Newsletter - October 2009

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Welcome to the latest edition of the Anti-Fraud Network newsletter.

The Pitfalls of Corporate Intelligence: How to Be a User and Not an Abuser

Authors: Ian Casewell and Luke Sully

The misuse of corporate intelligence (CI) has recently made an unwelcome return to the news. Allegations of improper practice and incompetence have turned the spotlight on the companies that use CI and on an industry that neither wants nor benefits from the attention. Despite the media’s often sensationalist image of the CI industry, there is a genuine need for practitioners as the marketplace becomes more competitive, open and aggressive. It is these practitioners who often provide the key piece of the puzzle, which allows executives to make the right business decisions. The misuse of intelligence gathering techniques, however, not only exposes the flaws in corporations’ ethical and legal boundaries but also the limitations of many CI firms’ ability to fully understand the clients’ problems and prepare and execute assignments in a proportionate yet discreet manner.

Case Study
A publicly owned Western food company heard of a threat to their market share in Taiwan from a local competitor. The company’s CEO, on his first trip to Asia, dined with his Asian counterpart who told him about a boutique bakery in Taipei. It serviced a clientele of upper class Taiwanese, major hotels and luxurious restaurants and its products were already becoming among the most sought after in the country. Profits were increasing and its client base expanding as a result. “Be aware of these people,” advised the CEO’s Asian colleague.

The CEO thought about this as he flew home. When he returned, he hurriedly ordered research be conducted into the Taipei bakery to assess any risk it might pose to his business. In turn, his company’s head of strategy, panicked by the need to provide information to his increasingly worried boss, phoned a CI company and assigned them to the case.

The CI team immediately activated their sources—a mixture of high level former law enforcement agents, corporate executives and local investigators—at considerable expense to the food company. The next day, the CI case manager flew to Taipei and, a day later, a source had found the name of the head baker. His information was translated into English and passed on to the case manager who read that the man was an individual of “immense technical skill, tactical acumen and high level business contacts.” This initial assessment was reported back to the client.

Reading this report, the CEO concluded that the risk, as exemplified by this individual’s talents, was high. Proof was needed, however and the CI firm was told to dig deeper. The case manager followed instructions but none of his sources were able to provide further details. Frustrated by both his inability to speak Mandarin and his sources’ inability to help, the case manager placed an illegal tracker on the baker’s car, leading him to a building that he assumed must be the company’s headquarters. Excited by this development, the case manager assigned a team of Western agents to provide round the clock static surveillance on the buildings to identify any high ranking businessmen who might visit the site.

The headquarters was in fact the baker’s family home where his mother and father made pastries from their back yard. His cousin was a chef at the local hotel and they occasionally provided him with cakes and pastries. The local neighbourhood, in a middle-class area of Taipei was their only market.

None of this was clear to the Western surveillance team or the Western case manager, unfamiliar as they were with either Taiwan or Asian culture. After three days, they had no results but nonetheless the surveillance team was told to stay in situ. By this time, the presence of such clearly unfamiliar figures had raised local interest. The police were called and the surveillance van impounded. The individuals inside were arrested, although eventually released.

The assignment was in ruins. The case was leaked to the press and the client’s name printed in the local papers. The company was branded as heavy handed, morally corrupt and naïve to the local market. Their market share dived, the CEO was forced to field difficult questions by his Board and the press and the company’s reputation in Asia severely dented. Events could not have gone more wrong.

This story, although simplified, is based on a true one. What it illustrates is failures in the preparation and execution of an assignment. However sensitive the job, if these factors are not dealt with professionally and judiciously, they can cause more harm than good.

What Went Wrong
How can something go so badly wrong? There are a number of key questions that should be asked at the start of the assignment and clearly they weren’t asked in this case. Was there really a threat? What specifically did the Western company want to know? Was the CI clear on what the objectives were? Were the activities of the CI team proportionate to the objectives?

In the example cited, no-one internal took the time to understand the provenance of the claims, nor did the CEO reach out to his local team in Taipei to request financial analysis or cultural contextualization. Instead of properly questioning and then understanding the aims of the assignment, the CI firm set in motion a disproportionate course of action with damaging consequences. Equally, in different circumstances, the firm could have set in motion an inadequate course of action, which would have been equally disastrous. The failing was on the part of the client having inadequate understanding of what they wanted to achieve and the CI firm having inadequate skills.

Need to Know v Nice to Know
A client must distinguish between what is “nice to know” and what you “need to know.” This distinction is often borne out of the types of client a corporate investigator encounters.

First, there is the sensible, pragmatic client who understands the parameters of intelligence, both in terms of its legal admissibility and of the ethical parameters in gathering the information. This client is knowledgeable because he or she has a clear understanding of what information is needed and what the company cannot acquire on its own due to linguistic, cultural or societal boundaries. Similarly, the client may know where the answers are but lack the necessary skills or appetite for risk to gather that information. In both scenarios, however, the client is aware of both the added value and the limitations of such information gathering.

The second client may not be so pragmatic. He or she may have a poor understanding of the situation, with large knowledge gaps. The company may not have the appropriate internal channels of communication by which information can be fed into the decision making process and a response to information can be fed back, leading to a lack of real communication with those in positions of power. More importantly, this client may have difficulties separating fact from conjecture. One individual may also have an amateur detective streak, a not uncommon situation and one perpetuated by the huge amount of information that is publicly available. In addition, when a client is frustrated at the lack of progress of a case, or simply has voyeuristic tendencies about their target, this can lead to demands for disproportionate action.

