In the landscape of international business, establishing regional offices in locations such as Hong Kong or mainland China is a strategic move for multinational corporations looking to establish a presence in Asia.
It is not uncommon for a sole employee to be assigned to take up a managerial role in a satellite office. Local staff are often appointed as regional general managers or directors. While this can bring invaluable local insight and expertise, the physical distance from head office often means that unless robust policies are put in place and adhered to, instances of misconduct, fraud and the like can occur and go on undetected for significant periods of time. Employee fraud or misconduct can take many different forms and can be uncovered in many different ways – usually following a tip-off , management change, and internal or external audits. In any event it is reported that more than half of employee fraud cases occur due to lack of internal controls. This article aims to highlight the risks as well as provide practical tips to employers when engaging a single worker to manage and operate a satellite office.
Potential for Misconduct
General Managers (GMs) often hold substantial authority relating to the running of an overseas office, including being the sole authorised signatory for bank transactions and approving expense reimbursements. Without proper internal controls and governance, it is easy for a GM to abuse this authority for personal gain, leading to financial and reputational loss for the company.
Expense fraud
Without internal checks and balances in place, there are many ways in which a GM may abuse his position. For example, a GM who has the authority to approve his or her own work expenses may potentially commit expense fraud by: requesting reimbursement for personal expenses that are not business related; submitting bogus expense claims; or inflating the cost of expenses claimed. Common examples of expense fraud include: claiming dinner with friends as a business development expense; claiming personal travel as a business trip; and submitting fictitious invoices which are put through accounts and are paid without any verification of goods or services being received by the company.
Inaccurate leave records
Where a GM oversees HR matters in a small office, they are
expected to act as their own gatekeeper when it comes to
maintaining their own annual leave records. It is not uncommon for
an exiting GM to claim that they are owed an excess amount of
untaken annual leave, which if unverified could lead to potential
legal consequences for the employer. Pursuant to section 41G of the
Employment Ordinance, employers have a legal obligation to keep
accurate annual leave records for their employees. Where a GM or
employee makes a claim for untaken / rolled-over annual leave,
unless the employer can prove that leave was in fact taken during
the course of employment, more often than not, the employer will
end up having to pay the claimed leave entitlement, especially
where the GM issues legal proceedings to recover his alleged
contractual entitlement.
Furthermore, an employer may face legal consequences for not
keeping proper records of its employee's annual leave, sick
leave, maternity/paternity leave, statutory and public holidays and
wages paid. An employer who fails to keep these records is liable
on conviction to a fine of HK$10,000. Where a GM has failed to
ensure that proper records have been kept for him/herself, the
company will be held liable despite it being the GM's
omission. It is often the case that the GM will seek to leverage
their position based on their knowledge of these facts.
Misplaced loyalty to GM
Detection of misconduct is even harder to uncover in an office
where the GM has personally hired all the staff of the local
office. In such situations it is not uncommon for staff to feel a
sense of loyalty to their immediate supervisors and be less
inclined to report any misconduct to headquarters especially where
they have minimal interaction with overseas teams and their
management.
We have seen instances of local GMs obstructing HQ efforts to
uncover fraud or misconduct by, for example, instructing local
staff not to cooperate or communicate with HQ management and / or
denying entry to the local office premises.
In our experience, this misplaced sense of loyalty usually
continues even after the GM has been fired. Remaining employees may
feed their ex-boss confidential information which can adversely
affect court proceedings being brought against the ex-GM.
To reduce the possibility of a GM abusing their position, employers should consider the following:
Dos:
1. Implement Strong Internal
Controls: Establish robust internal controls to
prevent abuse. This includes requiring two (or more) signatures for
approvals, conducting regular audits, and implementing a separation
of duties in financial processes.
2. Encourage
Transparency: Foster a culture of transparency where
all employees feel comfortable raising concerns. Implement
anonymous reporting mechanisms for staff to report suspicious
activities without fear of retaliation.
3. Provide Training and Resources: Offer
training to ensure that all staff know what is acceptable conduct
within the workplace.
4. Grow trust and relationships between
offices: Ensure that there is continuous contact
between headquarters and local staff to strengthen communications,
relationships and to build trust.
Don'ts:
1. Don't Centralise Power: Avoid
placing too much authority in the hands of a single individual.
Distribute responsibilities to ensure checks and balances are in
place.
2. Don't Ignore Warning
Signs: Be vigilant for signs of potential misconduct
and address red flags proactively.
3. Don't Neglect Cultural
Differences: Understand cultural differences that
may affect business practices in different regions and tailor the
company's approach to compliance and governance
accordingly.
Conclusion
The establishment of a satellite office presents unique challenges and opportunities for international corporations. Over-reliance on a single individual to manage an office can lead to significant risks, including potential misconduct and long-lasting effects even after the individual has left the organisation. Employers can mitigate some of the risks by having strong policies in place and ensuring proper corporate governance.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
