Transcript: Investigating Conflicts of Interest

with Control Risks' Kent Kedl and Tung Jung (TJ) Tan

· Transcripts - CBLP

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Kim: Welcome everyone to the China business, little plug. Well, my name is Boone Kim fam. I go by Kim and I will be your guest host for this episode today. We are very excited to welcome two prominent guests to our podcast, Mr. Kent kettle and Mr. TJ tan of controlling. So before we begin with also like to introduce and thank one of our new sponsors for the China business law podcast for 2021, he used Castile who was a premier legal search firm in Asia and the pioneer in legal and compliance search in greater China since 1986.

He was Castile's trusted brand name gives it unparalleled ability to engage top level legal talent in a broad spectrum of industries and calmness, including top fortune 500 corporations, banks, and international law firms. Welcome Kent and welcome TJ to the China business law podcast today. Thank you so much for joining us.

So by way of introduction for our audience, Kent kettle is a partner in control risks, greater China and Asia, Candice responsible for control risks practices across mainland China, Hong Kong, Macau, Taiwan, the Koreas and Mongo. No, he has worked in Asia since the early eighties. He certainly, he doesn't look it though.

Can test insulted with multinational and Asian corporations on a range of risk and strategy issues. For example, mergers and acquisitions, organic growth strategy, crisis management and operations of business countries. And of course strategic and organizational development programs. Kent has particular expertise in the Asia, Pacific healthcare, food and beverage and consumer product sectors.

Kent also serves on the board of governors of the American chamber of commerce in Chang. So now moving on to TJ. TJ is a principal in control risks, greater China, could clients forensics and intelligence practice based in Hong Kong. He has a specialized in forensic accounting, corporate investigations, business intelligence, and insolvency for more than 20 years.

Again, he doesn't look it at all. PJ has extensive experience in leading reactive investigations as well as proactive compliance, risk assessment reviews for multinational corporations across. TJ has also provided forensic accounting and investigative support to international law firms appointed as the independent advisors of publicly listed companies.

Once again, welcome Kent and welcome TJ today. We are going to discuss what I think we would see both myself and our audiences alike as a myth, Buster of sorts in the realm of conflicts of interest. For many in-house compliance practitioners, one of the evergreen issues that our audience perhaps continues to face, and it is not always given the airtime that it deserves.

It's the perceived or potential existence of a conflict of interest within an organization. So this then leads us to our first question. And this question is for you Kent. So Kent, you have literally lived and worked in Asia for over four decades. Looking at the topic of conflicts of interest, generally with a focus on.

Do you see an increase in transparency which may lead to a decrease in potential conflicts? Or do you see a trend of more sophisticated ways perhaps of concealing potential conflicts of interests within an organization? 

Kent: Yeah. Can we it's it's a, it's a great, a great place to start. I think, I think the, the, the change that what we've seen over the years, Is an interest in companies or, or concern in companies around conflicts of interest, you know, years ago when we were, you know, the economy is growing at 12 and 13%, we were all just trying to hang on.

Right. We were just trying to keep our business going and trying to hire as many peoples because of. We just try to hang on. Conflict of interest was kind of like, well, I, you know, kind of the cost of doing business in a sense, you know, when we all know conflicts of interest are people kind of lining their own pockets, leveraging their, their, their title and their position to line their own pockets.

It's kind of an atrial problem throughout all of Asia, but I, I, I have a special place in my heart for the unique approach. That happened here in China. And so in the old days, we never really concerned about it. As things slowed down, competition got stronger. We were trying to squeeze more margin and efficiency out of all our organizations, companies starting to get more concerned about it, but there was still the problem of actually investigating conflicts of interest, conflict of interest aren't caught very often typically because it doesn't always obviously pass things.

The company books or company records or something like that, if it is it's like you say, it's quite hit. And so investigating them was, was a very difficult thing. And people thought, well, you know, we're not going to find out much. Anyhow, why even bother to investigate. A number of years ago, we, we started hearing from clients that they were, that this was a real concern of theirs because they wanted to clean up their organization, particularly even during COVID now, too, you know, that, uh, the phrase, you know, when the, when the tide goes out, you see who's wearing a bathing suit.

The COVID tide went out and a lot of people found out they weren't wearing very much and they, they, they, they really wanted to fix things. And there's one client. It was about a year ago, one client who we're doing this massive conflict of interest investigation for. And I asked him, I said, really, do you want to spend this time and money right now?

I always try to be honest with my clients on the front end to say, listen, I think we'll find something. But, but it's gotta to be expensive. And he said, he said, he said, we know postcoded that we're going to be running a marathon. I can't run a marathon on a Brooklyn. And this inside insider trading conflict of interest, all that stuff is a broken leg from my organization.

