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Highlight – due diligence

Intro: Reshmi Khurana, MD, Kroll Associates (India), the risk advisory firm, emphasizes the importance of conducting due diligence studies in order to mitigate risks in banks and financial services institutions:

Due diligence – that’s the key phrase she gives out all through the conversation and rightly so. Due diligence, says Reshmi Khurana, MD, Kroll Associates (India), the Indian unit of the global risk consulting firm, should be the key part in all risk management exercises in all enterprises, more so in banks and financial institutions. “You can also call it investigative due diligence, which by the way is one of our core competencies, because this exercise goes beyond what’s available publicly or provided by the company that is being reviewed,” says she.

“Financial institutions in India can do a lot more in terms of proper risk evaluation,” says Khurana, emphasizing: “It is not just sufficient to look at the company from the perspective of its accounts data or legal documentation. There is a dire need to have systems and processes in place, especially a system that involves on-the-ground and ongoing due diligence in every major transaction that a bank or a financial services institution does.”

At the global level, Kroll offers services from investigations to cyber security to due diligence to compliance, to security risk management and data recovery. “We can help clients find answers to a host of critical questions in these spheres. It is like we are trying to replace uncertainty with answers through due diligence,” claims Khurana.


She explains the four big areas of concentration for Kroll:

  1. Investigative due diligence, which is a concept pioneered by Kroll. This capability provides a consultative approach to clients undertaking new and significant projects, whether underwriting an IPO, considering a merger or acquisition, participating in a joint venture or entering a new marketplace. In doing so, Kroll provides answers to questions that financial and legal analyses cannot address, especially regarding integrity issues and the reputations and backgrounds of counterparties. In doing so, it helps identify risks so deals can proceed or be restructured for clients. This approach has been found to be highly beneficial in mergers and acquisitions, IPOs, financing, JVs, PE, VC and other investments.
  2. Fraud and corruption investigations, which helps to identify perpetrators and bring closure through legal channels or restitutiion through effective fact-finding strategies. Kroll deploys expert investigative resources and applies traditional and forensic analysis. In anti-corruption investigations, it does probes into alleged violations of laws, allegations of bribery and financial mismanagement including kickbacks, money laundering, internal control lapses and other financial improprieties.
  3. Political risk and market entry investigations in which it inquires into the delicate balance between business and politics to offer analyses and insights for corporates. This helps profitable businesses to decide on whether to undertake operations in challenging locations, especially emerging markets.
  4. Computer forensics and cyber investigations where it conducts investigations of electronic assets including computers, servers, email systems, mobile and other devices to identify areas of vulnerability or to trace loss of data or other information. Cyber security challenges put sensitive data at risk and can cost a company time, revenue and most importantly, a loss of reputation. Kroll helps enterprises to benchmark safety measures and shore up weaknesses, take up penetration testing that checks for robust defenses.


Khurana says Kroll has developed systems and processes that can unearth information,which is often not disclosed in the public domain and identify patterns to create detailed portraits of a business’s activities and reputation. “The key for us is to obtain this information in a legal, above board fashion, using the global investigative tools that we have developed over the years, and then be thorough and independent while analyzing it”, she says. “It is a combination of very thorough and creative public domain searches and on the ground inquiries with knowledgeable sources. Independence is key in our business – our clients come to us because they know we obtain and analyze information in the most objective manner as we do not have any of the conflicts that other consultants might have”, she points out.

Kroll offers services in pre-transaction intelligence, investigative due diligence, market entry, forensic due diligence, cyber due diligence, compliance-related due diligence and supply chain due diligence. “For example,” says Khurana, “think of a scenario where a start-up has offer of an investment from a prospective investor. In such ascenario, we may work with the investors to undertake due diligence on the people behind the start up, their reputation, pedigree, political affiliations/connections as well as the business practices they actually follow. We feel all this information is important in evaluating the true health of the business and the ability of the company to manage current and potential risks that it will face as it grows.”

She cites the instance of an assignment Kroll had when it was entrusted with the task of appraising an underwriting transaction. It was a global assignment and inquiries revealed that one of the senior functionaries in the company had been running a side business, which he claimed was under the authority of the company. The investigation showed that the officer had defrauded numerous clients falsely claiming inventory in various warehouses as his own. This information was valuable for the client because they could ring fence their transaction from these related businesses, ahead of the underwriting.

“I would define due diligence investigations as a crystal ball gazing exercise where the future can be to a great extent predicted if you analyze all the information and analyze it thoroughly and independently,” says she.


