It IPOed on the US stock market in 2019 and reached a valu. As a commercial firm, EYs revenue depends on its relationships with its clients, which may create a conflict of interest the clients interests override public interest. Luckin Coffee store in Shanghai on June 1, 2021, managed by one staff. Established in October 2017, this . (L.K. The fraud began in April 2019, a month before Luckin, the largest coffee chain in China, made its public market debut in the United States. Jenny Zhiya Qian at Luckin's IPO - (Forbes)), employees were The scandal could have a profound and far-reaching impact and offers lessons for the business world and beyond. Luckin Coffee, China's coffee chain and rival to Starbucks, was involved in rampant fraudulent accounting practices. , Nikkei montage/Source photo by Yuki Kohara, The Luckin scandal: fake sales, power struggles and a 'broken model', HENNY SENDER, Nikkei Asian Review columnist, Luckin first casualty as US takes aim at China transparency, Death of the coffee king: power and money in corporate India, In Depth: Investors sip bitter taste of Luckin Coffee scandal, Trump threatens to cut 'whole relationship' with China, China Inc. rethinks US listings as scrutiny tightens, Trump adopts wrong response to China's tech threat, China's STAR Market to ease merger rules for tech companies, SoftBank and Son search for path out of 'Coronavirus Valley', How Trump's China obsession undermined the coronavirus effort, Son Heung-min: The rise of Asia's biggest football star, 'Fear for our families': A year of Putin's war through the eyes of Ukrainians, Kazuo Ueda: Next BOJ chief inherits world's toughest central bank job. The company's CEO had to resign in light of the accounting fraud, which involved fabricating the transactions in 2019, the same year it . The Big Sell | Luckin is not dead. The company's shares were delisted from the Nasdaq on Monday. [16]However, EY wrote a private letter to a number of investment banks stating it did not have an issue with the financial performance of Luckin in the first three quarters of 2019. "The problem is it sounds good, but it's a really slow process," said Stevenson-Yang. Public issuers who access our markets, regardless of where they are located, must not provide false or misleading information to investors, said Stephanie Avakian, Director of the SECs Division of Enforcement. France-Presse, However, these vendors did not provide any services or products to Luckin in return. Monica, Paul R. Chinese Coffee Company Luckin Will Be Delisted after This could be a result of prioritizing short-term profits and overlooking behavioural pitfalls. Zhengyao] Lu.. But are these incentives worth packing a moving van? EYs letter raised a few questions. Luckin Coffee Inc. was the last Chinese consumer brand that took U.S. stock markets by storm. Chinese coffee chain super-brand Luckin Coffee has been in the spotlight the past week after the company revealed in an SEC filing that it has undertaken an internal investigation into an alleged . Luckin Coffee serves coffee for about $3.50 a cup, while an average cup of coffee at Starbucks is $4.80. Without admitting or denying the allegations, Luckin has agreed to a settlement, subject to court approval, that includes permanent injunctions and the payment of a $180 million penalty. Weizent. To fulfil a contractual obligation, the seller has the responsibility to disclose information thoroughly and accurately. For a full comparison of Standard and Premium Digital, click here. The Awards are an annual recognition of the influential work carried out by think tanks across the globe. As of the end of September the coffee chain had 3,680 stores, according to its third quarter 2019 earnings release. Shuli Ren. Luckin opened 5,000 locations in Beijing, Shanghai, and other cities across China and last year reported sales of as much as $200 million a quarter. China's second accounting scandal in less than a week is underscoring concern over . That represents an almost six-fold increase since June 2018. Applying virtue ethics: the Rajat Gupta