I need to make sure that I am as strong as possible so I can compete as well as possible going forward. So I think there's a, there's a new concern about it. And, and based on our experience and the methods that we use, uh, some success in, in investing. 

Kim: That's an excellent point that you've made there Kent.

So instead of an area where one could turn a blind eye, perhaps, and perhaps such conflicts were somehow tolerated in the past, would you say that a company would actually lose its competitive advantage? If they don't actually, they don't actually take the issue of conflicts of interest seriously at this day and age.

Yeah. 

Kent: I would definitely agree with that, Kim, the problem is you really have to help a company connect the dots. We did a bunch of conflict of interest investigations a couple of years ago with a client and they just, they decided that they had not been giving any training around conflict of interest, their clients or their employees really.

Didn't know anything about that. As a, as a side note in the mid nineties, I ran a software company, uh, here in China, and one of my guys hired his cousin to be one of our service providers that we have, but he didn't tell me that it was his cousin. I found out later and I got really angry at the guy. And I said, listen, you're, you're exposing us by hiring a relative.

Like I said, I said, you're putting us at risk. I said, why didn't you do this? And he looked at me right in the eye and he said, I vividly remember this. He said, Ken, I did this to reduce risk. And I said, okay. I, I, maybe I'm just a lot. Why here? I don't get this. And he said, he said, he's very qualified for this.

He, he can do the job. His prices are right market rate. And if we have a problem with him, my mother talks to his mother, slaps them around a little bit and straightens up. And I said, brilliant. I said, what? There was a fundamental misunderstanding of what a conflict of interest when it was, we think conflict of interest, our employees very often just shared interests.

So back to this client, we were going to do training for them. And I told them, I said, listen, we have to use examples from the company of how conflict of interest harm this. And we have to use, and you have to be honest about, these were examples and you have to kind of come out and say, freak out the lawyers a little bit.

They didn't want to admit to and things like that. But we got around that and we said, you know, in this case, because someone played a game on the inside, this team did not hit their bones target. Th the, the, the, they, they routed some of the business. These guys got Richard themselves, the team miss their bonus over here.

We lost three deals in a row because we suddenly became non-competitive. Our prices were so high because they were trying to pay for kickbacks and everything on the inside. That, that, that our business was hard. So you really have to tie those together. In addition, we almost always find conflict.

Conflicts of interest are associated with kickbacks, with bribes. There's all sorts of things that's going in the market, which really can have a international regulatory impact and, and could be quite 

Kim: serious. Thank you very much, Ken. Indeed, for that very helpful insight. I think it would not be an understatement to say that conflicts of interest perhaps is for want of a better description.

The mother of all evils from a compliance space. So this then takes us to my next question, where we very often hear. In-house counsel. And sometimes even people from local companies saying that it is almost impossible to really get into the weeds of a potential conflict of interest issue. I'm curious.

So how much of this is actually. 

Kent: Yeah. So maybe what I'll do is I'll talk a little bit about the context and then TJ, as the practitioner can talk about the methods that we use again, like I said, in the intro, one of the challenges is that conflicts of interests don't naturally kind of come through the, the, the, the books and records, you know, you're, you're playing, playing games with rebates.

You're you're inflating prices, slightly and kickbacks. There's all sorts of things that are. So, so companies that typically will investigate these things, we'll do kind of an audit. They'll go in and audit the books they get an audit is, is really the function of an audit is to run a series of tests. And then if you find a problem with some of.

It's not investigation. Oh, those are two different things. And so we recommended an investigation. So depending on the type of company, we're a product company, blue company, industrial products company, we've done so many of these that we know kind of where the bodies are. So let's go look there first, you know, and the first thing you need to do is you need to get outside the four walls of the company to go find out what's happening in the market.

What, what are the relationships out there between your own employees and say a distributor or a vendor or another third party that are, that are motive that are motivating us? What types of deals are involved? Things like that. So, TJ, can you talk a little bit about the, the, the methodology and how we start out?

TJ: Thanks. Ken, before I dive into the methodology, I thought it'd be useful for our audience to get a little bit of flavor as to, you know, the evolution of the investigations in the conflict of interest. So I started off doing investigations in greater China in 2005. Okay. So back then, 15 years ago, ID forensics was still very new.

And it was considered a silver bullet of investigations. I remember there was a case where we were doing an investigation for a French conglomerate, you know, against one of its local general managers in China. You know, B did a forensic acquisition of what the suspects are. Computer. And immediately when we did the review, there was a list of payments that he kept on XL, you know, listing out all the payments that he received from the parties, you know, so it was an open and close case.

Bring that forward by five years, you know, in 2010, things were getting a little bit more complicated. You know, people were becoming more sophisticated. We did a case. I mean, Beijing, where. You know, there were issues of similar issues of conflict of interest. You know, when we look at our books and records, we did the computer, the ID forensics, you know, It came out relatively clean.

