How much do you trust listing bodies and regulators
As global financial centres like Hong Kong, Singapore, London and New York push to position themselves as the world’s top IPO market, calls for proper depth due diligence in financial services are getting louder and requiring urgent attention. The need for tighter controls in financial services are exacerbated by rising incidents of misconduct especially in Asia and Hong Kong in particular.
Traditionally, regulated financial markets are regarded as highly compliant, ethical, transparent and full of integrity because of the purportedly strict nature of how the industry is governed. However, there are examples, such as where the former Hong Kong Stock Exchange head of listing was recently arrested for suspected corruption, where these expectations fall short of the truth. The reality is, that white collar crime - fraud, bribery, corruption, money laundering, racketeering, insider trading and Ponzi schemes – is rife wherever money flows and is therefore very common in financial services.
Detecting the existence and extent of white collar crime in financial services is not a simple undertaking because most illicit activities frequently occur right at the core of the system – inside regulatory agencies, governing authorities and listing bodies. This makes it difficult to identify white collar crime through standard due diligence on the entities themselves. For instance, when a prospect is intending to trade in stocks, securities, bonds, commodities or other investment options, they will unlikely do any form of due diligence on fund managers or IPO handlers on assumption that such vetting has already been done by regulators and other relevant authorities. This lapse in the screening process has caused significant financial losses for many prospective investors because:
- no due diligence was performed
- the crime occurred within the regulator or in the bourse
- no independent advice/opinion was sought from experienced due diligence service provider
In view of the difficult challenges of detecting and managing white collar crime in financial services, it is advisable to:
- seek professional and independent advice prior to closing any transaction on the bourse
- perform proper depth due diligence rather than relying on a listing (especially for high-risk jurisdictions)
- thoroughly screen all the key parties handling your transaction (like brokers and underwriters)
- equate the scope of due diligence to risks presented to you
- opt for external due diligence providers as there is no vested conflict of interest in the prospective transaction or deal
- consider an integrated due diligence process that involves technology and people so that all “hidden” risky areas can be critically analysed and explained what they mean to you.