case, https://investor.luckincoffee.com/news-releases/news-release-details/luckin-coffee-announces-smart-unmanned-retail-strategy-bringing, https://www.sec.gov/news/press-release/2020-319>, https://sevenpillarsinstitute.org/profit-ethics-short-selling-case-muddy-waters/, https://www.qsrmagazine.com/fast-food/luckin-coffee-faces-fraud-allegations-anonymous-report, https://drive.google.com/file/d/1LKOYMpXVo1ssbWQx8j4G3-strg6mpQ7F/view, https://www.reuters.com/article/us-luckin-coffee-stock-citron-idUSKBN1ZY2EK, https://investor.luckincoffee.com/node/6391/html, https://www.globenewswire.com/news-release/2020/06/19/2050625/0/en/Luckin-Coffee-Received-Notification-from-Mr-Tianruo-Pu-of-his-Resignation-as-an-Independent-Director.html, https://www.forbes.com/sites/russellflannery/2020/04/03/responsibility-for-luckin-coffees-accounting-debacle-is-far-and-wide/?sh=a7be566104e4, http://www.chinabevnews.com/2020/07/ernst-young-says-it-isnt-responsible.html, https://www.nasdaq.com/market-activity/ipos/overview?dealId=1083391-89499, https://www.caixinglobal.com/2020-05-20/luckin-explained-how-did-scandal-plagued-coffee-highflyer-get-into-such-hot-water-101556560.html, https://www.wsj.com/articles/behind-the-fall-of-chinas-luckin-coffee-a-network-of-fake-buyers-and-a-fictitious-employee-11590682336, https://investor.luckincoffee.com/news-releases/news-release-details/luckin-announces-substantial-completion-internal-investigation, https://www.qsrmagazine.com/finance/luckin-coffee-agrees-pay-180-million-fine-fraud-scandal, https://www.sec.gov/news/press-release/2020-319, https://www.capitalwatch.com/article-5769-1.html, https://asia.nikkei.com/Opinion/What-the-Wirecard-and-Luckin-Coffee-scandals-can-teach-Asia-s-boards, https://crm.marcumbp.com/china-accounting-insights/who-is-responsible-for-preventing-frauds, https://sevenpillarsinstitute.org/glossary/conflict-of-interest/. The company also said it was "actively co-operating" with the probe, and that its stores remained open across the country. 6LinkedIn 8 Email Updates. Video, Rescuers search wreckage of deadly Greece train crash, Record numbers of guide dog volunteers after BBC story. able to fake these sales, by purchasing tens of millions of vouchers that If youd like to retain your premium access and save 20%, you can opt to pay annually at the end of the trial. organisation [31]US Securities and Exchange Commission, Luckin Coffee Agrees to Pay $180 Million Penalty to Settle Accounting Fraud Charges, 2020-319, 16 December 2020, Press Release < https://www.sec.gov/news/press-release/2020-319>. Luckin Coffee Shows How Risky Chinese IPOs Can Be, but Investors Are Luckin Coffee [2]. Luckin Coffee confirmed on its official Weibo account that it was being inspected by the State Administration for Market Regulation (SAMR). risks and opportunities. The first United States listed coffee retailer based in China, Luckin made roughly USD600 million from investors. Several parties are responsible for the accounting scandal and fraud at Luckin. The Nasdaq listing had been one of China's few successful American stock market debuts of 2019. China-based Luckin Coffee has agreed to a $180 million penalty as part of a settlement with the U.S. Securities and Exchange Commission to resolve charges related to the coffee chain's inflated-sales scandal. 2023 BBC. document.getElementById( "ak_js_1" ).setAttribute( "value", ( new Date() ).getTime() ); 2023 Seven Pillars Institute. Internal auditors are the first defensive line in the prevention of financial misstatement. These two companies have one other thing in common beyond their recent involvement in high profile accounting scandals - it turns out that both companies' auditor was Ernst & Young, as was the case with several other companies involved in recent . Overseas stock markets - and those in Hong Kong - can often turn a blind eye to . It conducts research about financial fraud. In April 2020, a financial scandal plagued a Chinese firm called Luckin Coffee, a coffee chain headquartered in Xiamen, a coastal city in Fujian Province. Video, Record numbers of guide dog volunteers after BBC story, Ed Sheeran says wife developed tumour in pregnancy, Covid origin likely China lab incident - FBI chief, Ruling party wins Nigeria's presidential election, Uranium particles enriched to 83.7% found in Iran, Finland starts construction of Russia border fence, Daily walk prevents one in 10 early deaths - study, Twitter goes down with users unable to view tweets, Bieber cancels remaining Justice world tour dates, Pictures show devastation after Greece train disaster. by Emma Lee and Eliza Gkritsi Jun 21, 2021. Integrity, objectivity, and competency are the core elements of the code of ethics among internal auditors. The case is being supervised by Laura Josephs and Ms. Welshhans. Luckin also reported its revenue reached USD71.3 million in the first quarter of 2019 more than half of the total revenue for the whole of 2018. The case deals with a RMB 2.2bn accounting fraud at Luckin Coffee Inc. Change the plan you will roll onto at any time during your trial by visiting the Settings & Account section. Sign up for free newsletters and get more CNBC delivered to your inbox. 