Of course, there are elements of each type of client to be found in every company; the pragmatic client may struggle with poor channels of communication, for example. So it is the role of the CI firm to educate their client as to the operational realities of the assignment and alert them to the potential dangers ahead.

Taking as another example, a client may demand the employment of certain techniques to gather information as, to them, the “ends justify the means”. It should, however, be the corporate investigator who decides on the methodology, as it is the investigator who is the expert and should be guiding the client. Plus, the investigator is ultimately the person responsible for delivering the results in a proportionate manner.

An investigator who is unwilling or unable to control the operational parameters of an assignment from the outset will be introducing a likely risk of failure.

Is the use of corporate intelligence a science or an art? It’s both. The art is in the creative use of collecting information: the ability to identify individuals who have both access and motivation and the ability to develop scenarios that maximize the chances of gathering definitive information on the individual’s activities. Those skills, coupled with existing networks of sources, are vital in solving a problem.

The science is in the analysis. Testing hypotheses, corroborating sources, identifying any gaps in the investigator’s own knowledge and in the information provided by the client is vital in the production of an accurate report that the decision maker can use. There is nothing more useless for a client needing to take a vital business decision than a collection of half truths backed up by vague assumptions.

When either the science or the art is implemented improperly, the results of the assignment may be uncorroborated or, at worst, factually incorrect. Should this happen, the corporate investigator has failed in their duty both to their client and to their industry.

Proportionality
The most important element that needs to be defined in any CI project is proportionality. CI firms often conduct work in difficult settings such as areas of political or social instability or highly sensitive industries. As a result, the investigator often faces pressure from the client to deliver results on a complex or sensitive matter in a prohibitive operating environment. How these demands are balanced against the legal and ethical parameters of the assignment is key. The actions taken must be proportionate to the objectives of the case and the operating environment.

As in the example above, desperation on the part of the case manager and a lack of knowledge of the operating environment led to disproportionate, high risk and, ultimately disastrous actions.

Once again, thorough understanding of the objectives of the case, the information required and the local setting are vital to determining how the case is run and its eventual outcome.

There are many factors that can lead to the use of illegal or ethically questionable activities in order to preserve a corporation’s reputation or protect its bottom line. In order to avoid the pitfalls, companies should

• Establish channels of communication that enable accurate and effective reporting of information to those in positions of power to avoid unnecessary crises.
• Ensure they have a clear understanding of what their problem is. If the client is not sure, the CI firm should help them to reach that understanding.
• Understand why they need the information they are requesting. If necessary, the CI firm should be able to give guidance on what information would be of value.
• Discuss with the CI firm the correct methodology for their case and agree on proportionality.

Should a company neglect any of these steps, the assignment risks finding itself on the front pages for all the wrong reasons.

© 2009 Anti-Fraud Network.

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News

BAE
British defence manufacturer BAE faces further allegations of corruption. The Serious Fraud Office’s investigation into bribery allegations relating to Saudi Arabia was blocked in 2006. However, the SFO has now announced that it is seeking the necessary permission from the Attorney-General to proceed with a prosecuation in relation to allegations of bribery in Africa and Eastern Europe including the Czech Republic and Tanzania. This move reportedly follows plea bargain negotiations having stalled, with BAE unwilling to agree a fine said to be sought in the region of £0.5 to £1 billion. BAE’s shares fell 4% on the day of the announcement on the uncertainty and fears that a conviction would exclude BAE from European and US contracts.

Coca-Cola in Alleged China Bribery Claims
Coca-Cola has become the latest international business to be involved in allegations of bribery in China. Two former employees from a Chinese bottling plant are being investigated for soliciting kickbacks from suppliers and for bribing government officials, although Kenth Kaerhoeg, Coca-Cola Pacific’s group communications director, denies that any government officials were involved.

UK’s SFO Brings First UK Prosecution for Overseas Corruption
As reported in the September newsletter, the UK’s Serious Fraud Office (SFO) has successfully prosecuted Mabey & Johnson, a bridge building company for bribing ministers in Ghana and Jamaica and for breaching sanctions in Iraq. Mabey & Johnson handed out over £1 million in bribes between 1993 and 2001, netting £60 million of contracts. The investigation started in 2007 when the company self-reported. This is the first time a case has been brought in Britain for overseas corruption and the first time US-style plea bargaining has been used in an SFO case. Mabey & Johnson has been fined £3.5 million and ordered to pay a confiscation order of £1.1 million plus £350,000 costs to the SFO and the £250,000 costs of an ongoing monitor. In addition, the company is paying reparations of £658,000 to Ghana, £139,000 to Jamaica and £618,000 to Iraq. The company has also been instructed to submit an internal compliance programme to the monitor.

Pacific Consolidated Industries
Leo Winston Smith, 73, the former director of sales and marketing for Pacific Consolidated Industries pleaded guilty to charges related to the bribery of a U.K. Ministry of Defence official in connection with contracts for supply to the Royal Air Force.

The UK MOD official has already pleaded guilty in the UK to accepting more than $300,000 in bribes from Pacific Consolidated Industries and was sentenced to two years in prison.

Sentencing of Mr Smith is scheduled for December. He faces a maximum penalty of eight years in prison.

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