The PERILS of Managing OVERSEAS.

You may have seen have seen the television commercial. A gaggle of employees at a New Economy company is partying on a yacht in San Francisco Bay, celebrating a multimillion-dollar financing. Then the CEO informs them that the company has just 30 days to expand into Singapore and Hong Kong. The announcement is met with dead silence as a female voice intones: "That's when you know you are so ready for IBM."

It's a catchy ad. But to Paul Regan, a forensic accountant at Hemming Morse in San Francisco who has been investigating white-collar crime and corporate scandals going back to Howard Hughes' will in the 1970s, IBM's hypothetical example eerily mirrors real business situations, which can be fraught with peril. "It's not necessarily bad in every instance," he says of a new company's need to ramp up overseas' operations quickly. "But it's possible that the company will be stretched thin and focused on meeting a short-term deadline and not on setting up a structure with sound management controls."

In an era of increasing globalization, more and more companies are discovering that, to be successful, they must take their act abroad. The U.S. Department of Commerce reports that 205,188 U.S.-based companies were exporting merchandise in 1998, the most recent year for which it has figures, up 82 percent since 1992.

In venturing abroad, however, companies are not only encountering unfamiliar territory -- different languages, currencies, diet, dress, religious practices and social customs -- but they are entering areas where laws, traditions and ethical standards could conflict with the company's own. What's more, sheer geographical distance from home may complicate matters and diminish transparency, providing a perfect environment for rogue managers bent on concocting scams or carrying on fraud.

Forensic accountants and security experts say that, in addition to the challenge of operating an unwieldy, far-flung enterprise, management at global companies must be on guard against fraud and embezzlement, money-laundering, accounting shenanigans, political corruption, bribery and other illicit activity. White-collar crime is also made easier when face-to-face transactions give way to faxes, electronic mail, mobile telephones, teleconferences, laptops, beepers, overnight mail delivery and courier services.

"There is more exposure to fraud with globalization of the economy, advanced informational systems and the reliance on computers," warns Kenneth Zignorski, a managing director at Mercer Management Consulting. "Firms are conducting commerce on a 24-7 basis and, when business is going on around the clock, there is more opportunity for fraud."

Robert Preston, a senior vice president at Deloitte & Touche based in Edmonton, Alberta, says it is not uncommon today for companies to know very little about their own employees or customers. A former investigator with the Royal Canadian Mounted Police, Preston adds: "You'd be surprised how many people just have a business card. I see this all the time."

Which is not to say, of course, that bad things cannot happen to good people even in their own backyard. Robert Urban, senior vice president at the global insurance broker Marsh, a subsidiary of Marsh & McLennan Cos., reports that he is currently involved with "a big company that has more foreign exposure than domestic" yet is registering theft losses in 11 U.S. segments but only two non-U.S. operations. "The fact that it had a lot of foreign operations didn't affect that at all," he says.

That said, there is ample evidence that "in today's 'connected economy,' fraud risks are ever-increasing," as Ernst & Young noted in the preamble to its May 2000 survey on international white-collar crime. Sixty percent of senior executives responding to the E&Y survey listed "computer fraud" as their No. 1 concern. (See table, page 20, for other results.)

Unlike street crime, where a stickup might mean a few moments of terror but relatively small losses, white-collar crime's costs can be staggering. The Surety Association of America, which underwrites "blanket fidelity bonds" -- insurance policies that provide coverage against losses due to employee dishonesty -- found that insurers like AIG, Pruduential and Travelers paid out $385 million in losses in 1998 on $674 million in premiums underwritten -- a high loss ratio of 57 percent. Those figures are above the losses eaten by the harmed companies themselves in the form of deductibles -- and even companies that are insured often sweep instances of white-collar crime under the rug to avoid embarrassment, Urban says.

Meanwhile, only 42 percent of companies responding to the E&Y survey reported taking out fidelity bonds in 2000, up from 36 percent two years earlier. For many, the insurance policy is mandatory: the Securities and Exchange Commission, for example, requires that brokerages be insured against securities loss, forgery and fraudulent trading.

The consequences of white-collar crime and malfeasance are becoming increasingly severe. The Foreign Corrupt Practices Act imposes tough penalties, including triple damages, on U.S. companies that pay bribes to foreign officials to win bids or secure contracts. Shareholders are more willing to file lawsuits when stock prices plummet in the wake of lax behavior, and global regulators, international police and criminal prosecutors are less willing to take a benign, "boys will be boys" attitude toward fraud and corruption.

"Companies that don't keep a watchful eye on all their activities face the risk of possible criminal actions, lawsuits for breach of fiduciary duty, potential shutdown of the company and everything in between," says Deborah Meshulam, a former SEC enforcement attorney and now a partner at the Washing ton, D.C., law firm of Piper Marbury Rudnick and Wolfe.

Consultant Dan Mulvenna thinks corporate managers would do well to take extra care when doing business in the world's trouble spots. A Lees-burg, Va.-based international consult ant on corruption and fraud investigations who spent 20 years as director of security at a U.S.-based, multinational oil company, Mulvenna notes that corruption is raging in areas like Africa, Russia and the countries of the former Soviet Union. There may be strong pressures, he warns, for company officials to bribe low-paid bureaucrats and government officials to gain contracts and win licenses.

"What you can do is have very clear, unambiguous corporate policies that are enunciated and supported by senior management," Mulvenna says. "They should say, "This will not be tolerated. It is not in our corporate policy and is in violation of the corporation's creed, values and mission statement.'"