But the moment we started looking at the corporate records at some of the suspicious vendors, we found that suspicious when they were supposed to have been providing training to the company's customers was in fact, a supermarket in. Okay. So when we put that together and you know, the, you know, when we interview employees, you know, the whole story came out, you know, so this company was actually set up by the local general manager to what it called to get kickbacks.

Now, fast forward to the present day, 2021, generally employees are now very tech savvy. You know, everything happens on a Vtech. In fact we get will be new. I different is Excel-based, you know, employees, as you tell each other, not to use company and computers to discuss anything. You know, so not just as the issues, but you know, not to discuss anything at all, you know, so you can see the, how things have evolved for the last 15 years.

You know, they don't, if they want to be, uh, they want to be up to no good, you know, they will, they may register parties or companies are using the names of their relatives, you know, rather than, you know, registering in their own names, you know? So the. The way, the lay of the land has actually moved quite a bit in the last 15 years, but what, what is good to know is.

Technology has also kept up to speed investigative tools that are available to, you know, to do this power of compound interest of investigations. I have also kept up to speed. So what Ken has mentioned just now is what we call the outside in approach the doing investigating interest. Now what this involves is basically a combination of, uh, external and internal information.

When you look at one side of the, you know, whether it's internal or external by itself, it may not make sense, or it may not tell the whole story, but when you combine both internal and external sources of information, that is when you get a full story and you know, that is how you solve the, the, the, how is how you do the investigation.

Now, what do we mean by our external sources of information? There are several main types of sources of information. First is a corporate records. You know, you look at how you know, who is behind this company is what a shower does. What a directors, you know, are they, uh, related to the employee, that person.

And then one very reliable source of information that we use quite a bit in. It's a, what we call source inquiries. So we speak to industry sources. These, you speak to sponsors who are familiar with the topic or the, of the, or the suspect is under investigation. And, and another avenue is we actually conduct site visits.

So site visits are fairly is, is really useful. Or I remember a case a while back where. You know, this company claimed that two of its customers, which contribute more than 85% of the revenue, they, they, what do you call? So what had happened is that there were allegations that these two end customer, these two customers are false.

Okay. So. When we look at a box of records, everything was green. You know, there were farmhouse, there were, you know, invoices, you know, there seems to be payments from these two and come from these two customers. But when we, when we did site visits to the offices of these two customers, they didn't exist.

They had no operations whatsoever. So obviously these customers forms now. From the internal perspective, what we have, you know, we can do forensic accounting review of the books and records. We now have more tools in terms of the it forensics side of the house. In fact, I do forensics is so powerful nowadays, where we leverage artificial artificial intelligence.

Basically what happens is that as you do the it forensics, we view the machine learning basically. Help us to prioritize what you, you know, use your, your findings and prioritize the review for you in order to make the review more efficient, but really the silver bullet of this age of, of this current, what it call this this current age is.

Data and ethics. Okay. Because there's just so much data out there. And the answer is usually in the data. Okay. What we need to do is to analyze it and get an in order to find that information. So as you know, just to, just to stress again, what I said at the beginning, When we look at each individual components in isolation is not going to give us an answer, but when we combine everything internal, external sources, that's where we, that there in lies the findings for your investigations.

Now, I thought it'd be useful to just share a recent case that we did, you know, so the client is an, uh, a European-based industrial equipment. Uh, matter of fact, They have extensive operations in China, they receive allegations of, of interest. We got in one of it's a middle manager, you know, saying that this middle manager has been my, has set up a company and, you know, you start getting kickbacks by having a company to do business with, with, with the client.

Now, when we look at the internal documents, you know, the way the vendor was onboarded, the way the vendor, the, the transactions involving the, when the, everything, since everything was properly. And then when we look at the external records, know, again, this company doesn't seem to be the legal representative does not have the same surname as, as a suspect, you know?

And so everything on the surface looks, it looks clean. We then took, took it one step further and started to look at it. Forensics. The, we met in the end, we mess crack the case. When we from ID forensics, where we. Where we identify a document where the suspect had applied for a car loan. And in that document, he actually stopped all his family members, including his parents.

It turns out that his mom was in fact, the legal representative of his company. And even when we did an interview with a suspect subsequently and presented all this evidence, you know, that there'll be found. He, he claimed that he, oh yeah. You know, he lent his mom's name and identity to a friend in order to set up a company, you know?

So eventually the employee was obviously removed from his position, you know,

Kim: Thank you so much, TJ for that wealth of information that you shared with us, especially the case studies, which I think for our audience is basically an insight infect, a sneak peek into what actually goes on in the day-to-day of the investigations that you actually handle. So thank you for that. If I were to actually.

