Forensic or what investor needs to know when entering the emerging market

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One of the most important rules of investment funds states: when entering a dark room, first of all you need to find a window. Put it simply, this statement means : when investing in a startup or investing in a business with a new partner, you need to think about the Exit strategy in the early stages.

This especially relates to emerging countries, which are defined by rapid growth in production and increased return on investment compared to the developed markets. At the same time, such countries are characterized by a significant level of corruption and neither fully perfect nor transparent regulatory norms of the legislative and executive branches. As a result, the investor can quickly lose his investment if certain rules of financial and legal hygiene are neglected.

Unfortunately, Ukraine belongs to such economies. Therefore, when entering the Ukrainian market, the first thing to do is to hire an intelligent and experienced lawyer and a reliable forensic specialist.

Why does such practice exist?

A lawyer will definitely help the investor to avoid legal, tax and legislative risks. As it has already been mentioned, it is not uncommon to encounter imperfect laws and conflict of law in developing countries.

Also, taking into account the specifics of such markets, a lawyer, besides “material” part knowledge must have good government relations skills ( GR- skills of interaction with the authorities, the ability to work in a particular political environment. This may be necessary during vital moments for the company, that the specialist can show his roughness and turn the scales in favor of the ordering customer.

A forensic specialist, in turn, will help to perform the function of supervision and return on investment in favor of the investor, will minimize the risk of loss of capital and loss of control over the asset.

Forensic (from the Latin forēnsis) literally means “ to address the forum”. This is a tool, that, on the one hand, is designed to perform a function of control over the internal processes of the company, and on the other hand – helps to get instant answers to where to look for lost assets, how to improve business processes that function imperfectly, who is responsible for potentially caused damage to the company.

From a foreign investor, shareholder and company’s chief executive standpoint, Forensic has the following tasks:

  • control over planned use of investments;
  • • background check of business reputation of partners and contracting parties;
  • • audit, supervision and analysis of the company’s financial statements;
  • • supervision over the preservation of the company’s assets;
  • • examination of conflicts of interest in the company’s purchases and sales;
  • • risk analysis in the purchase and sale of assets;
  • • supervision over the building of the corporate security system and the company’s internal control system.

In one form or another, all these functions ( or at least the majority of them) are present in any developed business, but are scattered between different departments and officials, which does not give the desired effect.

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How it works:

There is a case, that happened to one of the foreign investors, who created a joint business in the agricultural sector with a Ukrainian partner (50% to 50%). According to the agreements reached, Ukrainian side obliged to provide land for crop production and provide a foreign investor with 3% of the annual return on invested capital. For his part, the investor, of course, has obliged to provide funding for the joint venture in the amount specified in the agreement and within the established deadline.

But as a result, the investor suffered a net loss: the investment was not returned, the abovementioned profitability is also off the table. After that, he approached my company to order an investigation using the Forensic procedure.

I will briefly list what the Forensic procedure has revealed in the operations of the enterprise:

• overstatement of prices for reconstruction and purchase of components by 200% (!);

• write-off of the equipment at a reduced price, which was subsequently transferred to the balance of a competitive partner company;

• intentional non-renewal of contracts with shareholders ( shares with a total land area of 2000 ha). Subsequently, the lease of the land agreements were transferred to a legal entity related to the Ukrainian partner;

• withdrawal of money in the so-called tax pits ;

• sale of crops for cash, without proper posting;

• overpricing when purchasing plant protection agents;

• payment of wages to so-called ghost employees and much more.

In the Forensic procedure such tools as OSINT ( open source intelligence) and HUMINT (human source intelligence) were applied.

Conclusion

Unfortunately, the main result was disappointment- as a result of the abovementioned actions of the Ukrainian side, the joint venture and the state ( in the form of taxes) have suffered losses totaling $3 million. The conclusion from this case is quite simple: such a situation could have been avoided with the help of the business protection tool called Forensic, as Forensic is the quintessence of the best financial and legal tools for supervision and construction of a business. With the help of this tool, the investor can sleep peacefully.

Written by

Auditor, Fraud investigator Co-Owner, Partner, Forensic services at Crowe Erfolg Site: https://www.crowe.com/ua/croweaa Member ASIS, ACFE, ASCP Board member GS

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