1. LECTURE 2: INTRODUCTION TO RISK
Subtitle

2. 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.

3. 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.

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

5. 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

6. 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

7. 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

8. 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

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

10. 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

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

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

13. Source: UNISDR

14. Source: UNISDR

15. Source: UNISDR