Some up at this stage, you know, the, the answer to the question, is it a myth or is it the truth? I would say it's a myth. And you can tell me if you disagree, because so the, if the conflict of interest is an elephant in the room that needs to be addressed, then we obviously need to identify all segments or all parts of the elephant to piece together, the puzzle, a 360 holistic view, if you may.

And also, as I was hearing, you know, with great interest, I have to say. How you actually engaged in the different methodologies, including data analytics, how to identify and piece together, the whole puzzle. One thing to bear in mind. And I think everyone who's tuning in this episode probably will agree that we cannot judge a company's books and records by its cover.

So thank you for that. And this then leads us to the next question. We're going to shift gears a little bit, Kent and TJ. So we're going to go to mergers and acquisitions because I think this is an area where it's always a very happy environment where we're trying to close something. So from a mergers and acquisitions perspective, My question is, you know, to the, both of you, how much weight should an international multinational company place on the review and identification of potential conflicts of interest before determining whether or not okay.

Do we go ahead or do we step away, walk away from this deal? So over to the both of you. 

Kent: Yeah. So, so that's a great question, Kim. I mean, I think certainly the obvious things should be done first. It's just checking, checking to see, does the target actually talk about conflict? Uh, is it, is it in there, their handbook, you know, does it address that and says, these are the kinds of behaviors that we don't accept?

Do they, do they make some attempt to monitor these kinds of things? Do they have a declaration policy? You know, do they, do they have things like. Th the, the basics in place. I think the, the, the difficulty of, of trying to figure that out before the acquisition is that as you acquire or you have less information available, No.

And most of it's kind of sitting in the deal room and it's, it's a commercial nature and things like that. And, and again, like, like TJ and I were saying, it's very difficult to identify these things naturally within the books and records and transactions and things like that. You really do need to get on the outside.

The challenge here is that is. And very often these, these investigations start with the whistleblower. It starts with a, you know, someone saying, Hey, you know, person X is associated company-wide and they're lining their pockets and things like that. If you don't have that starting point, it's very difficult to say which thread you should start pulling.

First. The only way you can, you can do that is through the data analytics, the predictive data analytics to, to predict these conflicts of interest. But again, you need access full access to the books records to do that. And that can't be done with. Until after acquisition. One of the things I would suggest though, is that in your post-acquisition compliance review, that is one thing that should be looked at because that will have a direct, as I said before, direct business impact on your success and will have a huge impact on the, on the integration and, and the eventual success of the enterprise.

So it's something that, that should absolutely be checked once we have access to everything on the inside.

TJ: And I think that's, that's a really good one. You know, just to add on what can I say, you know, from the dealer's perspective, we shouldn't ignore reflects, you know? So just to give you an idea, just to give you a case that we did awhile back, you know, so the no deal accountants, um, had already finished their work and, you know, the client was in fact acquiring a glass company.

Up in Sichuan province and, you know, deal accountant had already finished their work. You know, generally companies really clean except for certain marketing. Or that they couldn't find, they couldn't identify the actual nature and also, or they couldn't get sufficient supporting. So then the, they requested for, uh, accountants come in us, you know, look at this, this marketing expenses.

So when we were there, we, the onsite work, we look at the book, the records, you know, talk to people in interviews. It turns out the mark, the expenses, and, you know, it was like in 10 millions for, for very short period, the marketing expenses was paid to an individual who would turn up in a factory carrying suitcases.

The suitcases were actually to carry these millions of cash in case. To go and pay customers, you know, you know, in order to win our business. So, and part of was cash was actually being diverted to the boss of the company, you know, so they had an arrangement. So point of the story, don't ignore it flex, you know, it will come back one bit to.

Kent: I keep telling the teacher that he's got collect all these stories and rights movie scripts, we should retire because they're such great stories. You're here. First question give about, you know, is there a greater transparency or are we seeing people come up with more ingenious ways of doing it? I think, I think the level of ingenuity is.

I mean, it's, it's terrible. It's brilliant. You know, and we see these at a, how much effort people, people put into this. And it is it's, it's no wonder it hasn't been able to be discovered until you apply to a real specialized methodology. But I, you know, part of me has to stand back and almost admire the work and the effort that they've put into it.

On the other hand, I think, well, if they would just put half that effort into their real job, then maybe the, maybe the company would be, would it be successful, but it's yeah, the, the, the stories are unbelievable every day. 

Kim: That's those are incredible stories and I couldn't agree more. So a movie script written by control risks probably would be the way to go.

So thank you so much to both of you for, for actually providing insight. Kent one, one off in your, in your, one of your past lives, you will also, as you put it a deal guy. So you've actually been in both worlds where, you know, you, you would be, it would be in your interests to actually close the deal. And then now you're actually advising on risks.