“Investigations into corruption and fraud are another major area where we have specialized skills and in fact, this practice is one of the top ones for the Indian unit,” says Khurana. “For example, in the case of banks, we have been conducting a number of investigations on non-performing assets where banks suspect that the non-payment is due to fraud and misappropriation of asssets. In such a scenario, if we have access to financial data, we not only conduct an investigaiton of the books and accounts of the company (BMR Advisors, a leading financial services firm, is our strategic partner) but we then also conduct an external, on-the-ground investigation to understand the true practices of the business and gather evidence of fraud. It is critical that these two approaches be combined because a financial investigation alone does not provide a full picture of what is happening in the business. Promoters and managers often cover their tracks by manipulating the books and records and hence investigators need to look outside the books and records to understand what is going on.”

As part of the investigations, Kroll staff interviews employeeand non-employee witnesses, conduct site visits, retrieve and analysize critical documents and data. Through these investigationsit hasunearthed unauthorized wire transfers, unexplained inventory loss, fraudulent vendor invoices, employee misconduct, product diversion, theft of product and inventory, mismanagement and theft of intellectual property, says Khurana.

As regards corruption investigations, she says these often involve violations of laws, allegations of bribery and financial mismanagement including kickbacks, money laundering, internal control lapses and other financial improprieties. Kroll has specialized investigators who have experience and skills to undertake customized investigations and substantiate their findings with evidence to initiate legal action.


“Political risks are one area that global entities are very vary about while considering entering emerging markets. This involves an analysis of the political landscape at the grassroots level and we involve various stakeholders in this process, including local people, NGOs, media people, educational institutions, etc, assessing their possible response to a proposal to set up a greenflied plant in a particular area of the country and opposition expected before their funds are blocked. We try to provide information post our investigation that can afford a delicate balance between politics and business, importance of relationships and networks that need to be developed, anti-corruption regulations and enforcement, competitive environment, market trends and any potential concerns around sovereign interests with respect to specific industry sectors. In gleaning the information, we use people who are directly involved and knowledge gained from earlier projects. Wherever market entry is considered, our aim is to provide actionable intelligence on the competitive landscape, the relative strength of industry competitors, the identity and strengths of potential partners, and an assessment of the political, societal, economic, regulatory and operational risks,” she explains about handling political risks.

Today, every enterprise is vulnerable to cyber crimes. The issues involved in cyber crimes, according to Khurana, are very complex and investigations by local authorities may not provide all the answers. . She says Kroll has definitive expertise and resources necessary to investigate a range of cyber crimes, locally, nationally and internationally. There are evolved investigative strategies to identify system vulnerabilities, intrusions and data ex-filtrations and recommend appropriate and cost-effective solutions that can be applied across the enterprise. Depending on the data collected and the assessment made on the nature of the breach, the enterprise can develop effective counter measures that can ensure such breaches do not occur in future.


“In India,we find that as far as risk management in financial services institutions, especially banks, is concerned, it is often a reactive approach whereas global financial services institutions are increasingly becoming proactive in countering risks,” she says. “I am happy that some of the private banks do have a better risk management perception and they follow global standards. But that is not the case with all the banks. There is no point in waking up after the money has vanished.”

She says risk management must be considered as a scientific practice and a challenge. Banks should develop systems to create information leads and to conduct negotiations at the most opportune time and not just rely on courts and try to find out a negotiated settlement to the best interests of both the parties. It is quite likely that the delinquent may fail to pay the money and would be ready to go to jail if the court decides, but for the bank, the money is lost for ever. Therefore, a negotiated settlement, she says, is always better than initiating legal procedures.


Does the RBI’s plan to create a national fraud registry help banks in countering delinquency?

“I do not think there is any silver bullet to deal with fraud,” she affirms. “However, better due diligence on investment and lending targets and detailed monitoring of these companies can certainly help alleviate the likelihood of fraud. Take the instance of consortium lending. Who is responsible in this case to carry out the due dligence on a prospective debtor? Is it sufficient for the lead bank only to conduct the due diligence?”

She says that as long as the data that is used is from independent and reliable sources, then such a mechanism can be uselful.


“Why I am insisting on due diligence is the fact that accounting standards are not fully evolved in India. Secondly, corporate governance standards are still at an infancy level and relatively weak in many institutions. Thirdly, the legal and judicial system in the country is slow-moving. So, in any banking activity, a system based on effective oversight and efficient recovery processes is important . Banks must also seriously consider evolving proactive measures in preventing defaults rather than asking for assistance after the funds have already been diverted by the borrower” says she.

She points out that today technology is available and it can be tailor-made to suit different requirements. There are software and data analytics tools, which can effectively predict when an account is likely to become sick. Even frauds can be predicted using these tools.

What is the possible outcome of banks and financial services institutions now waking up to the need for chief risk officers?

The position is critical in any bank,” says she. “But the question is how empowered such a position is. What we need ideally is an ’empowered CRO’.”

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