Compliance Conundrums in Emerging Markets
This article originally appeared on Financier Worldwide’s July 2018 issue.
Emerging markets are the undisputed driver of global growth today. As noted by Credit Suisse’s 2017 Global EM Equity Strategy, in every quarter since Q1 2005, emerging markets have made a contribution of more than 50 percent to overall global growth. Moreover, according to the International Monetary Fund (IMF), they are growing twice as fast as developed markets.
Emerging markets are also an investment magnet for multinational companies (MNCs) and make for valuable additions to portfolios. That said, while such markets do offer opportunities galore, they also come with significant risk and numerous compliance obligations.
An FTI Consulting research report – ‘What Companies Do Right (and Wrong) in Emerging Markets’ – outlines three major categories of risk companies face: regulatory, fraud and bribery, and reputational issues. Much of this risk stems from association with assorted third parties, such as distributors, resellers, system integrators and other partners.
“Under the Foreign Corrupt Practices Act (FCPA) and similar legislation, MNCs are responsible for the behaviour of third parties, vendors and agents,” says Frank Brown, director of anti-corruption and governance at the Center for International Private Enterprise (CIPE). “It is often difficult to motivate third parties to put in place comprehensive compliance programmes when the risks associated with enforcement action seem low.”
Furthermore, the report notes that the MNCs which experience the least difficulties all had one thing in common: they play by the rules, guard their reputation and make compliance a strategic priority. “A significant development across the emerging markets landscape in recent years has been the expectation by law enforcement agencies that MNCs in these markets must be held to the same standards of behaviour as in developed markets,” adds Mr Brown.
“Much of this risk stems from association with assorted third parties, such as distributors, resellers, system integrators and other partners.”
Indeed, with companies increasingly looking to emerging markets to boost revenue, competitive position and growth, standards need to be uniform across the board, with compliance a major component.
Compliance strategies
With the compliance challenges likely to be encountered substantial, MNCs need to take a strategic approach in order to address them. According to the FTI Consulting report, care must be taken to accommodate and influence the local regulatory environment, meld corporate ethical standards with local culture and maintain a consistently good reputation over the long haul.
“Companies develop response plans to deal with incidents before they arise, and those plans are continuously updated and communicated internally and externally,” states the report. “In this way, when any one of these three risks emerges, it can be isolated so as not to produce a storm of converging issues that multiply losses and impair a hard-to-restore corporate reputation.”
Local help
In addition, the value of local assistance – which can offer established networks, expertise, scalability and flexibility – should not be underestimated. For many emerging markets investment practitioners, blending local know-how with global best practices is the key to achieving compliance success.
To harness local expertise, the FTI Consulting analysis advises companies to: (i) conduct continuous dialogue with local staff on compliance issues; (ii) avoid doing business in places where compliance may not be possible; (iii) have compliance policies suitable for the territory; (iv) perform exceptional due diligence on potential joint venture partners and senior employees; (v) train in-country expats and locals in fraud and compliance; and (vi) retain substantial compliance resources in-country.
Although not an exhaustive list of compliance strategies, the above suggestions do go some way toward establishing a compliance management ecosystem that helps companies to tailor policies to local conditions and avoid falling foul of ever-present regulatory, fraud and bribery, and reputational risks.
“The most important thing is to perform a thorough risk assessment and recalibrate it from time to time,” says Mr Brown. “Without a risk assessment grounded in the local business context, it is very difficult to fashion an appropriate compliance management strategy.”
Ongoing compliance
Given the prevailing political and regulatory uncertainty in many emerging markets, the compliance challenges facing MNCs, or any other entity for that matter, are unlikely to diminish any time soon.
“Developing a culture of compliance by implementing a broad risk-management programme will almost certainly be central to the success of a company’s efforts,” notes Deloitte in its ‘Winning the away game’ report. “The benefits of such a programme are automatically associated with preventing damages that ‘cost the company’ in terms of fines, legal fees, brand erosion and lost opportunities.”
Going forward, with emerging markets continuing to offer a wide range of opportunities, growth-oriented companies need to avoid the expectation that all parties will comply, adopt a systematic approach and solve the compliance conundrums they face, as and when they emerge.
Published Date: June 21, 2018