So do you think that that has actually helped you in terms of advising clients, what they really should be looking at, you know, from, from a conflict of interest perspective, 

Kent: Yeah, absolutely. Because, because the goal is, and this is development and, you know, doing deals is to do a good. Not just do a deal, you know, and, and I, we get that last.

I actually, I got to know control risks when I was doing them today. And one of my clients insisted that I use control risks to do it as pre-transaction due diligence, my team. And I had found the, found the target we've qualified them. I was the lead negotiator on the deal. I was, you know, really cool deal guy.

And I said, okay, fine. We'll let these control risk guys, you know, take. They came back with this report that was just dripping in blood. It was just, it was the nastiest thing. And I was, you know, typically I have an ego and I was really angry. I summed it in the drawer, locked away. And the next day I kind of called down and I pulled it out.

I said, well, okay, let's take a look at it. And what I found was just some amazing information that we could use to negotiate. Not just close a deal, but then negotiate a good deal and gave me a lot of insight into the company. And what would you do and how we could restructure it to make it work and how we could do a deal that was inherently compliant rather than do a deal.

And then, you know, make sure compliance keeps us out of jail, which is the wrong way to do. We're in compliance to the strategy table, bring compliance, instant deal like that. So I became a, I became a, an absolute convert as a, that was a client of control risk. And then a couple of years later when I sold my firm and was looking for something to do the stars aligned and I couldn't be more happy just, but, but bringing.

Experience from, you know, doing deals and negotiating deals, but then okay. How to do the right deal. And, and it, it, if you go into it with that thought solves a lot of problems. Everyone thinks of doing pre-transaction due diligence of this level kills deals. It does not kill them. I'd imagine only, you know, couple of percentage points.

Do we ever kill a deal, but that's because the deal should be more often than not. We help them adjust the deal to do better. And that's that I think is, is how we all have to look into going into recent.

TJ: Sorry. I was going to say that, you know, Ken is probably one of the few cases where, you know, we have permanent not site.

Kim: Brilliant. So we're going to, again, shift gears a little bit, just because, so TJ, you mentioned something about data analytics and that was really interested to hear more. So from a transactional testing perspective, will you, would you be able to share with our audience today, what are some of the red flags or warning signs from a data perspective, which would give us indications that a potential or.

4 4, 4 worse, you know, an actual conflict of interest actually exists. 

TJ: So just to lay the, the context of data, you know, again, going back 15 years, you know, 15 years ago, when you look at, you know, financial data, you know, maybe for a particular financial year, you may have, you know, thousands of items. Okay.

Fast-forward to today, you know, we are looking at for any medium sized company, you know, there will be at least hundreds of thousands, if not millions of items of financial data, it is just impossible for us to actually manually do any kind of manual reveal, you know, let alone do, you know, a hundred percent transaction testy.

So the way, the only way that we can get any kind of any. To do the investigation in the most cost effective and efficient manner is to use data analytics. So essentially what we are doing is basically put your, you know, we group all your data, collect data. And then we run an experiment. Okay. So the analytics is basically in the form of, you know, what, you know, just based on our experience, you know, the kind of reflects that we, that we have come across, you know, in the hundreds of investigations that are done, you know, the, some of the issues that we have come across in the past all are all use, start to run this reflect checks.

Okay. Just give me an idea as to, you know, walk out with. We'll look for, you know, so for example, in the case of interest involving the party vendors, we will do checks like, you know, whether perform, whether the vendors for number, or is it the same as one of your, one of the company employees, a full number or address?

We compare things like, you know, bank, account numbers, you know, does the vendor use the same account number, bank account number as one of your employees? So if you only have 10. It's very simple. Okay. If you have 10 employees, you have a 10 bed, simple exercise, you know, you just compare, take that at basically times that by, you know, say 200,000.

Okay. It's impossible for you to do any kind of comparison. That's where data analytics come in. So typically what we'll do is we'll request a client to help us collect the data. And it is, it's not just financial data. It's basically data from your vendor management system data from your employees data.

And you run that using the analytics. Now, if we, that is again, trying to catch up with the fast moving pace of, of, of fraud and conflict of interest. If you want to take one step further. Okay. What you can do is consider what we call predictive data analytics. So essentially what you do is continuous monitoring of your financial data in, in real time.

So as the transactions occur, you are continuous monitoring your data. And the moment that's a red flag, you know, it will be a flag to your finance team or a factory or a compliance team. And then the comparison will follow. In my mind, that is the gold standard currently of, you know, in terms of, you know, trying to grapple with these conflict of interest issues.

Kim: Thank you very much for sharing that with us, TJ. So at the end of the day, it really boils down to good data and how much data you actually have on your records. And that's actually going to help companies, I believe in identifying potential issues within the organization. So. In terms of from a personal action viewpoint, because this is an area I think specifically in China, you know, Kent and TJ is an area where we constantly find that it is the hardest to deal with.

