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Navigating post-merger and acquisition disputes

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Stephen Millington, Partner, and Pooja Shah, Manager, Forensic Risk Alliance

 

Despite the restrictions that were imposed during the COVID-19 pandemic, the number of merger and acquisition (M&A) transactions globally were higher in 2021 compared to 2018. They increased by 33%, amounting to a total transaction value of USD 3.9 trillion.[1]

By contrast, according to the Institute for Mergers, Acquisitions and Alliances, the Gulf Cooperation Council (GCC) saw the highest volume of transactions in 2018 with some 433 deals. These subsequently dropped in the first half of 2022 to approximately 140 M&A transactions.[2] Some of this activity has been fuelled by the liquidity in the market and historically low interest rates.

However, with financing costs rising and the macro-economic climate becoming more challenging, acquired businesses – especially those which are highly leveraged – will be under more financial strain. One consequence of this will be more post-merger and acquisition disputes.

In the event of a dispute, it’s important to differentiate the factors contributing to the alleged underperformance of an acquired company. The impact of the Covid-19 pandemic and the global macroeconomic climate, for example, must be distinguished from misrepresentations around a business’ financial performance. This will enable the buyer to understand whether or not they are covered by the warranty provisions.

The impact of Covid-19

Consequently, when assessing the potential for warranty claims, the buyer must try to understand whether the poor performance of the acquired company is fact due to their own poor assessment resulting from the pandemic.

The global macroeconomic climate

A difficult macroeconomic climate – marked by high interest rates and soaring inflation – and geo-political tensions have also raised the risk of M&A disputes in recent years.

These dynamic market factors affect the financials of companies, putting pressure on their revenues, profits and earnings growth, and ultimately enabling performance to fall below the buyer’s expectations.

However, changes in macroeconomic factors rarely form part of the warranties provided by the seller. If a business’ due diligence did not include, for example, scenario testing for the doubling – or even trebling – of interest rates, its acquisition may be underperforming.

In addition, as inflation continues to rise, buyers and sellers should expect to see more heavily negotiated purchase prices, alternative payment methods, and longer exclusivity periods.

Extracting the macroeconomic impacts on the performance of the business post-acquisition is key to establishing whether there is any potential claim against the seller.

Accounting misstatements

The most successful post-acquisition claims invariably evidence elements of accounting misstatement or misrepresentations by the seller, such as revenue recognition and debtor recoverability.

To attract the most interest, a seller will often present the financials in the most attractive form. As such, thorough due diligence at the time of purchase will provide a clear picture of what was represented.

The challenges ahead

The COVID-19 restrictions and the tough global macroeconomic climate have impacted the level of due diligence carried out in recent M&A transactions, making it harder for buyers to quantify post-merger or acquisition claims.

Prior to commencing costly litigation, buyers should engage professional advisors to assist them in identifying the potential claims based on accounting misrepresentations by the seller as distinct from Covid-19 or macro-economic impacts on business performance.

 

[1] Global Data

[2] S&P Global Market Intelligence

Business

Shutting off mule accounts to effectively tackle APP fraud

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By

Cleber Martins, Head of Fraud Management for Banking at ACI Worldwide

 

Authorised Push Payment (APP) fraud is on the rise. Losses from this type of fraud are expected to record an average CAGR of 21% from 2021-26 in the UK, US and India. To combat this rising threat, late last year the Payment Systems Regulator (PSR) published new rules for banks and building societies regarding the reporting of APP fraud.

While losses won’t keep pace with the overall growth of real-time payments, banks shouldn’t be complacent regarding the risks. And though it’s true real-time payment channels have created a reality where fraudsters can succeed faster, it is mule accounts that allow them to keep getting away with it.

Fraudsters recruit mule accounts often through identity theft, turning a user’s account into a mule account without their knowledge, or by recruiting and targeting more vulnerable people on social media and other online communication channels. Thereby enabling criminals to hide their identity and quickly move stolen funds beyond the reach of banks and authorities, either through other mule accounts at different banks, or by buying crypto or NFTs. This is why, in order to effectively tackle APP fraud, banks need to shut off these mule accounts once and for all.

Banks battling back

Currently, most banks only tend to check outgoing transactions. This means that when a mule account suddenly receives money from numerous different accounts, following little to no activity, it’s usually not picked up. And this needs to change.

Cleber Martins

When battling back on scams, banks need to have the appropriate Know Your Customer (KYC) standards. Thus allowing them to monitor the money coming in as well as out of customers’ accounts and analyse the user behaviour of those accounts. This all helps banks to monitor for synthetic and stolen identities in relation to the money coming into accounts.

Being able to monitor and analyse all the data in real-time requires machine learning algorithms with rich contextual information. Put simply, these models are only as good as the signals and inputs they have been given. This means the more financial institutions – on both the sending and receiving end of the transaction – collaborate on signal sharing, the better they can target mule accounts. Additionally, more data and more accuracy should also lead to a decrease in the number of false positives and an improved user experience for legitimate customers.

To effectively shut off the supply of mule accounts, better collaboration and data sharing between banks and financial institutions are needed and with the introduction of the new PSR rules, we could see this quickly come to life.

