Car Insurance

No-one in Swaffham slept that night. Police and immigration officials moved from house to house, flushing out the ‘illegal’ ones. Some were taken from their beds, some detained at work, others let go because there weren’t enough vans. By dawn the choppers had landed, the immigration officials had left and the police had done their job. A story dissolved, never to be told, never to be printed, never to be aired. How lives change overnight!

‘The inflow is mainly from the Eastern European countries and they use “waiting area” countries like Ukraine and Russia for easy access to the West,’ says Professor Marko Bojcun, Director of the Ukraine Centre at London Metropolitan University, who has spent the last couple of years researching the east-west migration path from the former Soviet Union to Western Europe.

These are the people ‘Fortress Europe’ loves to hate, the ones the United States labels as ‘aliens’, Middle Britain sees as asylum seekers taking ‘our jobs and benefits’, and the developed world christens ‘illegal immigrants’.

My life as an illegal worker started last summer when I rang Peter, a notorious gang master in Swaffham, Norfolk, eastern England. He has command over more than 200 illegal Eastern Europeans. All I needed to do to cross the threshold into this uncharted nether world was to go there.

Peter hides out in a pub most of the time, where he occasionally also does his business. I get an intimidating reception from the people inside the pub, but quite the opposite from Peter himself. Valencia, who is Polish, guides me to my pre-arranged accommodation: 53 Station Street, a ratinfested edifice and an eyesore for the locals. Scores of dirty working boots and raincoats litter the hallway. Four or five beds to a room, bare concrete floors, the stench of urine and greasy kitchen sinks, oily cooker and corroded utensils, rusty gas pipes and soiled floors.

Many workers already occupy the place I will be calling home for the next three months. I get a bemused look from them–a single coloured skin in a stronghold of East Europeans and Russians.

Next morning in the wee hours I find myself beside a road waiting for a van to take me to the workplace. National Insurance and work permits are not an issue. Peter hasn’t even asked me for my surname. Standing on the street this cold foggy morning I feel like an illegal Mexican waiting to be hired for a day’s labour in San Diego. A van screeches to a halt. The driver pops out his head and asks me if I am Pranav. An eerie silence fills the van when I hop in. A Nepali is a surprise. No-one speaks a word to me.

The Manor Farm Ducklings Company employs a huge number of illegal workers. Today another greenhorn (me) has arrived. Flora, an administrative assistant, guides me to a room where I will slave for the next 13 hours, lifting 15-kilogram packages of Marks and Spencer ducks, stacking them in a truck. She introduces me to Marian, a Polish man who started earlier in the day. Language stands as a wall between us.

Barely two hours into the job my vision blurs, my arms ache and my legs won’t hold me up any longer. I lose consciousness and collapse inside the truck. A minute or two later I find myself held by Marian. He has dragged me further into the truck to avoid the CCTV cameras that glare at us from every corner of the factory. He gives me the thumbs up and goes back to work–at twice the speed, to compensate for the time he has lost with me. We haven’t exchanged a word yet, but I have discovered a humane bond and my idea of ‘illegal East Europeans’ is transformed. In the darkness of the cold truck, against the agonizing body ache, I weep silently–a Nepali let loose in the lowlands of England.

After 14 days of 14-hours-a-day slavery at Manor Farm Ducklings, and the total loss of my self-confidence, I get paid–a little yellow envelope containing my recompense for gutting a duck every three seconds. They have subtracted $56 a week for National Insurance contributions, $56 for a bed like a trench and $6 for the white-van ride to and from work. And then there is Peter’s $48 ’security deduction’. My wage is $136. It’s a rip-off.

Peter, one of the gang tycoons of Norfolk, is not a nice guy. If driving across rhubarb fields in a Range Rover while abusing workers at the top of his voice is all it takes for this ex-Londoner to do his job, so be it. After all, he says, when his workers do the midnight runner ‘it doesn’t mean a damn thing’–new recruits will fill the gap within hours.

No-one is allowed to break his rigid rules. He segregates us on the basis of race alone. A handful of English welfare fraudsters work for him. They travel in a different van, work comfortable seven-hour shifts and get holiday and sick pay. Sycophantic Carl, Peter’s right-hand man, makes sure the rules are properly implemented.

The day starts as early as five in the morning. It takes an hour-long van ride to reach the fields. The long summer days of June are a windfall for gang masters like Peter and Carl: a battalion of illegal workers, a gang of mean supervisors and vast fields of rhubarb to be harvested. You slave for 16 hours a day bent double, five minutes for lunch if you are lucky, abuse and threats of deportation in between.