How can we, as in-house professionals dealing in the realm of compliance, ensure that the conflict of interest review is actually robust. Yes. So secure and action against the suspect or the perpetrators of the conflicts of interest. 

TJ: Yeah, that, that, that 

Kent: is the that's the most important question really is, you know, gathering evidence or gathering information is interesting, but unless you can do something about it, that doesn't matter.

We actually started this whole process of conflict of interest investigations, because we were responding to clients who had a crisis. They, they did their own internal investigation where they did something and they tried to fire this individual and this individual freaked out and started, you know, getting on, on wasting away, blah, chatting, threatening, extorting, all sorts of things.

And so we were called in as crisis managers, which, which would be part of it. And I remember for a year we had two or three a month that we were doing. And finally we thought, okay, W what we need to do is we need to that the investigation is a decision making process. Can't don't us in a place like this.

We need to take those risks into account from the very beginning. So we developed a methodology that we call a recovery led investigation. If we're doing a conflict of interest investigation. And there are some very senior leaders very often we say, okay, let's assume that we get enough information that we can take some action.

What do we need to pay 10? Some of it's personal, you know, is this person angry type of person? Have they exhibited these kinds of behaviors in the past? How critical are they to business? Do they have key client relationships, key vendor relationships, key government relationships. Are they personally connected?

If they got angry at the company, how could they turn around and threatening them? Then we go do the investigation, the problem with the Chinese labor law here. And I, I realize that. I've got a bunch of lawyers here listening to this podcast with their microphones pointed at you. And I'm not a lawyer, but the challenge with Chinese labor laws there, it's very difficult to provide evidence capital E evidence in order to find out.

it's very difficult without paying them to leave, obviously. So what you need to do is you have to have get enough information and build a story. That's a combination of shame and fear, basically that you can confront this individual and you can do it in a, you know, very, uh, organized fashion, which we have a whole methodology around, around setting that up.

And, and so, so you can, you can do the investigation with the, with the end target. These issues are not so much a legal problem in China as they are a business continuity problem, that that certainly has a lot of legal issues to it. So it really needs the entire organization to be thinking about all the threats to business continuity.

If, if we remove these people, what could have. Just in the past three or four months, I've been involved in a number of cases where we removed the China CEO, China GM's heads of sales. I was one case we're working right now, where it has an individual that runs a certain division in China. That individual also runs that division worldwide.

It's a $2 billion business, and this person is pretty flagrant, really involved in these conflicts of interest. So it's, it's a huge, huge concern, but that's why we focus a lot of our effort, not just on doing a good investigation, but on helping the client, our clients resolve these problems and get back on their feet as soon as they possibly can.

TJ: Can I also just, you know, one step for the, to say that, you know, a strong compliance program would also, or some ways to actually help more into the situation and flag the issues, you know, and, you know, deal with the issue in its infancy, you know, rather than, you know, having a full blown crisis at Eddy era D.

What I would recommend. And these are relatively simple and, you know, compliance 1 0 1 steps, you know? So things like having a, making sure that your finance team, in fact, the gatekeeper of the business, you know, so instead of a finance team be beholden to the business and, you know, taking all the instructions for the business.

Finance team in ideal combined situation finance team, or should be the gatekeeper of the business. They essentially need to approve payments going out and do proper review before any payments are approved. So just to give an example, You know, and these are relatively simple that that finance should be made to the, they should be trained up and they should be, have the good, the discipline to actually do so.

So one, one way, one way that we normally recommend to our clients is to ensure that their finance team actually do substantive review. So basically what this means is having making so finance and check and approve payment, understand what they are approving, you know, so for example, they look at, you know, uh, the contract of they're supporting that particular payment is a 5 million payment.

Does the contract, is it consistent? Does it even make sense? You know, is this sufficient supporting documents? Does it, is the services that read that? Is it, is it actually, does it even make sense for the. Does the business even required this style for services. So has all these simple questions have finance ask all the support questions?

The answers may be quite surprising. Okay. So as long as you know, finance is, is a strong gatekeepers. I would imagine that is half the battle won in terms of trying to prevent these types of interests and issues. The other, um, component just as important is a strong tone from the top, meaning to say management does not, uh, collaborate any form of their interests or any form of compliance misconduct for America.

And, you know, this may be in the form of a regular communications can be the form of training for their employees, you know, too. I do highlight, okay. What constitute comfort, interests, and so forth. So all these tools have been around for a long time. It should be top of your, you know, it should be the cornerstone of any good companies, our compliance program, but you know, certainly it certainly, even in this day and age, you know, a lot of companies out there don't have this part of.

