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ness practices.
In this section the definition is a bit more defined and refers to the types of
risks that the Basel banking risk framework reviews as business practice risks:
Clients, Products & Business Practice “ Losses arising from unintentional or negligent
failure to meet a professional obligation to specific clients (including fiduciary and suit-
ability requirements), or from the nature of design of a product.



Case studies
The flood of accountancy scandals has led to a large increase in litigation in the
US according to a report by Stanford Law School and Cornerstone Research,
the Securities Class Action Clearinghouse Report. It cited a 17% increase in the
number of actions filed for 2004 and that the companies being sued lost $169
billion in market value. This figure was almost treble the figure for 2003 and
Professor Joseph Grundfest said that many of the allegations and cases arose
about the companies™ financial performance:
UK Defence Company BAE Systems fell 3.1% to 238p in November 2004 after
the Serious Fraud Office announced the company was under investigation for
alleged false accounting in Saudi Arabia (Financial Times, 4 November 2004).
Following September 11, the UK Anti-Terrorism, Crime and Security Act 2001
was introduced. A number of the provisions attempt to address the problem of
bribery and corruption abroad and enable criminal prosecutions to be brought
within the UK against a company and its officers.
In addition the Enterprise Act 2004 has come into force after 18 months in
the legislative pipeline. The Act is designed to crack down on company direct-
ors who conspire to inflate prices, and sets out penalties of up to five years™
imprisonment and unlimited fines for directors found guilty of serious market
abuses. In addition, directors who blow the whistle on cartels and who cooper-
ate with subsequent investigations will be offered immunity from prosecution
(for further information visit www.oft.gov.uk/enterpriseact.htm).
UK airline operator British Airways fell 5.9% to 346p on news that the Office
of Fair Trading had raided its offices as part of joint UK/US investigations
into price fixing (Financial Times, 23 June 2006).
As in many jurisdictions, UK regulators are becoming more empowered and the
Financial Services Authority (FSA) and other authorities are beginning to
Chapter 10 “ Corporate power, business and marketing risks 235



extend their investigations. One example is Ofcom, which is planning an inves-
tigation into BT™s axing of its standard tariff (the most common choice for com-
petitors™ customers to use the BT infrastructure).
There are a large number of recent case studies in doubtful business prac-
tices worldwide. Corporate scandals include WorldCom, Enron, Andersen,
Xerox, CNN, Warner AOL, Elan, ABB, Tyco, Merck (Merck ˜exaggerated™ rev-
enue in accounts), Kmart, Global Crossing, Qwest, Johnson & Johnson (pending
probe), GE and compensation, GSK and financial institutions. Even Coca-Cola
Co. was being investigated by the US government into whether it engaged in
accounting fraud (Wall Street Journal, 3 May 2004).
A range of examples that have been seen to affect the value of companies
are as follows:
When UK regulator Ofcom launched an investigation into Patientline (a hos-
pital patient communications company) the shares had fallen from above 100p
in 2005 when the investigation was launched to 503„4p when it announced it
had closed its investigation (Financial Times, 19 January 2006);
With regards to the rebooking of reserves, Shell had been hit by lots of embar-
rassment due to the reworking of its estimates of its oil and gas reserves “
with repeated rebooking of reserves particularly affecting share prices; and
Tax avoidance: JTI-MacDonald, Japan Tobacco™s subsidiary in Canada, had to
seek protection from creditors in August 2004 after the Quebec provincial
government demanded immediate payments of C$1.4 billion (US$1.1 billion)
in tax charges relating to alleged cigarette smuggling.
Governments can have an effect upon work practices of organisations which it
deems to have adverse business practices:
The US Internet Gaming Prohibition Act when endorsed saw internet gambling
sites take a fall with Partygaming of the UK down 4.5% to 148p, 888 Holdings
down 5.8% and Sportingbet down 4.6% (Financial Times, 4 May 2006);
UK electrical retailers Dixons and Kesa shares rose 3% and 9.4% respectively
when it became known that the UK government ruled against the banning of
the extended warranty sales at point of purchase (Financial Times, 20
December 2003);
Mobile phone operators lost market value after they were charged by
European Regulators for excessive charges for international travellers which
could involve up to 10% of annual sales being fined. The shares of UK oper-
ators Vodafone and MMO2 lost 1.9% and 1.5% on the news in July 2004
(Financial Times, 27 July 2004); and
US stun gun maker Taser International fell 13.1% after it said the US SEC
was stepping up an investigation to the point where it could subpoena docu-
ments (Financial Times, 28 September 2005).
Tax benefits and subsidies: the removal of, or threat of removal of, subsides can
affect organisations™ values dramatically. The Irish budget airline Ryanair fell
30.6% to ‚¬4.70 and suffered its first ever profit warning in January 2004. This
coincided with the news that the EC would soon rule on the legality of subsidies
Part B “ Overview of the Economic Aspects of Business Risks
236



to airlines to fly from airports. UK operator easyjet also fell 7.9% on news it
may be affected (Financial Times, 29 January 2004). When the decision arrived
the next month of a decision to pay back subsidies of at least ‚¬4m, this figure
was much lower than expected and the companies rebounded with Ryanair
gaining 6.4% and easyjet 4.2% (Financial Times, 4 February 2004).