Peter is finding it easy to command more than 200 immigrants this season. For four months the Home Office hasn’t bothered to raid. It’s a zero-sum game, and profits in six figures are imminent. Peter has good connections. The other day Cheszek parked his tax-expired car on the wrong side of the road. A police officer approached. Cheszek got away with ease when he mentioned that Peter was his ‘boss’.

The Swaffham locals do not sympathize with this. You get a pitying or hostile look even from the sales assistants in shops around the market square. Because my skin colour doesn’t look familiar to her, the lady in the movie-rental store uses sign language to tell me the price of an item. The minute you walk into the Co-op store you are under surveillance. Pop into the pub and a creepy hush descends. Adolescents abuse you in the street.

Three weeks later Peter moves me over to Norfolk Farm Produce, a nasty little vegetable-processing factory in Beeston, King’s Lynn. Hostile folks, unbearable working conditions–but shorter shifts. Peas, carrots and potatoes efficiently packed in cans for supermarket chains, from Asda to Safeway and Sainsbury.

Work starts with the sound of a siren. Another eternity of labour in a Great British factory begins. Twelve hours standing, with 40 minutes break in between. Anyone British can order a foreign worker about. A workplace can’t come any worse than this, I think to myself that night.

We have a Home Office scare. Some people just run away to hide in a nearby wood. Others wait for orders from Peter. We are herded into white vans and ferried to a safer place–Safeway’s car park in Swaffham. Peter and his cronies come along in their Range Rovers. He makes a few phone calls from his mobile. After three hours in the scorching heat we return to the hellhole we call home.

Having worked for three months and earned $1,568, I leave. My new employers are a Lithuanian couple. Wirgis has masked his identity and calls himself ‘Chris’, his wife Bejruta ‘Kelly’. They have a great vision–to amass as much money as they can by trading in humans, then drift on to Canada.

Serene Cambridge. Scenic countryside. Amicable social setting. No racial tensions. Vibrant nightlife. Students from around the globe have come here to get their slice of the world pie. But somewhere close by, in Chittering, is a place where grief and misery roll along with the potatoes on the grading-belt of a factory–The Produce Connection.

It is a sunny day. Nothing to hide. But the glass-walled factory veils a dirty secret, as dreary as a Chinese coal mine, as grim as a Bombay slum. Young white faces turn brown in the pervasive dust. Standing at a grader for 16 hours, your legs go numb, your hands go rigid and there’s an excruciating pain in your neck.

Among the 50-odd doomed workers in this factory, one speaks reasonable English. Yveta, a Latvian woman, is an intermediary between Don, the manager, and the Russian-speaking workers. She makes life agony for them. Today it’s Andrez’s turn. He manages to bark ‘You bitch!’ at Yveta before losing his job. Elated by his new-found courage, he strolls across the yard to the van–where he waits for another eight hours before being driven away.

I received a call from a business systems analyst one afternoon. He said: “We’re in negotiations with a prospective new technology vendor. But the process is going too easily. The vendor is conceding every single negotiating point. Could you review the financial information on the company?” I retrieved the company’s statements from the Internet. The company was losing money, it was insolvent, and its accountants had just issued a “going concern” qualification. I called the systems analyst and conveyed these facts. “Is that bad?” he asked. I again tried stating the information in financial terms. I ended up telling him: “If we pulled up to the company’s headquarters tomorrow, I wouldn’t be surprised to see the lights out and the doors locked.”
Several years ago, vendor due diligence primarily involved conducting background checks, nailing down operational requirements, and negotiating contract language. While evaluating an armored-car company or check-printing vendor once seemed arduous, today’s technology risk managers face such nettlesome questions as these:

* If the bank’s primary telecommunications company declares bankruptcy today, will the phones ring tomorrow?

* If the Web-hosting vendor cuts back on customer support personnel, will the bank’s Web site be down for hours rather than minutes?

* How would the bank know if its transactions-processing vendor were sold to management of questionable character?

Even if a vendor is in poor shape, there may still be compelling business reasons to stay put rather than seek alternative solutions. Shifting front Crafty Crocodile Software to Big Boa Constrictor Systems can take a bite out of your budget as you leave your old vendor and squeeze your resources while installing a new one. Like the man who journeyed the world searching for romance only to return home and fall in love with the girl next door, sometimes the best course of action may be to sit and do nothing.

Indeed, many robust and cutting-edge solutions come from vendors who lack a long track record or have weak financial statements. As one vendor recently lamented:

“I am sorry to hear that your bank has decided not to take advantage of our revolutionary new product. I think that it is a grave mistake to eliminate a vendor from consideration based on a due-diligence process that appears to be unduly focused on number crunching as opposed to seeking opportunity for your bank to gain a competitive advantage.”