Kim: Indeed. If, if I were to coin, you know, if I were to sum up at this stage in terms of how we can actually ensure that the efforts of the investigation does actually lead to a meaningful outcome, which is then measurable in terms of actionable items, we can't actually deploy, you know, the Chinese proverbially, the blind leading the blind or south.

So that is something which I think we should all have to strive to, to avoid so that we all have a holistic 360 picture. And TJ, to your point, I noticed that you had mentioned that a lot of the emphasis is actually placed on the finance team. And one of the things that we do in both in my previous roles, as well as my current role is that I always emphasize to the teams.

It doesn't matter what department that you're in. We are all team compliance. So, so I think that that's one of the areas where, you know, some of our audience who sometimes come to me and say, look, I don't actually have a team. I don't have a bunch of people reporting into me. This is why the compliance program is so difficult to deploy.

I completely agree with you that it has to come from the tone at the top, and it has to trickle down and cascade down to all levels of the organization regardless of department. So with that, moving onto the next question, and TJ, you mentioned this a little bit briefly as well in your, in your sharing earlier about, you know, training and communication.

One of the things that, you know, as in-house compliance professional, though, That we are always striving to do is to look for ways to add value to an organization. To me anyway, and I'm sure to a lot of our, our colleagues or our peers out there prevention is usually a better medicine than cure. So is there anything that you could share with us in addition to what you mentioned earlier from a training perspective or a communications perspective that we could then embed into the culture of compliance that we have potentially prevented?

Conflicts of interests from actually happening in the first place, as opposed to tackling the issue when it does happen. And it then becomes investigative and remedial in nature. So, 

Kent: yeah, you're just, you're just kind of cleaning up the blood once a happened once it happens in a sense. So I think, I think TJ has already mentioned that training talk from top the data analytics is on a monitoring basis.

We find. Absolutely brilliant cam, you were very polite to say that I don't look as old, but I sure feel it that old. And when I sit around these, you know, smart guys with data analytics, I'm just blown away at what they come up with. So that is brilliant. I think, I think it needs to be even more fundamental than this, that I think every one of your listeners, we need to call out conflict of interest as a, as an issue, fraud rivalry kicked off.

Okay. We all, we all get that stuff cause there's FCPA and all the rest of. But, but conflict of interest is this death by a thousand cuts for companies. And we are shocked. And TJ probably probably agree with this. You are shocked at the number of times you come in and co companies don't address conflict of interest.

It's not in their handbook as a, as an issue it's never defined. They never do training on it. They don't have a declaration program we've come in and if they don't have anything like that, we've helped them run an amnesty. Where, if there are some issue, you know, as long as it's not been a criminal activity, that that, that my employees can come and say, Hey, listen, I, I do know this distributor over here.

And I haven't been, you know, lying in my pocket, but I do know it and they want to come complete just to show how important that is. So I really do think it starts off with just calling this out as a problem. And then all the other stuff that the TGA laid out I think is, is correct. But you've got to call it a problem first, if you don't, everybody's just kind of wondering around, I lost, I think 

TJ: where, you know, going back the cancer example earlier on, you know, about his employee hiring his cousin to do the work, you know, so in a lot of the cases that we have seen, you know, employees feel that this is the.

You know, whether it's, you know, hiring, you know, setting up their own company and minding their own pockets is basically part of the company posts, so to speak, you know, but so in order for us to address the issue, we need to change the company, the employees, our mindset, you know, so that's when you know, training and pulling for a, uh, comes in, you know, it's all about training, training, changing their mindset.

So. And there is some, there is some improvement, you know, in the last 15 years that I've been in this industry. Things are slowly changing, you know, employees coming to realize they need to hold themselves out to a highest and the, you know, they are, they are starting to understand, okay, this is wrong. And you know, they shouldn't be doing this, but a lot more still needs to be done in terms of bringing the awareness and putting that message across.

Kent: I think to Kim that we are, as TJ said, we're, we're, we're up against the culture here a lot. And we did an investigation about 10 years ago, and there was a sales manager for this consumer products company. And she had set up her own Taobao stores. She'd done a whole bunch of other things, sealing products selling and lining her pockets.

I mean, to the tunes of millions of them. We did a BA huge investigation, got everything dead to rights. The CFO at the time that we were working for said, okay, I'm going to confront her. I'm going to confront her. And I go, okay. Yeah, good luck with that. And I don't know how he did this, but he convinced her to pay back a certain amount of money and they were going to do it for like the next Tuesday.

So the next Tuesday she comes in and we were there. She comes in and her father's and her father has two large shopping bags, literally full of. That, that he is following right behind her. And we were fascinated with this. We thought this was just amazing. And so I was really interested in this. So we sat down with the father while the daughter was over there.

