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Risk Assessment of an Investment Transaction with a Related Party
Risk Assessment of an Investment Transaction with a Related Party
Risk Assessment of an Investment Transaction with a Related Party

Risk Assessment of an Investment Transaction with a Related Party

One of the governance rules is to apply sound systems of risk management and internal audit, as one of the tools to apply this rule is to monitor and analyze the risks arising out of any transactions between the Company and a related party.

What are the regulatory bodies that obligated business entities to assess risks of investment transaction with related party?

Article 6.3 of Module 15 “Corporate Governance” of the Executive Regulations of Law No. 7 of 2010 regarding the Establishment of Capital Markets Authority and Regulation of Securities Activity, as amended, sets forth that:

“The company organizational structure as approved by the Board of Directors shall have an independent risk management department/ office/ unit, which shall primarily measure, monitor, and mitigate all types of risks encountered by the company in accordance with the following:

  1. Review transactions to be made by the company with the Related Parties and provide proper recommendations thereof to the Board of Directors”.

Where Capital Markets Authority has authorized the listed and licensed companies to engage with third parties to execute all or part of the risk management tasks; accordingly the Company is entitled to engage with a consulting firm specialized in risk management to assess the risks arising out of any transactions with related parties.

What is a related party?

Pursuant to Module 1 of the Executive Regulations of Law No. 7 of 2010 regarding the establishment of the capital markets authority and regulating securities activities and its amendments, Capital Markets Authority has defined “related parties” as below:
A party is considered as having a relationship with the company in any of the following cases:

  1. If he/she has direct or indirect control over the company.

  2. If he/she is an affiliated or associated company.

  3. If he/she is a member in the same group in which the company is a member.

  4. If he/she is a member in the company’s Board of Directors or in the company’s executive management.

  5. If he/she has a relative relationship (till the second degree) with a person referred to in items 1 or 4.

  6. If the related party is a company under the control or the joint control or the material influence of the persons referred to in items 4 or 5 thorough their power of voting, whether directly or indirectly.

In identifying the related parties, the provisions of the law, the executive bylaw, International Accounting Standard (24) as amended should be taken in consideration.

Why some companies engage a consultant to assess risks of investment transaction with related party?

Some companies engage with a consultant to assess risks of investment transaction with related party for the following reasons:

  1. In case of engaging with a third party to execute the risk management tasks as a whole.

  2. To ensure independence in terms of preparation of this report before reporting to the board.

  3. Availability of diversified databases and expertise to assess risks of investment transaction with related party including, but not limited to, assessing geopolitical risks, currency risks, concentration risks, credit risks and operational risks.

  4. Timeliness and accuracy in preparing the report.

What is the added value from risk assessment of an investment transaction with a related party business entities?

  1. Compliance with laws, regulations, resolutions, and instructions issued by regulatory authorities.

  2. Avoiding risks arising out of transaction with related party and ensuring that it is within the risk appetite approved by the board.

  3. Availability of transparency in making decisions.

  4. Availability of reports that support the decisions taken by the board.

  5. Assisting in performance improvement.

Why Baker Tilly to provide this service?

Baker Tilly is distinguished by specialist professional experience and offers the following characteristics carrying added values to our clients as follows:

  • A global consulting firm operating in the State of Kuwait
  • Baker Tilly’s local experience under international umbrella
  • Professional bilingual team with in-depth experience in providing risk management services
  • Baker Tilly’s experience in the matrix of regulatory instructions in the State of Kuwait related to risk assessment of an investment transaction with a related party
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