Introduction to Integrity Awareness Training. Table of Contents Commercial, Operational & Risk Management Advisory Firm in China 1.Introductions 2.Changing

Introduction to Integrity Awareness Training

Table of Contents

Commercial, Operational & Risk Management Advisory Firm in China

1. Introductions

2. Changing Business Dynamics

3. Integrity Awareness Training Overview

4. Defining Fraud and Corruption in China • What is it? • What are the statistics? • What are the potential risks? • Why does it happen? • What can you do about it?

5. Recommendations

Alex BryantFounder & President

Former Director of International Business

Development for Barnhardt Manufacturing Company

Alex Bryant has been an active leader in the international business arena for more than 12 years, primarily in the areas of strategic planning, sales and marketing, global logistics, product development, joint ventures/partnerships/wholly-owned foreign enterprises and general management.

Prior to founding East West Associates in 2005, Alex spent eight years as the Director of International Sales and Business Development for Barnhardt Manufacturing Company.

Moderator


Introductions

Introductions

Jon AndersonSenior Executive Advisor

Former Director for Kyosay Global and Vice President-

Director of Strategic Services for Boldt

Metronics

Jay HoenigDirector

Former Chief Operating Officer Asia Pacific for Hill and Associates Group and

Chairman of Hill & Associates (PRC)

Ex-Chairman American Chamber of Commerce in

Shanghai

Mark PlumDirector

Former President of Briggs & Stratton Asia(NYSE: BGG)


The Changing Business Dynamics in China

CHINA’S NEW NORMAL

• Stagnant Global Economies; Exports Slowing; Currency Strengthening

• Traditional Eastern markets maturing

• Go West Traction Expanding Domestic Market

• Rising domestic and foreign competition

• Government Promoting Consumerism

• Rising Nationalism/Indigenous Innovation/Anti-Monopoly

Table of ContentsChanging Dynamics


BUSINESS IMPACTS OF THE NEW NORMAL

• Labor, Material and Services Cost Rising

• MNC’s Restructuring Businesses Ops

• Government Mandated Labor Increases – 15%

• Growing Income Disparity

• Increased Unionization - ACFTU

• Increased Labor Demands and Activism

• Government tolerating Labor Activism

Changing Dynamics


Changing work force: older, less mobile, more costly• Size of working population (15-64) has stopped growing in 2015• 15-24 age group shrinking: 225m today, 150m in 2022• Fewer young workers, but growing numbers of factories2nd Generation Migrants: Children of Reform Era• Better educated: Exposed to mass media• More demanding• More aware of rights: Sensitive to inequality• Different expectations:• Little experience as farmers• Not going back to farm• More acclimated to city life

Changing Dynamics


DEMOGRAPHIC, POLITICAL AND SOCIAL CHANGE

Review of China

Most US companies remain optimistic and continue investing in the China market

29% reported China as their number on global investment priority

96% are maintaining or increasing their investment in China

95% forecast similar investment in 2015

2015 AmCham Business Survey

Changing Dynamics


Introduction to an Integrity Awareness Training

Workshop

11

Typical Training Workshop Objectives Enhance awareness and understanding of proper ethical conduct in business situations

Deputize and empower your employees to be an important element of fraud detection, deterrence and prevention through the understanding of reporting mechanisms

Customized training to address IP theft prevention, fraud, kickbacks, bribery, conflict of interest, cyber crime, etc.

Integrity Training Overview


12

Typical Venues

Introduced by senior executive/manager to stress importance

Maximum 20-25 employees

Separate sessions for (1) executives (US and China), (2) managers, (3) employees, and (4) suppliers

Typically “functionally” focused using recent Company ethics issues

In English and/or Mandarin

Changing Dynamics



Information Sharing (1.5 hour)

Workshops (1 hour)

Group Discussion (1 hour)

Wrap-up & Takeaways (30 min)

13

Typical Training Outline

Changing Dynamics



Assume that…You are the General Manager of ABC company

You have received an anonymous email alleging that Mr. Y, who has been a Procurement Manager with your company for 7 years, has a personal interest in DEF company, which is one of ABC’s suppliers

What do you do?