2020 should have been a massive . Some Luckin employees switched the source data from the actual business operations database to the fabricated database. In Luckins case, several moral agents failed to fulfil their moral responsibilities, which led to the accounting scandal and fraud. Luckin Coffee DD. Chinese Starbucks Competitor's IPO Briefly Makes Its Female Founder A Billionaire.. investors. It is not a guarantee that financial performance is free of error. [17]This letter was issued before the 2019 financial statements were audited. Luckin is a beverage retailer in China selling mainly coffee and tea. China corporate governance in doubt after two accounting scandals in week. The Beijing-based company, which is publicly traded in the U.S. and which filed for bankruptcy here, too, has new investors and says it is better positioned for financial stability. Then, discuss a recommendation you would suggest about how the ethical dilemma should be resolved or should have been resolved, despite the outcome reported. personalising content and ads, providing social media features and to Luckin Coffee is a Chinese premium . Luckin Coffee Says Independent Probe into Sales Fraud Is In May 2019, within 18 months of Luckins grand opening, the company launched its IPO of American Depositary Shares in the United States and listed on Nasdaq. Luckin -- Starbucks' rival in China -- had boosted transactions last year through fake coupons by 2.25 billion yuan ($330 million) and inflated . On April 2, Luckin said that Chief Operating Officer Jian Liu and some subordinates might have faked more than $300 million in revenue, more than a quarter's worth of reported sales. Luckins share price increased 100% from the IPO price. Last week, the Chinese coffee chain Luckin Coffee declared bankruptcy in the U.S., hoping to hold off a bunch of lawsuits as it seeks to reorganize. However, the purpose of due diligence is to express the auditors opinion of reasonable assurance. You may change or cancel your subscription or trial at any time online. The firm's share were suspended from trade on 7 April. Expert insights, analysis and smart data help you cut through the noise to spot trends, Analyst. CNBC, CNBC, 7 July 2020, www.cnbc.com/2020/07/06/investing-fraud-at-china-luckin-coffee-fraud-case-warning-for-investors.html. [29]Luckin Coffee, Luckin Announces the Substantial Completion of the Internal Investigation, 1 July 2020 < https://investor.luckincoffee.com/news-releases/news-release-details/luckin-announces-substantial-completion-internal-investigation>. Integrity is an essential element of financial ethics and its lack affects the trust between investors and senior management. The firm's shares slumped this month after it revealed that it had uncovered $310m (250m) in fake transactions. [30]Ben Coley, Luckin Coffee Agrees to Pay $180 Million Fine for Fraud Scandal, QSR, 17 December 2020 . 1 Luckin Coffee Inc. Code of Business Conduct and Ethics Adopted April 16, 2019 Amended April 12, 2022 Introduction This Code of Business Conduct and Ethics (the "Code") has been adopted by our Board of Directors (the "Board") and summarizes the standards that must guide our actions.Although they cover a wide The scandal and inaccurate representation of the company caused the company stock to fall from $79.73 a share in June 2020 to $20.74 in January 2021. External auditors should have been more proactive in raising red flags regarding the companys misconduct, as well as avoided guaranteeing financial performance to other parties until the firm had conducted its due diligence. Luckins finance department could only access the fabricated database and thus failed to notice the abnormal transactions. After opening its first Beijing and Shanghai stores in January 2018, Luckin rapidly expanded by establishing 4,507 stores in the following two years. WASHINGTON (BLOOMBERG) - Luckin Coffee's collapse from a stunning accounting scandal has prompted a stiff price tag from US regulators: US$180 million (S$239 million . EY failed to act ethically by not reporting the potential fraud to the regulators, and instead serving the interests of the client. Furthermore, in order to ensure the launch of the new series of coffee in the second half of 2022, Luckin will purchase more than 2.5 million tons of Hambella beans. For example, Luckin allegedly materially overstated its reported revenue by approximately 28% for the period ending June 30, 2019, and by 45% for the period ending Sept. 30, 2019, in its publicly disclosed financial statements. Haters gonna hate. EY denied any responsibility in the scandal. ), a US-listed Chinese company, which led to a steep fall in its share price by more than 80% in April 2020. It was revealed that the short selling report released by Muddy Waters was from Snow Lake Capital, a hedge fund based in Hong Kong ( Li et al., 2020 ). to learn how you can update your cookie settings. The SEC has the authority to bring a civil action against an individual or company and impose civil penalties. Luckin said an investigation had found that fabricated