And, and I asked him, I said, do you understand, do you understand what happened with your daughter? That she used her position to align her pockets? And he looked me dead in the eye. He said, he said, he said she was looking out for her family. That is what we want. She was looking out for her. And that was all you had to say, wow.

That's I mean, when you got supportive, parental support, support like that, we are up against a pretty, a pretty stiff headwind here. We're dealing with these kinds of things. Hopefully over time, the culture will change and things, but like TJ said, it doesn't start unless you actually start and, and make an effort to establish what your company culture is.

And, uh, getting this may happen outside of your families. But here, this is what we do.

Kim: Couldn't agree more myself. If you don't call it out as a problem, then they don't think it's a problem. So now again, at the risk of COVID fatigue, do you think, you know, can't and TJ that the lack of FaceTime and social distancing between the headquarters of a multinational company and the local subsidiary here in China could lead to an increase in potential conflicts of interest.

Kent: Yeah, I don't, I, I don't know necessarily teaching. May I have another view? I don't know, necessarily an increase in it. I mean, I think. But the COVID crisis did get companies to look at their operations more. So they were more concerned about it. They're more, they're more concerned about taking care of it.

I mean, unfortunately for all of our clients, but fortunately for us, again, it's been a boon to our business in the sense of your honor, can't fly investigators in, they need some out of the people to do it on the ground. So we're, we're just incredibly busy with. But I don't know. I mean, I think the general business environment where, where competition has become tougher, the job market has, has cooled a bit for individuals.

And, you know, when we do an investigation, very often, we find that individual has been doing this for years, you know, has really have had the system maybe two years and they've become quite wealthy and they don't want to leave. And it's very difficult to find a job. So they fight it very. So I think the, the it's been the trends of the past couple of years, and maybe COVID like many other things accelerated that, but the trends of the past couple of years have changed kind of how both the perpetrators, how the companies and how the investigators haven't rolled up.

TJ: And I think what, another thing that has come out of the COVID crisis is, you know, going back to what Ken said about, you know, planning, proper, putting proper planning in place, you know, when, when the time comes to remove an employee, you know, at the end of investigation, what we're following the, in the last year or so is happening is that, you know, You know, headquarters is having problems, you know, trying to find the right person as a replacement for the, uh, for the perpetrators, you know, so.

These underlines, the importance of planning, you know, the, the whole operation or the whole manner in dish, you know, you replace these, these are local employees, you know, so I think a lot more planning has to be, uh, put into place, you know, in Korean contingency plans. And what happens if the local person, you know, starts, you know, using their local connections, local government connections, for example, you know, raise hell for the company.

You know, so these are some of the things and contingency plans need to be placed. Headquarters needs to be, to give their support for these. And they, more importantly, they need to realize the importance of these are planning, you know, just to make sure just to ensure business continuity.

Kim: Very well put indeed, if you, if you don't plan, then you plan to fail, I suppose, you know, for, for want of a better description and that, unfortunately, because it has been such a great, such a great experience and such a great learning experience for me as well. I've I believe as much as for our audience tuning in today, but we have.

We have only time left for my last question. So last but not least Canton, TJ, do you have any parting words of wisdom for all of us that are actually listening in to this episode? 

Kent: I'll let, I'll let, I'll let TJ his younger I'll let him go first. He's also a lot more wise than me, so I think he's going to have a better response.

TJ: So in my mind, you know, the. Tone from the top is always the most important employees or other CDM, Iceland, you know, needs to cascade the right, the right messaging to their employees, you know, and I believe I could be, it could be just me being too positive, but you know, I firmly believe that with time, employees will realize that, okay, you know, all this is wrong and you know, they will eventually change the way.

The right messaging, right. That has to happen for us before any changes can happen. 

Kent: Yeah, I'd agree with that. I think, I think finally, I mean, companies need to look at this as a potential business continuity issue. You said that before not strictly a legal issue, it's not a financial issue. It is all of those things, but it really is a business continuity issue.

We went poorly. We have seen this stuff, bring down companies. I mean, there's a number of, uh, you know, a big pharmaceutical company here eight years ago that had an internal whistleblower that didn't handle it properly. And it got out to the authorities and on all sorts of things and made headlines. And that was fundamentally internal issue like that.

An insider threat that wasn't handled properly. So we really recommend thinking about these full business continuity stance. And really planning this out very carefully and in order to resolve these problems. But then as TJ said, putting things in place to monitor this, to predict when you're going to have a problem.

So you don't have to call people like us very often, I think is

TJ: incredibly a good idea. 

Kim: Thank you so much to both Kent and TJ for spending time with us today on the China business law podcast. And of course sharing your stories and such helpful insights on this perennial important topic. So to our audience, I hope you have enjoyed this episode as much as I have hosting it until the next episode.

Thank you again, Canton, TJ and bye for now, everyone. And. Continue to stay safe.

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