Although a less formidable technology vendor may require a smaller contract with a closer maturity date, a stronger vendor may merit a larger, longer-term contract. Moreover, some vendors have capitalized on their financial and operational strength: “Sign a three-year deal rather than an annually renewable contract and save $500,000!”

Evaluating a vendor’s risk profile is troublesome because not all of the risks are financial. National banks are old hands at providing the Office of the Comptroller of the Currency with many indications of direct credit risk to borrowers (risk ratings, repayment histories, independent credit reviews, etc.), but they may be less experienced when it comes to evaluating third parties. In addition to credit risk, the OCC asks banks to consider strategic, reputation, compliance, transaction, and other risks, (1)

While encouraging national banks to use technology in a safe and sound manner, the OCC has stepped up its third-party risk assessment. Recently caught short, one national bank had to devote extensive manpower and financial resources to vendor review. As fate would have it, the solution involved the help of a new database from a technology vendor.

Ironically, while financial institutions are increasingly relying on technology, they also are migrating to progressively more outsourced solutions. As a result, banks are delegating control of the very functions that are becoming more important to their success! Just because the henhouse now has a digital gate doesn’t make the farmer any less responsible when the fox swipes the automatic opener.

Developing an Effective Vendor Evaluation Solution

What’s needed is a consistent means of identifying, prioritizing, and administering technology vendor risk. Vendors representing higher risk should be tracked more closely. And the solution should be dynamic. An effective vendor risk management system will:

* Rely on teamwork from various functional areas of the bank.

* Determine materiality of the vendor risk.

* Guide evaluation of a vendor’s track record.

* Incorporate financial analysis of the proposed vendor.

* Obtain proper legal review of vendor contracts.

* Integrate existing vendors into the system.

* Establish guidelines for tracking vendors over time.

The Teamwork Solution

Technology solutions are now so pervasive that they require input from throughout the institution. Traditionally, evaluation of new bank products and services included input from audit, compliance, security, privacy, and marketing. Clearly, the best approach to evaluating vendor risk has always been multidisciplinary. But in addition to these traditional areas, technology vendor risk analysis also depends heavily on technology, business systems, operations, finance, and legal review.

The task of overseeing all of these components is often assigned to an overwhelmed line-of-business (LOB) manager, who has a multitude of other business objectives competing for time and attention. When the loan officer is the captain of a customer relationship, the bank provides a stall, various mates, and deckhands to help operate the vessel. But the LOB manager in a vendor relationship may feel like he or she is at the helm of a ghost ship.

While several areas need extensive consultation at the beginning of the contract, there also should be a team dedicated to vendor risk assessment throughout the life of the contract. At a minimum, the team should include the LOB manager, a business systems analyst, the technology and operations consultant, a financial analyst, and a member of the legal staff.

An important benefit of the team approach is that it provides balance to the decision-making process. The team can reconcile conflicting priorities among the business needs for a product or service, the technology/operational hurdles, and any background/financial/legal obstacles.

Identifying Materiality

The bank should make a concerted effort to identify vendor relationships that carry a higher degree of materiality, which represents the degree of risk inherent in a vendor relationship. Here are several criteria that result in higher materiality:

* The contract has initial or ongoing credit risk exceeding a specific dollar level.

* The bank relies on a vendor as a fiduciary.

* The product or service is mission critical to the bank’s day-to-day operations.

* No readily available substitute exists if the product or service becomes unavailable.

* The bank lacks internal resources to manage the product or service if the vendor fails.

* The vendor’s financial or operational failure represents a direct risk to the bank’s reputation.

* The vendor has access to the bank’s confidential information.

* The bank permits the vendor to offer products or services directly to the bank’s customers.

* A critical part of managing the product or service occurs outside bank premises.

The highest level of risk occurs when the bank enters into a material outsourcing arrangement for information services, transactions processing, or settlement activity. These activities involve a higher inherent risk to begin with, but they also occur largely outside of the bank’s direct control. (2)

An example of an outsourced technology arrangement shared among many institutions is the Federal Reserve Bank (for check clearing) or VISA and MasterCard (for processing credit-card transactions). Fortunately, realizing that they pose a high risk to their customers, these technology vendors are generally overwhelmingly solid; furthermore, there are usually relatively few of them.

Track Record Evaluation

For more material contracts, many banks begin vendor evaluation with a field of several candidates. Although the complexity of the task increases with multiple candidates, the final decision is more robust. It’s hard to know whether a four-minute mile is good until you compare how your vendor runs with others on the same track. As part of the evaluation of the vendor’s track record, the bank should include the following criteria:

* Conduct an analysis of the vendor’s business franchise. How long has the company been in business? Who are the vendor’s main competitors? What is the company’s market share?