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Changing Dynamics



What actually happened…Mr. Y. was not contacted Instead we discreetly obtained DEF’s supplier application form and found that it had the same telephone number as the residential number stated in Mr. Y’s employment application formAt the same time, there were rumors that Mr. Y’s brother worked for DEF We reviewed DEF’s file and could not find any documents explaining how DEF was selected as a supplier We reviewed the bidding process and awards to DEF over last several years

15

Changing Dynamics



From this scenario, do you see any potential business risks?

(Group Discussion)

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Changing Dynamics



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Conflict of Interest (Mr. Y & ABC Company)

Kickbacks/Illegal Gratuities

IPR or Trade Secret Theft

Bid Rigging

Substandard Products

Fictitious DEF Company

Breach/Lack of Procurement Procedures

Breach/Lack of Internal Controls

Potential Risks

Changing Dynamics



What is Fraud & Corruption?

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Defining Fraud & Corruption


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Definition of Fraud & CorruptionPerpetrator(s)

Intentional or deliberate act

Deprive others of property, money or other assets through unethical means

Personal (or company) gains



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Key Elements of Fraud/CorruptionConcealed activity;

Public and private sector;

Violates company’s regulations/policies or country laws;

Direct or indirect financial benefit to perpetrator(s);

Adversely impact assets and revenue

Lowers morale and trust inn leadership

May Lead to unfair competition



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The median loss caused by fraud is $159,000

5% of annual corporate revenue lost to fraud

Costs $652 billion annually

1 in 4 frauds cost in excess of $1 million

3-5% of GDP

Source: “ACFE Report to the Nation”

High Cost of Fraud/Corruption in US



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87.9% of perpetrators are first time offenders Management accounts for 50% of financial statement fraud

The average fraud goes undetected for 18 months

Employee tips most common method of detection (34.2%) Second most common is by accident (25.4%)

Source: “ACFE Report to the Nation”

Statistics on Fraud & Corruption in US



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The average armed robbery nets US $65,000 with an 82% probability of being caught

The average fraud nets US $685,000 with a 2% probability of being caught

Fraud/Theft – Reward /Risk Equation

Source: Certified Fraud Examiner newsletter



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Corruption accounts for an estimated 13.5% - 16.9% of China GDP

Source: Carnegie Endowment

High Cost of Fraud & Corruption in China



Rising CostHR Constraints Increasing CompetitionLack of Market MaturityFraud and CorruptionIP Infringement Protectionism Lack of Infrastructure Labor Unrest Unfair ProcurementBusiness Disputes

Top Challenges for Foreign Companies

Source: AmCham Shanghai: 2013-14 White Paper: American Business in China

90%90%82%72%60%55%38%36%33%32% 30%



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Fraud and Corruption: China Statistics80% of government officials and 70% of CEO’s of SOE would be considered corrupt by international standards

82% of major fraud cases involved company’s own employees

19% of applicants have lied about their criminal records

Composition of Fraud: Secret Commissions or Kickbacks (43%) Expense account (29%) False invoicing (27%) Others - purchases for personal use, document forgery, price fixing (1%)



Why does Fraud & Corruption happen?

27Commercial, Operational & Risk Management Advisory Firm in China


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Opportunity, likelihood of detection,consequences

Motivation,pressure (real or perceived)

Drivers Behind Fraud

Benefit, rationalisation



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Why All the Fraud/Corruption in China?Relationship-based society – “guanxi”Lack of transparency/checks-balances – opportunitiesPoorly developed corporate governance – owner drivenPoorly developed/institutionalized corporate proceduresUnder-development regulatory bodiesConcentration of power – civilian/military/political party2-tier MNC management-employee structureLack of local and offshore oversightLow compensation for professionals – social pressureHesitant enforcement among foreign firms



Sales & Distribution Kickbacks, false sales, sales of counterfeit product, abuse of marketing funds

