What our client needed

Our client needed to be sure that all business operations of its affiliated company in Ukraine are conducted transparently and that local management acts in compliance with internal corporate policies and guidelines. The law regulating economic offences in Western Europe is very strict. If managers of a daughter company in Ukraine bribe someone in Ukraine, then the managers of the parent company in Germany can be prosecuted. Therefore managers of the parent company have a considerable interest in having no actions taking place in their Ukrainian subsidiary that may be considered white-collar crime in Western Europe.

How we solved the client’s problem

First we discussed the reason for the compliance check with the client. In this case it was an initial suspicion; in other cases it may be a complaint, regular internal audit etc. Afterwards we created a list of action steps for the check tailored to the specific case. Since a compliance check is usually a delicate and sensitive matter, discretion is of utmost importance. Therefore, we only interfere as much as it is necessary to prevent any disturbance of the ongoing business.

One of the first steps to take was to obtain a copy of the accounting database a few days before a planned a visit to the client’s office. We carried out a thorough analysis of the received accounting data.

During the subsequent visit to the client’s office, we did random checks to verify the correctness of the accounting database and compared this information with other data sources like publicly available market prices and coefficient of benchmark companies we know.

We analyzed the plausibility and transparency of transactions between the company on one side and the main contact points to its environment on the other side. These are:
• Suppliers
• Customers
• Employees
• State Authorities
• Banks
• Stock/logistics

For the above categories we checked:
• if the local management is empowered to conduct some operations and do not exceed the limit
• if a tender committee participates in suppliers selection according to internal policies
• if conducted transactions correspond with contractual arrangements (prices, payment terms)
• if service/goods deliveries actually took place (check of supporting documents to identify void agreements)
• if the level of purchase/sales prices was reasonable (contractual prices vs. market prices)
• if purchases/sales of goods/services were connected with the general business activity of the client (to identify non-typical operations)
• if any of customers/suppliers/employees are related to the management of UA subsidiary
• if bank account balance reported corresponds to the banking documents
• if stock balance reported corresponds to the warehouse (inventory taking)
• if number of employees reported corresponds to actually employed (staff list check)
• if bonuses and additional benefits granted to the employees corresponds to labor contracts and internal policies
• if balances of settlements with customers/suppliers/budget corresponds to the data of another party (reconciliation)

Within the check we found out that:
• There were some void agreements concluded with customers/suppliers related to the Ukrainian management
• The local company used additional bank account for money transfers to private entrepreneurs related to the local management
• One customer had out-of-range payment delays since he was related to the local management
• Some non-typical business operations were conducted, not agreed with shareholders (sales of fixed assets with low prices to related parties)
• Extra bonuses were paid to local managements, not foreseen with labor contracts
• Procedure of suppliers selection was violated (no tender committee protocols) which became a reason for some abuses
• Certain products were sold for a far too low price. The background for that was that one of the local managers of the company had a stake in the company that bought the products and therefore directly benefitted from a low sales price
• In order to prevent conflicts with the tax authority the company followed a payment scheme that was potentially subject to criminal liability

Basing on made analysis we prepare for the Client a detailed written report about a forensic results in a wording understandable even for people who are not financial specialists. This report includes:
1. detailed description of made analysis (including working tables as attachments)
2. definition of all non-compliance issues discovered during the check
3. recommendations on how to proceed and to fix the discovered issues

Overall, we may summarize that as a result of Compliance check the Client receives:
• reduced possibilities for abuses and kick-backs
• reduced legal and tax risks
• increased Company’s economic value
• local business more transparent, effective and profitable