Having articulated that policy, he argues, companies should employ "multi-channel mechanisms" for concerned employees to report fraud. These should include toll-free "hotlines" for whistle-blowers to make anonymous reports of suspicious activity; an ombudsman or ethics officer, to whom employees can make similar reports; and skilled internal auditors. "Unfortunately, many and, indeed, most auditors are not capable of detecting fraud, and most routine audits will not run this up," Mulveena says.

Mercer's Zignorski notes that more companies, especially financial institutions, have been designating a person as chief risk officer. Companies are also establishing broad based "enterprise risk councils" with representation from departments that may have high risk profiles.

An over-emphasis on security and control, however, can straightjacket a company and prevent overseas operations from reacting creatively to local markets. Idalene Kesner, a professor at the Kelly School of Business at Indiana University, thinks companies have to strike a balance. "U.S. firms are very restrictive, and that hinders their ability to be responsive," she says. "At the same time, you can't have everyone running around, being a renegade. If an organization doesn't make clear its core strategy, it can pull the organization apart."

But Regan, the San Francisco forensic accountant, warns that the trend toward downsizing could eliminate important mid-level managers whose duties include keeping an eye out for wrongdoing. Surviving employees could also be so over worked and shell-shocked that there is little time or incentive to fret over ethical concerns.

In addition, outright greed isn't always the driving force behind wrongdoing. "Concern about failure" is often a major motive, Regan says. "People may be cooking the books to cover up the fact that operations are not as successful as you're pressuring them to be. And the reward system is important: people may want to get a bonus, so numbers get misstated to show more profitability."

A common refrain of those in the business of protecting companies against white-collar crime is that it usually involves trusted employees and knowledgeable insiders, many of whom are quite intelligent and placed in sensitive positions. That makes this brand of wrongdoing among the hardest of contingencies to protect against, at home or abroad. Says Mulvenna: "Corruption has been with us since Biblical times and will continue to be with us."

Paul Sweeney is freelance business writer in Brooklyn, N.Y.

When Far-Away Problems Hit Home

Scams occurring in distant venues may not only be easier to carry out but harder to detect than the home-grown variety -- which can prolong the problems. Domestic managers sometimes have adopted a hands-off attitude that, in retrospect, created a permissive atmosphere. The consequences can be devastating. A few examples:

* The notorious collapse of UK merchant bank Barings in February 1995. Singapore-based Nick Leeson, a 28-year-old trader, racked up $1.4 billion in losses playing the Asian futures market, sinking the venerable company when it could not cover the financial losses. But the home office was culpable, too, because London managers pressured him to make profits and rewarded him with lavish bonuses.

* A rogue Korean operation has walloped Lernout & Hauspie Speech Products NV, a Belgian company that makes speech recognition products. A recent investigation by Pricewaterhouse-Coopers found that 70 percent of nearly $160 million in sales booked by the company's Korean unit between September 1999 and June 2000 was fictitious. Korean managers used highly sophisticated schemes to bamboozle KPMG, the company's regular auditors.

In one arabesque scheme, L&H customers with overdue bills transferred their contracts to third parties. The third parties then took out bank loans, guaranteed by L&H Korea, which used the borrowed money to supposedly pay down unpaid bills, PricewaterhouseCoopers sleuths found. For meeting ambitious sales targets, Korean managers received multimillion-dollar bonuses.

* Companies as seemingly disparate as Xerox Corp., BellSouth, Citibank and BankBoston Corp. (which has since merged with Fleet Financial Corp.) have had costly scandals erupt in their Latin American operations. Many occurred when bank officials went off in their own direction; some have required complex in-house audits to determine the extent of the fraud or illegal actions.

At Xerox, the parent company fired 13 Mexican executives over accounting irregularities and took an after-tax charge against earnings of $120 million, it announced Feb. 2 The business machine company, which used outside legal and accounting firms to probe the alleged wrongdoing, discovered ineffective and inaccurate billing procedures, dates on past-due accounts that were improperly changed and insufficient bad-debt reserves. At the root of Xerox Mexico's problems, the company's controller told the Associated Press, was a "very demanding" management team bent on driving growth.

BellSouth is the target of a probe by the Securities and Exchange Commission into whether one of its Latin American subsidiaries paid bribes to foreign government officials. The Atlanta-based telecommunications firm says it hired an outside legal firm to look into the issue after a routine audit identified. "accounting issues." Although BellSouth concluded that no laws were broken, the SEC began its own investigation after the company filed, an application for a Latin American tracking stock.

BankBoston was hit for some $70 million in 1998, when a lending officer in New York, acting on his own initiative, lent some $62 million to an Argentine businessman plus loans to several other clients who had no intention of repaying. BankBoston said it discovered the financial discrepancies during a routine review of accounts at BankBoston International.

Citibank got its share of headlines a couple of years ago when it was revealed that Raul Salinas de Gortari, brother of Mexico's former president, used accounts at Citibank to launder and transfer out of the country some $90 million garnered from alleged drug and influence-peddling operations. A sharply worded report by the U.S. General Accounting Office, the investigative arm of Congress, argued that Citi never properly questioned Salinas on the source of the money and faulted the bank for assisting Salinas in moving money into bank accounts in London and Switzerland.

Top Fears of Global Managers
Computer fraud              60%
Unauthorized expenses       57%
Misappropriation of assets  38%
Collusion with org. Crime   24%
False profit inflation      22%
Counterfeiting              21%
Copyright abuse             21%
Source: Ernst & Young