The Top Ten Red Flags in identifying that your Company may be illegally diverting funds are:
Cash Payments. When a corporation agrees to make a payment in cash, this is clearly a Red Flag. With highly complex global banking systems and electronic transfers becoming the norm in business, any request for a cash payment of an invoice is a Red Flag.
Consultants. When a transaction involves a 'Consultant' and these consulting engagements are ill-defined or are for large sums of money with very little detail on the work to be done, this is a sign that the consultant may be being used to channel payments to an illegal source. Consultants being engaged in transactions with government should always be a Red Flag.
Non-Matching Invoices. When an invoice is received that does not match any contract or letter of intent, it is a Red Flag that there has been a change in the circumstances, and a person should ask questions to make themselves feel comfortable that the mis-match in the invoice or payment terms can be explained.
Multiple Layers of Resellers. While many transactions by their nature involve many layers of distributors, first-tier resellers and second-tier resellers, questions should be asked when there is a large number of 'tiers'. Are they are all actively involved in the sales/delivery cycle or are they in the 'chain' in order to take a slice of any deal and are used to channel funds to an illegal source.
One-Off Resellers. Many vendors have a channel or reseller program which requires a certification process including background and probity checks before an organisation is allowed into the program. When 'one-off resellers' appear in a transaction they are often unknown companies that have arrived at the last minute and are expecting to enter the chain of a transaction. Many 'one-off resellers' are not legitimate resellers of your products, but are 'consultants' that expect a slice of the deal and are masquerading as resellers to escape question from lawyers or finance team reviewing any transaction.
Customer-Appointed Partners. If a customer says that 'you have to work through this company', it is a Red Flag that there may be some special relationship between the customer (or a senior executive of the customer) and the proposed company.
Increased Level of Gifts/Entertainment by Staff. It is common and customary in many parts of Asia to provide gifts or entertainment to customers, including government customers. However, under many anti-bribery laws this may be illegal, or at the very least subject to monetary restrictions. Any regular and continued entertainment by a particular staff member of the same customer is a Red Flag that the customer may be receiving illegal inducements.
Rigged Awards at Functions. Many companies hold an annual or semi-annual customer event where they give out expensive 'awards' to customers. These awards can include golfing trips, digital cameras and the like. While many of these 'lucky draws' are designed to be a legitimate game of chance (and approved by management on that basis), in many cases the winners are pre-determined through a complex system of vote rigging. In some cases, inexpensive 'awards' have been given with the clear instructions to exchange those gifts for the real gift at a later stage.
Headquarter Site Visits and Customer Training. Customer travel funded by a company should always be a Red Flag. Particularly if the travel involves not just the customer but his/her immediate family and it is to a location 'to attend 'training' which is seen as luxurious, beach-side or at a US theme park. In many cases, customers do not even visit a company location or do so for only a one-hour presentation en route to a multi-day vacation in a luxurious golfing resort. This sort of travel combined with any per diems or allowances should be closely monitored by company finance, legal and compliance.
Unexplainable Margins. In many companies who sell through partners or resellers, there is an understanding that there is a particular 'reseller margin'. This is the typical range of margin or discounts that a vendor may give to any reseller to sell their products. However, in many situations, the reseller requests additional discounts in a particular situation. For example, for a very competitive deal or a large 'lost leader' transaction. While many of these additional requests are very reasonable, the company should have clear mechanisms in place to document those requests and to have an approval system that decides upon the pricing mechanism and the new increased margin based on transparent and objective criteria. Any request from a partner that is unjustified, unwarranted, undocumented or unexplained is a clear Red Flag. This is particularly the case when the vendor itself is either losing money or almost losing money on the transaction but the reseller appears to be making a full or even higher margin that contracted. This is a Red Flag that the reseller needs additional margin to divert funds to an illegal source.
Scott Lane is the Principal of The Red Flag Group. This article is a series of Articles previously published in The South China Morning Post.