* Check the vendor’s business reputation, complaints, and litigation. Does a reference and background check with the vendor’s existing customers indicate any problems?

* Review qualifications, backgrounds, and the reputation of the vendor’s management.

* Establish the vendor’s internal controls, audit, business resumption, continuity, recovery, and contingency plans. Review the vendor’s insurance coverage.

* Review the vendor’s experience in implementing and supporting the proposed product or service. Are there other similar-sized financial institutions as customers?

* Look at the significance of the bank’s contract to the vendor. Does the proposed contract represent a large par of the vendor’s revenues or income?

* Determine whether the vendor has any key subcontractors or enabling counterparties. If the proposed contract is large or material, conduct a check on these additional entities as well.

* Look at the service and support commitment. Does the vendor dedicate a sufficient level of resources to meet the ongoing needs of the bank?

* Evaluate research and development expenditures. Is the vendor’s current research-and development budget large enough to keep the bank’s technology current?

While answering many of the preceding questions is most important before entering a vendor relationship, the bank should revisit this checklist annually for more material contracts. Outsourced technology arrangements should clearly receive the highest level of regular scrutiny. However, as mentioned above, these vendors are generally very strong and the regular review can be conducted in a relatively short time.

Financial Evaluation

What would you think about a vendor who said the following?

By declaring bankruptcy, the company is in the process of reorganizing its finances. The news media will speculate to no end about whether or not we will survive. Regardless of what the financial press and our competitors say, the company has a proud past and we believe that it has a bright future. The company’s new management is in the process of addressing key constituencies, including our employees, supplier’s and customers….

One of the biggest risks in technology vendor relationships is financial stability. Several years ago, it seemed that a telecommunications carrier declared bankruptcy every day. Sometimes, in particularly volatile areas of technology, it seems tough to identify even one vendor with financial staying power.

Financial evaluation of vendor relationships often mirrors the bank’s traditional credit-analysis process. In a credit analysis, relationship size, terms of the specific loan transaction, and complexity of the borrower’s financial statement direct the underwriting. However, in a vendor financial analysis, materiality governs the required review. Generally, the more material the contract, the greater the need for more extensive (and more frequent) financial analysis. Following are some of the criteria that should be used in evaluating a vendor’s financial condition:

* Review recent pronouncements front the company’s management. Has the company had any recent earnings warnings? Does it seem that the company has provided any surprises related to its accounting procedures? One of the biggest areas of adverse surprises was revenue recognition. Are sales being converted to cash or are receivable balances rising?

* If publicly traded bond ratings are available, obtain them from Moody’s, Standard & Poor’s, and Fitch. Generally, a senior unsecured debt rating is preferable for a vendor analysis, since the vendor contract usually has no preferential terms or security. Pull a D&B or other commercial credit report on the proposed vendor.

* Update research on the industry.

* Analyze the vendor’s most recent financial statements. What are the vendor’s income statement and cash flow trends? How consistent has the company’s operating performance been in the past?

* Review the company’s balance sheet. Some technology vendors build fortress-style balance sheets to offset the volatility inherent in their industries. Does it appear that the company has enough financial staying power for the length of the contract?

* Evaluate the vendor’s forward commitments. Often, technology vendors have a healthy slug of deferred revenues or maintenance liabilities. Does the company appear to have the operating consistency and liquidity to meet its upcoming commitments?

A company in financial distress is not one to be avoided altogether. However, in attempting to right the ship, the management of a beleaguered vendor often takes steps that have adverse consequences for the bank. If the vendor significantly cuts its staff, the bank faces the risk of a more prolonged disruption in service than is desirable. The bank also faces the possibility that resolving even routine customer service matters will take longer and require more manpower. Often a company in trouble will greatly reduce capital expenditures, resulting in the risk that a competitor could develop better technology.

A company reorganizing in bankruptcy may ironically have better service quality than before: If service quality slips, the company becomes a candidate for liquidation. Nevertheless, a vendor in bankruptcy poses significantly increased risks: Even a company that successfully reorganizes may shed assets or reorient its service delivery.

For these reasons, in cases of financial distress, it is often appropriate to consider substitute vendors. At the very least, once a vendor in financial distress is identified, it is imperative that the bank develops a financial tracking system and an operational contingency plan.

Legal Review

The importance of proper legal review cannot be emphasized enough. Generally, the bank will have an established review system for all contracts, based on various criteria, including dollar size. The last pace of change in technology may warrant legal review if the term of the contract exceeds a relatively short length of time. In addition, certain criteria that raise materiality also increase legal risk.