Due Diligence & Corporate Investigations in China

1. Due Diligence & Corporate Investigations in China

2. PSA Group - Services BUSINESS INTELLIGENCE SECURITY MANAGMENT DUE DILIGENCE & INVESTIGATIONS INTELLECTUAL PROPERTY • Political & Security Risk Analysis • Threat Assessments • Competitive Intelligence • Security Consulting • Crisis Management • Business Continuity • Kidnap and Extortion Response • Executive Protection • Pre-transactional Due Diligence • Corporate Investigations • Computer Forensics • Systems & Process Audits • Anti-Counterfeiting Investigations • Grey Market Research • Brand Integrity Investigations • Commercial Espionage Protection

3. Due Diligence in China • Basic requirements • SAIC corporate registration records • Criminal and civil litigation checks • Corporate affiliation checks • National and local Chinese media searches • Next level – “human due diligence” • Reputational profile: who are they? how did they start the company, and why? where did the money come from? what are their personal connections and professional histories?

4. Due Diligence in China • State Administration of Industry & Commerce (SAIC) • Check out www.sgs.gov.cn • Legal representative; date of incorporation; business scope; registered capital; address; shareholders etc. • Civil litigation checks • Well over 200 court databases available in the public domain: People’s Court; District Courts etc. • Pending enforcement orders searchable as well • Try www.lawyee.com

5. CorporateInvestigations in China • The most common risks • Conflicts of interest (mgmt: procurement) • Competing entities (mgmt: sales) • Kickbacks (procurement: sales) • Internal fraud (mgmt: sales: everyone) • IP theft (everyone) • Physical theft (warehousing: everyone) • Commercial espionage (external parties)

6. Typical Examples • Conflicts of interest • Self / Family / Friend has a stake in the company’s vendor • Competing entities • Using valuable information (pricing lists, customer details, production blueprints etc.) to create a parallel business • Deliberately manipulating sales orders, stock amounts, waste disposal records to create grey market inventory • Kickbacks • Very difficult to define – not necessarily money and not always directly to the other party involved

7. How to Investigate? • How was the issue initially identified? • Whistleblower? 3rd Party? Internal Audit? • What information has already been collected? • How much more information can be easily obtained? • What does management intend to do if the subject(s) are found to be acting improperly? • Litigation or just termination? • How open/discreet does the investigation have to be? • Who within the organization already knows?

8. Case Study A – Procurement • Large manufacturing company • Emailed allegations that a number of ‘independent’ vendors are colluding • PSA tasked to examine possible connections between vendors • What next? • Vendors’ SAIC records checked, along with extensive media searches • On-site interviews with procurement staff conducted, along with company records audit

9. Case Study B – Conflict of Interest • MNC joint venture • Rumors that local general manager had established a competing entity • PSA tasked to investigate and uncover any other business interests he had • What next? • Corporate affiliations checks carried out • Targeted media search on GM and likely companies • Overt and pretext interviews carried out • Other records looked into

10. Conclusions • Almost every organization suffers from one or more of these problems • Prevention is better than cure • Systems need to be reviewed on a regular basis and lessons learnt from each incident • Be decisive about collecting evidence

11. Thank You Please feel free to contact me on: greg.hallahan@psagroup.com