sales from the second quarter of last year to the fourth quarter amounted to about 40% of its estimated annual sales. Nikkei Inc. No reproduction without permission. Being . Seven Pillars Institutes Financial Ethics Training Video Series: Ethics in Finance is Good! According to U.S regulators, the unicorn startup coffee chain had internationally and materially overstated its revenues in 2019 and understated its net loss (Peng, 2020). Jenny Zhiya Qian, former COO Jian Liu, co-founder and chairman Charles Zhengyao, Just Not Listening. MarketWatch, MarketWatch, 20 May 2020, www.marketwatch.com/story/chinese-ipos-are-risky-but-theyre-not-going-away-anytime-soon-2020-05-12. There is doubt regarding whether the directors questioned Luckins aggressive plan or its rapid growth in the market share of coffee in China. China's embattled coffee delivery startup Luckin has reached a settlement with the U.S. Securities and Exchange Commission, agreeing to pay a $180 million penalty to . Chinese Coffee Chain's Scandal Renews U.S. Calls Muddy Waters is an investment research firm based in the US. With a deal like buy-two-get-one-free, a cup of coffee costs about $2.50. [21]They then redeemed the coupons and created fake orders, thereby intentionally and dishonestly increasing sales figures. Securities and Exchange Commission (SEC) SEC is a federal government regulatory agency that oversees securities markets to ensure accountability, transparency, and fair financial transactions. Because there will be an app, the startup can call itself a tech company and boast about being a disruptive force. Selina, and Campbell, Matthew. For the several decades, the researches maturely, integrally, implicate methods for identifying frauds through data and managements. The members of Luckins former audit committees, Tianruo Pu and Sean Shao, resigned from the board in June 2020. Luckin Coffee Inc. BEIJING, April 14, 2022 (GLOBE NEWSWIRE) -- Luckin Coffee Inc. ("Luckin Coffee" or the "Company") (OTC: LKNCY) today announced that it has filed its annual report on . 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How a Chinese tech darling went from startup wonder to market pariah. The Nasdaq listing raised $561 million. But this company, in my opinion, has a future regardless of past fraudulent issues. Indeed, some of Luckins management and employees were aware of the schemes and the false accounting. Twelve employees who worked with the CEO and COO involved in the three schemes were fired, and by July 2020, Luckins CEO, Jenny Zhiya Qian, was fired. SEC is a federal government regulatory agency that oversees securities markets to ensure accountability, transparency, and fair financial transactions. Luckins former COO, Jian Liu, resigned in April 2020, admitting he had overstated the companys revenue. Established in October 2017, this high-profile coffee maker advertised itself as the Chinese challenger of Starbucks and soon attracted generous venture capital investment (Yang and Lv, 2019). While there are challenges in our ability to effectively hold foreign issuers and their officers and directors accountable to the same extent as U.S. issuers and persons, we will continue to use all our available resources to protect investors when foreign issuers violate the federal securities laws., The SEC's complaint alleges that Luckins disclosures to investors about its revenues were false, said Carolyn M. Welshhans, Associate Director of the SECs Division of Enforcement. [6]Muddy Waters publicly posted this report to its Twitter account and did not indicate how it obtained the anonymous report. The company knew its financial statement and records were misleading and deceptive. 'Substantially' Complete. CNBC, CNBC, 1 July 2020, www.cnbc.com/2020/07/01/luckin-coffee-says-probe-into-sales-fraud-is-substantially-complete.html. 2020-12-17T19:44:00Z. This payment may be offset by certain payments Luckin makes to its security holders in connection with its provisional liquidation proceeding in the Cayman Islands. To avoid structural conflict of interest and improve regulatory oversight, separating audit practices from other business units might encourage auditors to act independently. As a result, Luckin's closing price went down to $32.49, a 10% decline from the previous closing of $36.40. Luckin Coffee, iQIYI fraud allegations point to wider China problem By Jaclyn Jaeger 2020-04-09T18:24:00 Scathing reports against China-based Luckin Coffee and iQIYI both alleging fabricated revenues are the latest examples of a much broader accounting and auditing problem in the United States. 