Partner: GCS
Last month, I began to discuss the value of know your customer (KYC) and how it is not only plays an important role for retailers who are looking to adjust to a new operating environment, it also helps turnaround professionals because they are then aware of the challenges that the company faces and the red flags that manifest these challenges. We can then advise our clients appropriately and implement meaningful, structural change within businesses to help them navigate their financial distress. Financial irregularities can be a problem.
In GCS’ experience, one of the major root causes of financial distress is financial irregularities. We have seen many recent examples of companies that faced massive legal action because of financial mismanagement. KYC helps turnaround professionals navigate this by identifying the practice and holding those involved accountable to shareholders.
The biggest problem when it comes to financial irregularities is when a company is accused of money laundering. This can be detrimental to a company’s reputation and needs to be managed appropriately. How do you know when your client is laundering money?
Complicated business structures
The article points out that one of the most common ways to recognize money laundering is complicated business ownership, several different entities, and complicated structures, all created to hide the actual ownership of assets and money. Often, the businesses used as a front for money laundering use overseas investors and shareholders to make it more challenging to scrutinize their activities.
It isn’t easy to ascertain who the beneficial owner of a company is most of the time since the primary contract person is an acting nominee. The transaction architectures will also be challenging to understand.
Unusual transaction patterns
The article points out that the company makes strange movements concerning their money or assets. Unplanned transactions, selling assets below market value, and sudden movement of resources without a previous announcement are apparent signs of unlawful activities.
There is often evidence of frequent, high-value transactions involving very short dwell times of money in a bank account, accompanied by transactions to just a few sources. In other words, these companies don’t follow the standard business trends of either having a few customers and many creditors or few creditors and many customers. Money laundering companies have very few creditors and customers.
Photo By: Canva
Buying items with intangible values
The article points out that money laundering front companies often purchase items with intangible values. These include art, designs, databases, patterns, programs, and several other services, usually charged excessively.
Another method often used is buying items for much more than they are worth is a way for businesses to launder gains and not pay taxes.
Unusual monetary losses
The article points out that some actions speak louder than words.
For example, when a significant private monetary placement is lost within one tax year, but the same investor places another similar amount in the next financial year, this calls for a closer investigation, particularly if investors don’t question it.
Cash only transactions
The article points out that monetary transactions require detailed information, but businesses laundering money lack the accompanying documents for investments and payments.
This is seen mainly in companies with cash transactions, where they covertly add additional funds to boost their turnover. Unusually high transactions in cash-based businesses that don’t correspond with the turnover of similar companies are a warning sign of irregular activities. Cash transactions also include paying employees’ black’ salaries to unregistered employees in cash.
The good fruits of strategic implementation
The mining and chemicals sector has been under significant pressure over the past two years. In 2020, Seelan Gobalsamy took over the reigns and chemicals company Omnia and was tasked with implementing an ambitious turnaround strategy.
Turnaround Talk recently published an article that pointed out that Omnia not only achieved this but excelled in the implementation of this strategy. The strategy hinged on some key elements.
Photo By: Canva
Debt restructuring plays a key role in the restructuring strategy
In 2020, Gobalsamy said that the movement to the fix and renew phase of the turnaround strategy followed the group’s “very difficult patch” in 2018 and 2019 where the company needed to do a debt restructure and a rights issue, which resulted in a new management team coming in and the company needing to develop “a fixed and stabilised plan” for the business. The first phase of the strategy was to stabilise the balance sheet and deal with the company’s debt and capital structure, with the second phase focused on fixing and turning around business operations.
The article points out that Omnia’s key businesses in Southern Africa have also been consolidated into a South African Development Community (SADC) market facing unit with manufacturing and supply chain being separated to enhance production excellence, while businesses requiring additional investment have been split from the core business.
In a statement on 24 November 2020, Gobalsamy said the group was “well positioned to capitalise on growth opportunities”, which marks a key pillar of Omnia’s strategy that will be driven by appropriate capital allocation.
Gobalsamy said these opportunities will likely be in Omnia’s core businesses – agriculture and mining – which the company will look to expand and grow. Additionally, Omnia will consider investing in and expanding the production and distribution capabilities of its Australia and Brazil agriculture businesses.
Selling assets is important in a turnaround strategy
In October 2020, Omnia announced its intention to dispose of Oro Agri to Rovensa, a Europe-headquartered business.
The Engineering News article points out that the sale, which at the time remained subject to approval by Omnia’s shareholders in December 2020, would generate aggregate cash proceeds of about $146.9-million, thereby de-risking the group’s balance sheet.
Commenting on the proposed Oro Agri disposal, Gobalsamy said the board undertook a comprehensive review of Oro Agri as part of the group’s broader strategy, and that the board resolved to accept Rovensa’s offer, subject to shareholder approval.
In conversation with Engineering News and Mining Weekly, he refers to the sale of Omnia’s Oro Agri business (bought for $100-million 18 months ago), which puts Omnia in “a very positive space” to capture organic and inorganic opportunities for growth, and allows Omnia to consider resuming its dividend and, potentially, a special dividend or share buy-back post year-end in March 2021.
“We believe that Oro Agri’s risk profile, the attractive price offered by Rovensa and the opportunity to de-risk our capital structure, outweigh Oro Agri’s long-term potential which would require significant investment to realise,” he added in the separate statement on 24 November 2020.
Both sides of the story
When it comes to dealing with financial irregularities, early intervention is key as the company needs to undo the damage that has already been caused and systems need to be put in place in order to ensure that these practices do not take place in the future. This can only be achieved if turnaround professionals have intimate knowledge of the client that they are working with.
As we can see, Gobelsammy worked closely with the company’s turnaround professionals who had intimate knowledge of the business and the challenges that it faces. The turnaround professionals were then able to formulate a workable plan and present it to Gobelsammy who was brave enough to implement it. Face financial irregularities head on.
Moses Singo is a Partner at Genesis Corporate Solutions and is a Junior Business Rescue Practitioner.
