LECTURE 2: INTRODUCTION TO RISK Subtitle

Introduction to risk WHAT IS RISK? “The chance of Commercial or Personal Loss” Risk is most definitely a Matter of Perception Some examples of country-related risks illustrate payment risk issues in cross- border transactions. Sovereign or country-related risks stem from the actions of one or more governments and government agencies or by civil war, civil unrest and strikes. A seller has a contract to deliver perishable goods to a buyer in another country. There are actions by the government that could prevent the delivery and the completion of the transaction. War by a third country with either the buyer’s or seller’s country could cause the goods not to be transported and/or delivered by one of the warring countries. An embargo or blockade could bar the delivery of the goods. A strike in the logistic pipeline could also stop the goods from being delivered.

Introduction to risk GROWTH OF THE STUDY OF COUNTRY RISK ANALYSIS Globalization of Business Push for higher return by shareholders “Higher risk, Higher return” Examples: On the lower end of the scale, the risk-free rate of return is represented by the return on U.S. Government Securities because their chance of default is next to nothing. If the risk-free rate is currently 6%, this means, with virtually no risk, they can earn 6% per year on our money.

Invisible risks RISKS WE DO NOT THINK ABOUT EXPLICITLY Traditional Investigation: buying power of customers size of market growth of market etc.

Invisible risks 1. Corruption 2. Bureaucracy Bribery Disguised beneficial ownership Nepotism Cronyism (including ‘old boys’ network) 2. Bureaucracy Red Tapes Deliberate habits Local and Regional interference

Invisible risks 3. Counterfeiting & Theft Fraud White collar theft Ponzi schemes Insider trading Labor racketeering Embezzlement Copyright infringement Money laundering Identity theft Forgery Blue collar theft Product adulteration

Invisible risks CASE 1: Enron collapse With revenues exceeding $100 billion and the distinction of being named by Fortune as “America’s Most Innovative Company,” Enron was a seemingly indestructible energy giant during the beginning of the 2000s. However, even during its rise in the ’90s, rumors swirled that it was involved in illegal accounting procedures with its accounting firm Arthur Anderson, then one of the “Big Five” accounting firms. Jeffrey Skilling, who served as president COO and CEO, along with a staff he assembled, hid billions of dollars of debt through poor financial reporting, accounting loopholes and the use of special purpose entities. Andrew Fastow, COO, deceived the board of directors about the company’s accounting practices and convinced Arthur Anderson to go along for the ride. After stocks plummeted, the SEC conducted an investigation that ultimately resulted in the 24-year, 4-month prison sentence of Skilling and six- year sentence of Fastow. Founder Kenneth Lay died of a heart attack before he was sentenced

Invisible risks CASE 2: Bernie Madoff Ponzi scheme The word “Ponzi” was introduced into America’s lexicon in late 2008 when Madoff was arrested and charged with securities fraud. The former lifeguard, sprinkler installer and chairman of NASDAQ managed to build a multi-billion dollar investment firm with false trading reports and without assistance from the major derivatives firms, each of which refused to trade with him. Although he had been suspected of being a sham a decade before, it wasn’t until 2008 that he was arrested after his misdeeds were reported by one of his sons. In 2009, he pled guilty to 11 federal crimes including securities fraud, money laundering, and theft from an employee benefit plan. The penalty: 150 years in prison and $170 billion in restitution — investors lost billions of dollars due to the scandal, and three people involved with the business, including Bernie’s son Mark, committed suicide

Invisible risks 4. Cultural Issues Tradition/customs etc. Corporate culture Language

Invisible risks 5. Legal safeguards 6. Organized crime Trade union influence (Trade Union Act 2016) Nationalization Tax 6. Organized crime Kidnap/ransom Smuggling Cyber-crime

Invisible risks 7. Unfair Trade 8. Unfair competition Monetary quota Commercial espionage Lobbying Plants litigation

Invisible risks 9. Asset-security 10. Extremism Threat to premises Minority groups & extremists (environmentalist) Natural disasters 10. Extremism Terrorist activities( Religious ) Terrorist activities(political)

Source: UNISDR

Source: UNISDR

Source: UNISDR