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Embattled Luckin Coffee Inc. has reported a net loss of 5.6 billion yuan ($866 million) for 2020, widening by 77% from the company's 3.1 billion yuan shortfall the year before.. Revenue jumped one-third to 4 billion yuan, on the back of its products' increased average prices, the company said in its 2020 annual results released on Tuesday. Three core elements led to fraud in Luckins case: (1) internal pressure to reach unrealistic sales targets through coupon sales and redemption, (2) reckless company management creating the opportunity for fraud, and (3) rationalising it was acceptable to fabricate financial statements to meet targets. and Chinese companies in general. [21]Case Securities and Exchange Commission vs Luckin Coffee, Inc., 1:20-cv-10631, United States District Court Southern District of New York, 16 December 2020. . The SECs investigation is continuing and being conducted by Kathleen McDermott, Michael Brennan, Lory Stone, and Janet Yang, with assistance from Melissa Armstrong and Jan Folena. April 22The Chinese and international media widely covered the company's April 2 First investor lawsuit seeking compensation for losses caused by In Luckins case, the share price increased because of overstated revenue and expenses. RepRisk categorizes Luckin Coffee as very high risk (Peak RRI 73 in April 2020). Customers need to download an app to order and pay for drinks online. CEO VideoRescuers search wreckage of deadly Greece train crash, Blackpink lead top stars back on the road in Asia, 'Wales is in England' gaffe sparks TikToker's trip, Ukraine war casts shadow over India's G20 ambitions, Record numbers of guide dog volunteers after BBC story. After raising almost US$600 million in an initial public offering in the United States last May and another . Embattled Chinese chain Luckin Coffee is among a raft of 45 companies hit with a combined fine of nearly $9 million over a scandal involving false sales figures, China's market regulator said Tuesday. [14]However, another database comprising the fabricated transactions was used to prepare the false financial statements. Trial at any time online fabricated transactions was used to prepare the false financial statements [ 14 ],. In my opinion, has a future regardless of past fraudulent issues opening its first Beijing and Shanghai in! The US and created fake orders, thereby intentionally and dishonestly increasing sales figures to learn how you update! Series: ethics in finance is good content and ads, providing social features. Tianruo Pu and Sean Shao, resigned in April 2020 ) that represents an almost six-fold increase since 2018!, www.marketwatch.com/story/chinese-ipos-are-risky-but-theyre-not-going-away-anytime-soon-2020-05-12 fraud to luckin coffee scandal ethical issues fabricated database and thus failed to notice the transactions... To your inbox you cut through the noise to spot trends,.! And fraud, click here $ 310m ( 250m ) in fake transactions the country and. Ads, providing social media features and to Luckin in return debuts 2019. To ensure accountability, transparency, and that its stores remained open across the country action! Whether the directors questioned Luckins aggressive plan or its rapid growth in the market of. End of September the Coffee chain and rival to Starbucks, was involved in rampant accounting! Delivered to your inbox learn how you can update your cookie settings financial! Being inspected by the State Administration for market Regulation ( SAMR ), has future... To learn how you can update your cookie settings June 2020 took U.S. stock markets - those... Twitter account and did not provide any services or products to Luckin Coffee a. Premium Digital, click here integrally, implicate methods for identifying frauds through and! Up for free newsletters and get more CNBC delivered to your inbox to market pariah confirmed..., separating audit practices from other business units might encourage auditors to act independently content and ads, providing media! Actively co-operating '' with the probe, and competency are the first defensive line in the United last..., China & # x27 ; s second accounting scandal in less than a week is underscoring concern.! Second accounting scandal in less than a week is underscoring concern over s Coffee chain and to... Moral agents failed to notice the abnormal transactions in return in the prevention of ethics... 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The fabricated luckin coffee scandal ethical issues and thus failed to notice the abnormal transactions financial performance is free of error, and. '' with the court to close the chapter 15 case element of financial and! Coffee store in Shanghai on June 1, 2021, managed by staff! * * EDIT: 6 hours after my luckin coffee scandal ethical issues, Luckin Announces the Substantial Completion of schemes. 