developing markets increased the likelihood of a global recession in 2020. In Asia, the slowdowns have been seen in mainland China, Hong Kong, Singapore, Australia and Southeast Asian countries and the as-yet unresolved US-China trade war will further impact the prospects for companies in the finance, trade and retail sectors.

In response to the demands of investors in this uncertain climate, management are increasingly under pressure to maintain financial performance. In a rapidly evolving economy, management and employees also face the pressure to keep their jobs and maintain their standard of living. This creates a ripe environment for unethical behaviour as the pressure may lead some to manipulate financial results or ‘cook the books’, embezzle funds and offer bribes to win business.

“As macroeconomic risks mount and profits are squeezed, investors are applying pressure on management to maintain financial performance. We have seen this in past recessions – such an environment proves fertile ground for fraud, misappropriation of assets, bribery and corruption. As a result, it is crucial for companies to establish and regularly update their compliance framework in order to track evolving risks,” said Chris Fordham, Managing Director, A&M’s Disputes and Investigations in Asia.

Trend 2: Increase in regulatory enforcement from both local and overseas regulators

Signs of stricter regulatory enforcement are appearing across the globe. Under the U.S. Foreign Corrupt Practices Act (FCPA) corporate fines reached a new record of US$ 2.6 billion in 2019. Closer to home, the Securities and Futures Commission (SFC) in Hong Kong fined various banks approximately $150 million for due diligence failures in 2019.

“What happened in 2019 signals very clearly that local and overseas regulators are vigorously pursuing regulatory enforcement proceedings to ensure market stability and compliance of companies whatever their size. Companies are set to face more regulatory scrutiny in 2020 and so local knowledge and experience is important for understanding the nuances of local regulations. Every board and management team should be undertaking thorough risk assessments in order to identify risks and be prepared to respond quickly to mitigate any shock,” said Williamson.

Trend 3: New risk typologies are emerging

Australian banks currently embroiled in a money-laundering scandal associated with human trafficking and terrorist financing activities are a prime example of a new evolving risk that has come under regulatory scrutiny. Fintech industries involving blockchain, cryptocurrency, and virtual banking, have also led to new risks in an uncertain regulatory environment ripe with potential for abuse.

As businesses expand into new markets and industries and partake in China’s Belt & Road Initiatives (BRI), they face unfamiliar risks of bribery and corruption in these new areas. Each country varies widely in their regulatory approach particularly across Asia and the BRI region, which creates heightened risks of bribery and corruption.

Trend 4: Investment in smarter technology to reduce risks

Data and technology are two key ingredients in fighting risks and businesses will need to look at creating a complete data picture using cutting-edge technology. “Sophisticated technology has enabled us to identify information gaps and analyse information flows instead of looking at pieces in isolation. With the help of artificial intelligence and machine learning algorithms, we can design more effective systems for monitoring, detecting and even predicting risks,” said Davin Teo, A&M’s Head of Forensic Technology in Asia.

Strategies for smart companies to combat risks in 2020

In 2020’s challenging environment, winning companies will be pursuing three core strategies.

1. They will perform risk assessments on a continuous basis

Evolving risks have to be identified and navigated in real time based on the best information available. Businesses should also assess how risks are currently mitigated in order to evaluate their effectiveness in preventing those risks. Current difficult economic conditions increase the chances of unethical behaviour and businesses should tighten their assessments accordingly.

2. They will raise awareness of risks and improve prevention measures 

Faced with constantly evolving new risks, it is more important than ever to ensure all employees are aware of risks faced through effective training. Businesses need to consider strengthening their internal controls, policies and procedures to improve prevention measures. “In the face of increased scrutiny and enforcement action from regulators, business leaders must develop a vision of the future of their businesses focused as much on risk mitigation and protection as it is on growth,” said Chris Fordham.

3. They will combine know-how and technology to combat risks

Businesses should look to utilise a combination of know-how and technology by deploying expert opinion to assess their risk management strategy and investing in the right technology tools for them. With the help of both compliance and technology experts, businesses are better prepared for and protected against upcoming risks in 2020.

“2020 will be a challenging year economically for businesses across Asia, they must not take their eye off the ball in preventing and detecting unethical behaviour that could lead to expensive, damaging and distracting regulatory action,” concluded Williamson.