Why receiving banks must be held accountable

There’s currently almost no risk at all for receiving fraudulent transactions into mule accounts, despite hosting the mule accounts used by fraudsters to receive stolen funds. This results in most banks doing little to no monitoring or analysis of the money coming into accounts. And little to no meaningful intelligence being exchanged between the two ends of a transaction. To turn the tide on scammers, this needs to change.

The Payment Systems Regulator (PSR) has said that in addition to putting mandatory reimbursement for most victims of APP scams, liability should be split equally between initiating and receiving banks. Unless the receiving bank can prove it has gone to greater lengths to do it’s checks, in comparison to the initiating bank, resulting in the initiating bank being held more financially liable.

This should incentivise a major shift in how banks monitor fraud activity, by increasing how they monitor the money coming in, in combination with behavioural profiling of the receiving accounts. Ideally, once the two sides of a transaction are working together, a “fraud DNA” can be constructed to enable more precise decision making. One strand of that DNA, in practice, would be the initiating end’s sending an intent for a real-time payment, including intelligence about the initiating account in metadata format. The receiving end would then correlate that with their own, thereby adding the second strand of intelligence to the DNA chain. Finally, a decision would be made as to whether to allow the transaction to be completed.

This increase in collaboration between banks, would symbolise the first step of building a framework that promotes the sharing of insights and could mean the end of mule accounts as reliable tools for fraudsters.

What future collaboration might look like

While banks play an important role, mule accounts are often created on social media, through the telecom industry, via email or even postal mail. Making APP fraud a cross-industry problem. This requires a next-level, cross-industry collaboration strategy, that sees solutions, techniques and intelligence being shared between banks and vendors, merchants, issuers and acquirers, and even with social media companies and telcos.

Ultimately, it’s about ensuring customers are better educated and protected and that banks perfect their monitoring of the money that comes in, as well as out, all while sharing that information. Building a true cross-industry framework will help deprive scammers of access to one of their main conditions for growth. As a result, we should begin to see the value of APP scam losses, as a proportion of the value of real-time transactions, drop.

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Want to increase positive customer purchasing experiences? Let’s talk IVR

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By

Andy Watts, Senior Account Director, Financial Services, at Odigo

 

For many years, debit and credit cards have reigned supreme, with the latest figures showing that in just the month of August, there were 2.47 billion debit and credit card transactions. While this is unlikely to change any time soon, the way we pay has.

The popularity of paying ‘in person’, using chip and pin, has reduced significantly while paying online has skyrocketed. Nevertheless, during the highs and lows of this journey, making payments over the phone – using interactive voice response (IVR) – has remained.

When it comes to credit, debit and digital payments, the lack of physical cash can sometimes add an abstract layer to the purchasing experience. Resulting in some customers lowering their guard when it comes to financial fraud and risk, and the same goes for Interactive Voice Response (IVR) payments.

To combat this, businesses need to actively ensure their contact centres are internally remaining compliant with security standards when it comes to the data flowing around the contact centre, as well as tackling the external lack of IVR awareness among their customers.

Andy Watts

Fighting fraud from the inside

During the pandemic, the fear of fraud and breaching data security increased, as contact centre agents were required to work remotely. It’s fair to say, remnants of that fear still remain given the increase in spoofing scams, other types of fraud and hacks.

However, hope is far from lost. Different elements of these risks can be mitigated through the Payment Card Industry Data Security Standard (PCI-DSS). This global technological and operational standard aims to drive the adoption of data security standards for safer payments, including IVR payments. Providers that commit to the standard need to get involved in the protection of their customer’s data while it’s in storage, processing and transmission. As well as also regularly testing and monitoring their networks and maintaining a vulnerability management program.

Unsurprisingly, customers want to be assured of accurate, safe transactions and that organisations will follow through on their commitments to goods or services. Contact centres need to continue to adhere to operational standards to ensure compliance and security, and ensure they ramp up education and awareness around the risks of IVR payments. All in an effort to reassure their customers and enable them to have the smoothest and safest customer experience.

Ensuring education from the outside

The contact centre is the epicentre of personal customer data. Contact centre agents regularly pull up and use insights from the data accumulated to amplify customer understanding and add to new data points based on continuous customer interactions. To ensure a continuously high-quality customer purchasing experience, when using IVR payments, an awareness of the importance of data security – by both agent and customer – is crucial.

IVR payments are almost always fully automated for 24/7 self-service and are expertly tailored to suit the customer and business needs. In reality, this translates into customers slowly being guided through a process of intuitive phone menus and additional information to ease any fears of fraud and other anxieties they may have.

Information about the process of IVR payments, how to spot fraud attempts and how to best secure data must be readily available for customers. If this is not already being provided by contact centres, then businesses need to re-evaluate their processes, sooner rather than later. Agents should be actively educating customers and information should be readily available via FAQs pages and chatbot functions.

While IVR payments remain a popular payment method for customers, contact centres need to ensure they are internally operating to the highest security and compliance standard possible. By securing their data in transit and storage whilst simultaneously ensuring ease for agents to utilise the data to continue providing meaningful CX. All of which can reduce customer anxieties around potential fraud and increase awareness around the risks of IVR payments, while delivering high quality and seamless customer purchasing experience.

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