Financial services sector
The levels of payments are vast at the present moment, illustrated by the fol-
lowing examples from the financial services sector:
Citigroup, the largest financial services group in the world, has acknowledged
that it has lost business due to the controversy over its involvement in the euro-
zone government bond market. Corporate banking earnings fell in Europe, the
Middle East and Africa by 29% (Financial Times, 12 February 2005);
The Anglo-US fund manager Amvescap was involved with US authorities
over an alleged market abuse scandal. The fine level being discussed was
$255 million for allowing improper trading. This fine posed a threat to the
dividend levels of the company and the share price had slid from 5681„2p
(Financial Times, 4 August 2004);
$6 billion was wiped off of the value of shares of publicly traded asset managers
in November 2003, as well as 40 people losing their jobs and 30 lawsuits being
launched over a scandal which centred on the improper trading of fund shares.
Firms alleged to be involved or implicated in the scandal included Amvescap,
Bank One, Bear Sterns, Citigroup Brokers, Janus Capital, Chares Schwab and
Strong Capital among others (Financial Times, 21 November 2003);
Securities regulators announced the final terms of a $1.4 billion Wall Street
research settlement, ending almost two years of investigations into charges
that analysts issued biased research to gain investment banking business;
Citigroup Inc.™s Salomon Smith Barney unit, Credit Suisse Group™s CSFB and
Merrill Lynch & Co. settled charges of securities fraud, according to the US
SEC (Securities and Exchange Commission); Citigroup™s $2.6 billion
WorldCom payout;
J.P. Morgan Chase has set aside an extra $3.7 billion to cover investor law-
suits in relation to its alleged role in corporate scandals such as WorldCom
and Enron (Financial Times, 22 July 2004);
General retailers and the financial sector are coming under renewed criticism
about the record profits of store cards. Marks & Spencer have 28% market share;
All 10 of the participating investment banks, including Goldman Sachs Group
and Morgan Stanley, settled lesser charges of violating market regulations;
The US Federal Reserve fined Switzerland™s UBS $100 million for transferring
dollar notes to countries under US economic sanctions, such as Cuba and Iran;
and
Deutsche Bank, Morgan Stanley and Bear Stearns have been fined a com-
bined $15 million by the US brokerage regulator for improper handling of
shares in hot stock market flotations.
Chapter 10 “ Corporate power, business and marketing risks 237



Tobacco sector
The Justice Department is suing the industry for allegedly conspiring to
deceive the public about the dangers of tobacco products and smoking, and
the addictive properties of nicotine and how these can be boosted. It is esti-
mated that the tobacco companies gained $280 billion through fraud;
Tobacco growers and three of the four major US cigarette companies agreed
to settle a three year old price-fixing lawsuit. The deal, if approved by a North
Carolina judge, will pay tobacco growers and quota holders $200 million in
cash. It also sets a formula for minimum purchases of domestic burley and
flue-cured tobacco;
When a smoker dies, the Czech government on average saves US$1227, noted
Philip Morris in a report that became public, later forcing a public apology,
saying the study showed an ˜unacceptable disregard of basic human values™
(New York Times Upfront, 17 September 2001, p. 9); and
The EU plans to drop legal action against Philip Morris International, part of
Altria, the US tobacco and food group, in return for payments from the com-
pany totalling US$1 billion over 12 years (Financial Times, 6 April 2004, p. 18).
The EU eventually dropped its money-laundering and smuggling claims
against Philip Morris International in a $1.25 billion settlement (Financial
Times, 10 July 2004).



