The Unholy Marriage of Corruption & Due Diligence in Malaysia

So, the November Meme calendar of Malaysia honoured an entrepreneur couple, who got entangled in the mismanagement of nearly 50 million Ringgit in investment fund. The authorities are not after the money trail.

Combing thru a fine-tooth comb, the spotlight is now on two Government-Linked Companies (GLCs) for failing (or lacking) to perform the necessary due diligence on their startup. The general public can’t help but point their fingers at the “big C”.

Corruption, defined as the abuse of power for personal gain, remains a pervasive issue in Malaysia. Its far-reaching impacts spanning across economic, political, and social systems - destabilize institutions, distort markets, and erode public trust. Due diligence, on the other hand, is a rigorous process of investigation and analysis, aimed at ensuring transparency, assessing risks, and verifying information before entering into business or financial relationships. At its core, due diligence serves to prevent fraud, mitigate risks, and uphold compliance with legal, ethical, and regulatory standards.

The relationship between corruption and due diligence is vital and complex, because due diligence can serve as a crucial tool for identifying, mitigating, and ultimately preventing corrupt practices. This article explores how due diligence interacts with corruption, why it is a key defence against corrupt activities, and how businesses and organizations can strengthen their practices to minimize exposure to corruption risks.

1. Due Diligence as a Shield Against Corruption

One of the primary roles of due diligence in the context of corruption is as a proactive shield. Corruption often thrives in environments where there is a lack of transparency, weak governance structures, or insufficient monitoring of business practices. This is particularly true in cross-border transactions, where cultural norms, differing regulatory environments, and legal complexities can make it easier for corrupt practices to slip through the cracks. In Malaysia, we have stooped to a level that a police road block is just a ‘cari makan’ and not serving the true purpose. Political appointees are just Ministers’ cronies to stay in power. The list goes on.

By performing comprehensive due diligence, companies and organizations can:

- Identify Risk Factors: A thorough due diligence process helps identify potential corruption risks in a business or investment venture. For example, examining the ownership structures of a company or the backgrounds of key personnel can highlight connections to politically exposed persons (PEPs), known corrupt officials, or entities with histories of bribery or fraud.

- Verify Legitimacy: Due diligence helps ensure that the entities or individuals you are dealing with are legitimate, compliant with relevant anti-corruption laws, and free from any criminal backgrounds that could expose your business to liability. This is especially important when entering unfamiliar or high-risk jurisdictions where corruption is endemic.

- Ensure Compliance with Anti-Corruption Laws: Venovox had a full Seminar on ABAC. Do browse of publication list for the article and video. Many countries have strict anti-corruption regulations, such as the U.S. Foreign Corrupt Practices Act (FCPA) or the UK Bribery Act. Through due diligence, companies can assess whether their partners, suppliers, or third-party agents are complying with these laws. Failure to conduct proper due diligence can expose organizations to fines, reputational damage, and other legal consequences.

2. Types of Due Diligence to Combat Corruption

Due diligence is not a one-size-fits-all process; it requires a tailored approach based on the specific risks and challenges posed by a given transaction or partnership. In the context of corruption, several types of due diligence can be particularly useful:

- Financial Due Diligence: Examining the financial health of a company can reveal irregularities, such as suspicious payments or unexplained transactions that could be indicative of corrupt practices. This includes reviewing financial statements, transaction records, and tax filings to ensure all business activities are legitimate and properly documented.

- Legal Due Diligence: This process involves reviewing the legal standing of a company or individual, such as checking for any history of litigation related to corruption or fraud. It also includes assessing the legal compliance of partners and suppliers with anti-corruption laws and regulations.

- Background Checks: A key component of due diligence is conducting background checks on potential business partners, executives, and third-party intermediaries. This may involve investigating their history, including prior criminal convictions, associations with corrupt individuals or entities, and involvement in any past corruption scandals. 1000+ Clients of Venovox can’t be wrong in engaging our services for their new hires. Stay in touch with Kelly at 012 800 8888 or kelly@venovox.com for a tailor-made program to meet your hiring need.

- Anti-Bribery and Anti-Corruption Policies: A due diligence review should include an assessment of a company's internal anti-bribery and anti-corruption policies. This ensures that the company has appropriate mechanisms in place to prevent, detect, and respond to corrupt behaviour within its operations.

- Third-Party Risk Assessment: Companies often rely on intermediaries, agents, or contractors to conduct business. Due diligence helps assess the risk posed by third parties by evaluating their reputation, compliance with laws, and potential connections to corrupt activities.

3. The Costs of Neglecting Due Diligence in Corruption Prevention

Failing to carry out adequate due diligence can have significant consequences, not just in terms of legal exposure but also in the broader impact on an organization’s reputation, financial stability, and long-term success. Some of the risks associated with neglecting due diligence in the fight against corruption include:

- Legal and Regulatory Penalties: Non-compliance with anti-corruption regulations can result in hefty fines, sanctions, and even imprisonment for key personnel. This is especially pertinent for multinational corporations operating across jurisdictions with differing corruption laws.

- Reputational Damage: Corruption scandals can seriously damage an organization’s reputation, leading to the loss of customers, investors, and business partners. A tarnished reputation can take years to rebuild and may even result in the permanent loss of trust within an industry.

- Financial Losses: Engaging with corrupt parties can lead to financial losses from fraud, embezzlement, or contract cancellation. Additionally, the costs associated with regulatory investigations, legal proceedings, and settlements can drain corporate resources.

- Lost Business Opportunities: If a company is implicated in corrupt activities, it may be excluded from future business opportunities, partnerships, or government contracts. This can result in long-term economic damage and limited growth prospects.

4. The Role of Technology in Enhancing Due Diligence

Advancements in technology have significantly enhanced the effectiveness of due diligence processes. Tools such as artificial intelligence (AI), data analytics, and blockchain technology have made it easier to assess corruption risks in real-time, analyse large sets of financial and legal data, and track the flow of funds across complex networks. Companies can now use these technologies to identify unusual patterns or transactions that could signal corrupt behaviour, allowing them to act swiftly to mitigate risks. Venovox have established our own platform codenamed VOSS. Feel free to explore at www.venovox.com

For example, AI can be used to scan and cross-reference massive amounts of public records, such as news articles, court filings, and government sanctions lists, to identify potential red flags. Blockchain, with its transparency and immutability, can be used to track financial transactions and ensure that there is no manipulation or illicit activity in the movement of funds. With cross border banking and digital banks mushrooming, money trail is no longer limited to physical borders alone. Money today in Malaysia can resurface in Estonia by tomorrow.

5. Conclusion: Due Diligence as a Cornerstone of Ethical Business Practice

The relationship between corruption and due diligence is one of prevention and protection. By conducting thorough due diligence, companies and organizations can reduce their exposure to corruption risks, comply with legal requirements, and maintain their ethical standing. As corruption becomes an increasingly global challenge, businesses must prioritize due diligence as a key strategy in their governance and risk management practices.

Ultimately, a robust due diligence framework is not just about avoiding legal repercussions but about fostering a culture of integrity, transparency, and accountability. This not only helps protect against corrupt activities but also positions organizations as responsible corporate citizens committed to sustainable and ethical business practices. In a world where the cost of corruption is high, due diligence offers an essential safeguard for both businesses and society at large.