Purchasing Kickbacks, transactions with related parties

Logistics & Warehousing Sale of damaged goods, sales to counterfeit channels, theft

Finance Use of short term investments & petty cash, collusion with other employees

Senior Management All variations

Personal Expense Abuse Prevalent, Endemic

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Sectors Most Vulnerable to Fraud



Anonymous allegationsConcentrated authorityHigh reliance upon certain suppliers and reluctance to rebidChanges in employee behavior (absence from work, sudden paranoia, ostentatious wealthAccount Receivable is always not being recovered

High employee turnoverHigh incidence of cash paymentsMissing or poor paper trailRefusal or delays in cooperating with normal admin proceduresOver budgetNon-matching payee detailsRefusal to accept promotion/transfers

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Red Flags to Recognize Fraud



FCPA/SOX compliance and your exposure

PRC Anti-Bribery law and your criminal exposure

Declining profitability and other losses

Legal defense cost

Lowering Company morale and turnover

Damaging Company “brand” reputation

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Why be Proactive


Why Should You Be Proactive?

A word about Commercial IP/TS TheftIt’s more than just Recipes

33

Product designs Construction & Advance materials R&D products and activities Branding and trademarks Copyright and patents Chemical processes, formulations and recipes Manufacturing know-how Machine design and performance data Plant design and operations Internal work processes, including security Financial and accounting data Client data Proposals and pricing data Strategic and tactical business plansProduct launch dates

Global Concerns


Global IP Theft & Fraud Statistics 69.6% of business professionals have stolen some form of corporate IP from their employer when leaving a job.

32.6% of employees leaving a job took sales proposals and/or presentations with them.

30.4% admitted to taking information such as customer databases and contact information.

The most commonly used method for stealing IP is to send electronic copies of documents and files to a personal email account.

Only 28.2% think that IP theft is completely unacceptable. Source: US Department of Justice

Global Concerns


Source of IP Theft & Fraud

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Insiders, especially those leaving the organization

Competitors and corporate espionage

SOE and/or State sponsored espionage

Partners, customers and vendors

Accidental disclosures, such as online postings

Hackers and organized crime

IP Theft & Fraud


Legal, Compliance & Regulatory Requirements

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• US FCPA prohibits offering bribes or any payments to influence decisions, including:Offering, paying, authorizing payment to or promising any payment to a foreign government official, SOE, political party or official, or political candidate with the objective of obtaining, retaining or influencing business.

PRC Anti-Bribery (Commercial) Prohibits both demanding and offering property and benefits in exchange for favorably treatment

UK Anti-Bribery (Commercial) Prohibits both the demanding and offering property and other tangible and intangible benefits in exchange for favorable treatment

Regulatory Requirement


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Typical Corporate Code of Conduct Provides guidance to all employees, vendors, suppliers, agents, and

representatives on policies and procedures

Guidelines include: Integrity in Reporting Equal Treatment Business practices (internal & external) Procurement and bidding policies Finance and accounting procedures Expense account policies Conflicts of Interest Intellectual Property Sexual harassment

Defines Company’s expectations and clearly shows the reporting mechanisms



Summary - Integrity Awareness TrainingUnethical business behavior in Asia and China is a major issue

Fraud, corruption, and unethical behavior has serious legal, financial, morale and competitiveness impacts

Employees must understand the company’s ethics expectation, policies, practices and consequences

Lack of transparency creates management challenges

Deputizing all employees provides additional “eyes and ears”

All executives must set the “tone at the top”

38

Summary


CONTACT

Alex BryantFounder & President

East West Associates Inc.

Phone: (+1) 704-807-9531

Fax: (+1) 704-362-2686

China & United States

[email protected]

www.eastwestassoc.com

Jon AndersonChina Vice President & Managing Director

East West Associates Inc.

China Mobile: (+86) 137 6434 7001

USA Mobile: (+1) 312-952-8255

Shanghai

[email protected]

www.eastwestassoc.com


Documents

Introduction to Integrity Awareness Training. Table of Contents Commercial, Operational & Risk Management Advisory Firm in China 1.Introductions 2.Changing