Company specific examples
Airlines in the European Union must pay higher compensation for lost bag-
gage, up to ‚¬1200 under the new liability limit set out in the 1999 Montreal
Convention (Financial Times, 29 June 2004);
The EU is also vowing to force mobile firms to cut roaming call charges by
70% as there was profiteering at the expense of customers according to Viviane
Reding, the media commissioner;
Insurance and banking call centres: the issues surrounding call centres are
likely to intensify as jobs move overseas from the UK and US. Capital One of
the US has already pulled out of an Indian call centre deal as it became appar-
ent that Indian workers had misled US customers with offers of unauthorised
credit. UK companies may soon follow this new trend as the business risks
become apparent;
BAA are reviewing their awarding of free car passes to MPs and MEPs valued
at £5245.20 each after the issue was raised by shareholders who were con-
cerned at concessions to politicians (Financial Times, 28 July 2004);
The Guardian claims that BAE have moved evidence of ˜covert payments to
foreign politicians™ to the legally safe haven of Switzerland;
It is said that Barclays have moved their highly profitable Barclaycard oper-
ations to Ireland to avoid disclosing how profitable it is;
GlaxoSmithKline have been ordered to hand over internal documents to
the state prosecutor in Minnesota, which is investigating whether the
Part B “ Overview of the Economic Aspects of Business Risks
238



pharmaceuticals giant colluded with other companies to prevent cheap drugs
being imported into the US (The Independent, 12 May 2004);
HBOS: the Bank of Scotland was fined £1.25 million by the industry regula-
tor for ˜particularly serious breaches™ of anti-money laundering regulations;
Jarvis shares fell 16% in value in one day after the announcement by Network
Rail as to how Jarvis had supplied them with documents that falsely certified
work as having been completed. (Financial Times, 24 October 2003);
Philip Morris agreed to pay $1.25 billion over 12 years to settle smuggling
charges brought against it by the European Union;
Powergen, one of Britain™s biggest energy producers, has been fined £700 000
by Ofgem for ˜unfairly stopping 20 000 customers™ switching provider;
Reckitt Benckiser: there are concerns over their tax havens in Ireland,
Switzerland and Costa Rica;
Ryanair: there have been numerous concerns over local government payments.
The recent EU ruling will mean the return of some of these funds. Other low
cost airlines have boycotted Ryanair™s European lobby group the European
Low Fares Airlines Association;
Thames Water (UK water supplier) was warned that it could face fines of up
to £140 million if it did not meet the leak reduction targets set by the UK
water regulator (Financial Times, 22 June 2006);
Exxon Mobil has been denied a request to have an award for $1.2 billion to
10 000 Exxon service station dealers in the US reversed. They have been
noted to overcharge dealers for fuel over 12 years. The average recovery by
the dealers is expected to be about $130 000 plus interest;
Shell Transport & Trading: US federal criminal prosecutors are to probe Shell
over their reserves (Financial Times, 18 March 2004). This has already claimed
the chairman and head of operations. The FSA are also probing the issue;
Vodafone and O2 have been accused of ˜unfair and excessive™ roaming rates
by the European Commission. Vodafone shares fell 1.9% and MMO2 lost
1.5% on the day of the news (Financial Times, 27 July 2004); and
WestJet, Canada™s biggest low cost airline, apologised to their rival Air Canada
after admitting that its executives were engaged in ˜unethical and unaccept-
able™ industrial espionage. WestJet settled for paying all Air Canada™s costs
totalling C$5.5 million (US$5 million), a C$10 million donation to a chil-
dren™s charity and C$220 million in compensation and damages (Financial
Times, 30 May 2006).



Risk management
Examples of positive programmes and projects by companies in dealing
with adverse business practices include the following:

* Johnson & Johnson have donated new barrier gel to non-profit organisa-
tion, the International Partnership for Microbicides. The sector is
increasing the general level of contributions to worthy causes;
Chapter 10 “ Corporate power, business and marketing risks 239




* GlaxoSmithKline plc was accused of attempting to block an Indian
company from making cheaper generics of an anti-AIDS drug. This
issue has since been resolved with a partnership deal. GSK have also
cut AIDS drug prices five times this from 2003 to 2004; and
* Vodafone plc has barred users from accessing child pornography websites
from their mobile phones. This avoids risks associated with their products
being used to break the Protection of Children Act (1999), under which it
is an offence to download or possess child pornography. This follows a
similar move by BT Group who has already stated that they have blocked
over 20 000 attempts to break this law (Financial Times, 23 July 2004).



Adverse marketing practices risk
Results indicate that:
Adverse marketing practices puts an average 0.4% of market value at risk for
the top 500 US and EU listed companies; and
This risk exposure has been reduced from 0.6% of market value by good risk
management techniques (the risk reduction/management factor).
This section covers all advertising and promotional activities undertaken by a
company. Examples of bad practice include:
Concealing harmful side effects of the product (e.g. cigarette advertising in
the developing world);
Advertising harmful products to children; and
Invading consumer privacy (e.g. abusing data confidentiality).
The following graph shows the adverse marketing practices risk by sector.

Marketing Practices
1.6%

1.4% PHARMACEUTICALS &

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