Overseas Security and Compliance - What are the Risks and Liabilities?

The five risk categories dominating the threat landscape of corporations abroad, Risks of Physical Attacks, Legal Risks, Reputational Risks, Digital Security Risks, Strategic & Financial Risks, have seen an increase in related damages since the 2000s. The same can be said for entities in the financial sector, from banks to private equity funds.

These can be due to social media-based or ransomware attacks, ever increasing non-compliance fines for leading banks and corporations (some of them losing their business licenses), or even fraudulent actors destroying even large and high growth corporations listed at NASDAQ, NYSE or Germany´s DAX. These is often a reason why some of the most severe cases are related to foreign assets, foreign business exposure foreign business divisions. 

When facing under prepared management or auditors, it is much easier for the sophisticated fraudsters or corrupt actors to create deceiving and catching narratives about frontier market realities. A narrative of “the exceptional chances”, “how it is done there” – and even “how you do good while making profit”, is often provided.

In addition, fraudsters find it easier to fabricate “Potemkin Villages” in such places. Whole “banks” or “plants” can be (and are) hired for a day, in order to (a) create effects in the target (e.g. during investment or M&A due diligence trips), or (b) avoid and stall corporate fraud investigations. One has to understand that for certain actors out there, advanced persistent fraud is just a business model.

Whereas all of these threats do not only harm the targeted corporate entity, but seriously threaten and harm management, supervisors, employees, agents and other stakeholders alike in direct dimensions. For example:

- If fraudulent actors feel their plans or schemes are in jeopardy, personal harm is a potential threat. A lack of understanding the threats in many frontier market countries, can make individuals an easy target especially if certain interests are at stake.

- Furthermore, members of responsible management and boards can be held personally liable in their home country courts, and they increasingly are. Especially when their failure to conduct due diligence or establish adequate programs and controls (financial fraud prevention and detection), is seen as responsible for harm to a business or individual.

- Finally, in case of blindness to material fraud, auditors are liable too. In addition, auditors are starting to lose critical credibility, market share, and clients, after having been unaware of serious fraud cases. Thereby as a consequence, even bankruptcy is a real risk for the biggest of auditors.