Businesses must brace themselves for a storm of investigations and litigation in the wake of COVID-19.
COVID-19 has created an environment where employees and other company stakeholders are more likely to engage in various forms of misconduct. Fraudulently boosting financial results due to pressure to meet market expectations and internal targets, misappropriation of corporate assets, and gaps in companies’ internal controls are just a few examples of the heightened issues due to COVID-19. In fact, whistleblower activity is up globally by 35%, and history supports there will be increased investigations as during the 2008 financial crisis complex US enforcement actions increased by 60%.
of business leaders surveyed were not involved in the legal processes at their organisation (compared to just 28% for operations and 29% for strategy)
of business leaders expect to be victims of fraud in 2020
of business leaders surveyed said they would likely be involved in an investigation, compared to 18% for political disruption and 19% for trade restrictions
COVID-19 has also opened a Pandora’s box of disputes – the inevitable consequence of insolvency issues, restructuring and supply chain disruptions. More than 440 COVID-related class actions have been filed in the US since March. Force majeure clauses are being invoked worldwide: in February alone, such clauses were invoked for over 3,000 contracts (valued at $38bn) in China. The surge in legal action is certain to continue around the world.
The reasons are easy to understand. Companies are seeking to reduce exposure and mitigate damages through amendments to terms and pricing across various contract types, from securities and M&A to employment, fraud and insolvency. Financial pressures are forcing businesses to attempt to escape contractual obligations with some parties and seek reassurance (or damages) from others. Deadlines, supply conditions, fines, penalties and termination possibilities will all be contested. Even pre-existing disputes will be disrupted in this increasingly hostile environment: previously settled obligations may become impossible to fulfil, and remediation efforts rendered insufficient.
Businesses will not only face intense scrutiny from governments and regulators, but also the dual risk of direct enforcement action, and legal action from third parties (e.g. class-action lawsuits) as pre- and post-COVID misconduct is exposed.
Understandably, few businesses anticipated these issues. In January, FTI’s Resilience BarometerTM found fewer than one in five companies expecting to be litigated against in 2020. Only 9% of business leaders anticipated investigation from regulatory bodies. Political disruption and trade restrictions preoccupied twice as many respondents as regulatory investigations.
The world has now changed. Fortunately, with prompt action, lack of preparation can in many cases be remedied.