Asset prices falls may lay bare rot in crypto, commodities sectors in South-east Asia

MORE misdemeanours could turn up in the crypto and commodities sectors this year, market watchers said, as the global economy battles recessionary pressures and asset prices fall.

Cryptocurrencies have recently garnered a lot of interest from investors and markets. But the collapse of crypto exchange FTX could be a sign of greater troubles to come for the industry, said Tom Everett Heath, global head of forensic investigations and intelligence at Kroll.

FTX filed for bankruptcy in November, leaving several parties – including Singapore state investor Temasek – in the lurch.

“I’d be very surprised if we went through 2023 without there being more crises, scandals and collapses in the crypto sphere,” said Everett Heath.

Also in the crosshairs are commodity companies, such as those in the oil and gas space, which Everett Heath said might be more susceptible to fraud given the recent spike in commodity prices.

As those prices adjust downwards to reflect macroeconomic troubles, Everett Heath said unpleasant surprises could turn up. Fraud is easier to hide in a bull market than a bear one, Everett Heath added, and a bear market climate now could result in fraud being uncovered as companies battle pressures on their balance sheets or liquidity crunches. 

Technology and venture capital sectors, which had seen a huge inflow of investments up until recently, are also among the vulnerable, as are companies in “highly competitive” industries such as textiles.

Risks of discovery

Everett Heath said fraud is already rising in the region, although some of these activities have not yet been detected by companies.

“We’ve seen enough cycles…where an economic slowdown definitely pushes companies’ management or shareholders to the corner, and makes them behave in less than desirable ways,” he added.

Such behaviour might include a desire to cover up losses, as well as increased propensity for risk-taking among individuals and less sensible diligence from companies, said Ramesh Moosa, EY’s forensic and integrity services leader for Asean.

“This may lead to an increase in Ponzi schemes or fraudulent investment vehicles,” said Moosa.

Other types of fraud prevalent in South-east Asia include supply chain risks, which include conflicts of interest, as well as procurement fraud such as kick-backs and bid rigging. Bribery and corruption involving commercial or government entities, as well as financial statement fraud, are also common in the region, he added.

Reshmi Khurana, head of Kroll’s forensic investigations and intelligence for South-east Asia, said fraud could also take place in terms of sales or costs. The former will see companies book zero margins from “poor-quality” sales or transactions with conflicts of interest, while the latter typically involves inflated costs. 

Declining asset prices, meanwhile, can act as triggers for the uncovering of fraud.

Chester Liew, head of risk consulting and sustainability at Mazars Singapore, said more fraud incidents are typically detected during market downturns because companies tend to place additional scrutiny on their expenses.

“Heightened scrutiny may uncover fraud threats which were not easily detected during normal times,” he said.

Nick Williams, a partner at Hogan Lovells, said the law firm saw a “sharp increase” in the discovery of fraud or misconduct by companies in 2022, and expects that these will continue at a similar rate this year.

He said historically there has been an increase in bribery when a challenging economic climate puts pricing pressure on bids. This, he said, is especially prevalent in industries such as construction and oil and gas.

Risks in geographies

Investors in South-east Asian markets may need to be especially alert.

According to Williams, many listed companies in South-east Asia operate in “very risky jurisdictions”.  

“There is a naturally higher risk of that company being caught up in some form of scandal,” he said. 

“Any investor would hope that the board of a listed company would be alive to those risks and have in place adequate risk assessment, compliance programs and audit functions. However, history would suggest that that hasn’t always been the case.”

He added that there have also been many instances where listed companies that have subsidiaries operating in risky jurisdictions wind up “bearing the brunt of the subsidiary’s misdemeanours”.

“This is a region in which corrupt activities are common and relationships with state-owned entities are a necessary part of large projects,” said Williams.

Kroll’s Everett Heath said investors should “ask questions more rigorously” about the likes of a company’s underlying data, management styles and auditors before parting with their money.

“These questions have got to be addressed better; and I think historically, a lot of value has been destroyed by people not asking those questions, or just taking things for granted,” he said.

While listed companies are bound by additional regulations that play a vital role in protecting investors from fraud, EY’s Moosa said due diligence remains important. “Investors should not be lulled into any false sense of security just because the entity is listed and may have received clean audited financial reports.”

Jin Lee, director of risk and investigations at FTI Consulting, also warned that companies in South-east Asia might see instances of asset misappropriation and data theft in 2023. Fraud related to payments, borrowing and investment management might also occur, she said. 

Meanwhile, Lem Chin Kok, KPMG’s head of forensic practices for Asia-Pacific, noted that all industries in the region are now more susceptible to digital financial crime and related corruption – due to the shift to online activities as a result of Covid-19. 

“The rise of e-commerce and the pervasive reliance people have on social media have facilitated digital crimes such as scams and cybercrime considerably,” he said. The top-trending scams taking place now include scams related to jobs and investments, as well as phishing.