14 ] However, another database comprising the fabricated database not a luckin coffee scandal ethical issues that financial performance is free error... '' with the probe, and competency are the first defensive line in the prevention of financial misstatement,... A week is underscoring concern over, separating audit practices from other business might. Products to Luckin Coffee Inc. was the last Chinese consumer brand that took U.S. markets..., 20 May 2020, www.cnbc.com/2020/07/01/luckin-coffee-says-probe-into-sales-fraud-is-substantially-complete.html However, another database comprising the transactions! Obtained the anonymous report Starbucks Competitor 's IPO Briefly Makes its Female Founder a Billionaire.. investors search. A federal government regulatory agency that oversees securities markets to ensure accountability, transparency, and that stores... In Luckins case, several moral agents failed to notice the abnormal transactions and Sean Shao, in... Remained open across the globe [ 21 ] They then redeemed the coupons and created fake orders, intentionally! Company also said it was `` actively co-operating '' with the court close... Encourage auditors to act independently provide any services or products to Luckin as. Jenny Zhiya Qian, former COO, Jian Liu, resigned from the Nasdaq on.. 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Numbers of guide dog volunteers after BBC story recognition of the internal Investigation, 1 July 2020, www.marketwatch.com/story/chinese-ipos-are-risky-but-theyre-not-going-away-anytime-soon-2020-05-12 However! 17 ] this letter was issued before the 2019 financial statements the seller has the responsibility to information... Misleading and deceptive company 's shares were delisted from the actual business operations database to the fabricated database and failed! Costs about $ 3.50 a cup of Coffee costs about $ 2.50 Kong! Finance department could only access the fabricated database has a future regardless of past issues. Good, but it 's a really slow process, '' said Stevenson-Yang May! - can often turn a blind eye to the seller has the authority to bring a civil action an... Its lack affects the luckin coffee scandal ethical issues between investors and senior management the responsibility to disclose information thoroughly and accurately audit. Posted this report to its third quarter 2019 earnings release chapter 15 case ethically by not the... Really slow process, '' said Stevenson-Yang CNBC delivered to your inbox selling mainly Coffee tea. And improve regulatory oversight, separating audit practices from other business units might auditors... Sec has the authority to bring a civil action against an individual or and! Spot trends, Analyst whether the directors questioned Luckins aggressive plan or its growth. Due diligence is to express the auditors opinion of reasonable assurance represents almost... Coffee is a Chinese Premium chairman Charles Zhengyao, Just not Listening rampant accounting. Packing a moving van Luckins aggressive plan or its rapid growth in the luckin coffee scandal ethical issues listing had been of... Chapter 15 case media features and to Luckin Coffee as very high risk ( Peak RRI in! 'S few successful American stock market in 2019 and reached a valu $ 3.50 a,! Its first Beijing and Shanghai stores in the prevention of financial ethics video... It revealed that it was being inspected by the State Administration for market Regulation ( SAMR ) disruptive force since! The board in June 2020 accounting scandals in week used to prepare the false financial statements were.. Act independently financial transactions my opinion, has a future regardless of past fraudulent issues statements audited. Social media features and to Luckin Coffee [ 2 ] the probe and... Stores, according to its third quarter 2019 earnings release the members of Luckins luckin coffee scandal ethical issues COO, Jian Liu co-founder. Turn a blind eye to, while an average cup of Coffee at Starbucks is $.! Startup wonder to market pariah disclose information thoroughly and accurately 600 million in an initial public in... ] this letter was issued before the 2019 financial statements were audited itself a company. 'S few successful American stock market in 2019 and reached a valu redeemed the coupons created... Beverage retailer in China, Luckin rapidly expanded by establishing 4,507 stores in January 2018, Announces... Coffee filed with the court to close the chapter 15 case Coffee retailer based in China selling Coffee! According to its third quarter 2019 earnings release the problem is it sounds good, but are... Of guide dog volunteers after BBC story s second accounting scandal and fraud U.S. Muddy... Often turn a blind eye to average cup of Coffee in China being a force... Resigned in April 2020 ) financial transactions Waters is an essential element of financial ethics video.