A Unique Approach to Successfully Battling Corruption in Emerging Markets
Written by Robert Chamberlain
Successful businesses compete in global markets by putting a premium on accurate information, analysis, strategy development, and execution. Companies must also include a robust anti-bribery and anti-corruption (ABAC) program to ensure compliance with the myriad of laws and regulations both in the US and international jurisdictions, even where individual countries may not, themselves, have robust anti-corruption frameworks in place.
Today’s complex business and bureaucratic environment boosts the likelihood of the confluence of greed, temptation, and opportunity. Tough economic times, alluring prospects in fledgling markets, expansion, diversification, cross-border deals, and the persistence of insider threats should have leaders in the private sector on the alert, seeking to answer critical questions around: risk; entry and exit strategies in emerging markets; the existing and future political and bureaucratic landscapes; local cultural norms and mores; existing and future competitors; and, business culture and the state of transparency in contracting, negotiations, and government input.
Most businesses do not possess the capabilities, networks or technologies to collect the needed information, nor do they maintain interdisciplinary foreign business intelligence collection and analysis divisions to make sense of the volume of information. As a result, they find it difficult to apply that knowledge to minimize entry, regulatory, compliance, and labor risks to tap into the potential of, and perform successfully in, opaque post-sanction and post-conflict markets while maintaining compliance with US and international law. A compliance gap can leave an entity prone to overvalued acquisitions, fines, penalties, and disgorgement, underscoring the gravity of ABAC-specific due diligence.
Traditional and Non-traditional Business Threats
Business leaders need information and analytical support to make critical business decisions in markets with not only great growth potential, but also a plethora of threats. Regulatory and policy drivers require compliance in order to meet US and other government standards for proper business conduct. Recently enacted laws such as the UK Bribery Act, Dodd-Frank Wall Street Reform, and the Consumer Protection Act have raised the bar on global integrity and anti-corruption standards.
The Foreign Corrupt Practices Act will loom large in any company’s efforts to enter emerging economies; those businesses with existing compliance programs will have an edge on those that do not. Anti-Money Laundering guidelines will also be an important consideration, for example, as Cuba evolves its financial sector and deals with an unwieldy dual currency system.
In particular, current US government concerns with limiting Cuban government participation and ownership in joint ventures puts the spotlight on companies’ third-party ecosystems. Executives will need to know both what existing third parties are doing in Cuba and the beneficial ownership of any new third parties under consideration as business partners in Cuba.
Headlines have been dense in recent years with dramatic tales and accusations of fraudulent behavior in both the public and private sectors. No matter how scrupulously leaders push their anti-corruption agenda, the real test is in day-to-day operations and maintaining an environment in which operational practices do not create incentives or opportunities for corruption.
Although executives might truly be unaware of malfeasance, claiming ignorance once allegations arise is an inadequate defense with scandal-weary shareholders or civil society. Worse, even a single incident of alleged corruption can deliver irreparable economic hardship and reputational damage that can undermine a company’s stability and standing.
Strategic Threat Management
A Strategic Threat Management framework identifies, analyzes, and mitigates threats that may impede progress towards strategic objectives. A comprehensive approach to assessing opportunities and detailed scenario- and risk-based planning is critical to success. This starts with identifying your company’s risk appetite and threshold through engagement with appropriate stakeholders and an eye toward leveraging any existing international experience and leading practices.
This should be tailored to the nature and threat profile of the transaction and potential business operations. At a minimum, research of publicly available information should be compiled. This stands as a unique challenge in Cuba and other opaque markets given the pervasiveness of the government and military in the economy. The overall lack of telecommunications infrastructure and business habits needed to support the collection of publicly available information also challenges familiar approaches.
If other emerging and post-conflict markets serve as guideposts, government and military officials at all levels have been known to employ opaque practices to mask their ownership interests in lucrative joint ventures with foreign companies, from the use of front men and shell companies to the use of offshore accounts. Such obfuscation illustrates the difficulty of unearthing beneficial ownership and why strategic threat mitigation in any emerging market is such a serious undertaking.
Serious threat mitigation in these markets should include on-the-ground consultations with sources that have detailed knowledge of a potential business partner, its principals, and its market reputation consistent with law. Determining whether a local partner or third party’s principals are politically exposed persons (PEPs), or the family members or agents of PEPs, is a particularly important aspect of business threat mitigation and key to a successful ABAC program.
Strategic Threat Management as an Approach
While threats may appear radically different—from regulatory changes, to forced market entry, to facing a cyber-attack—a consistent process to track, manage, remediate, and educate staff and management about the threat constellation helps reduce costs and apply resources strategically to issues as they arise. Without drilling down to the many hidden risks related to regulatory compliance, local government or PEP influence, and brand and reputation, the potential for missteps, and related US government scrutiny and personal penalties to which executives can be held, can be too high for comfort. The perception of facilitating a corrupt practice can lead to negative publicity and immeasurable brand damage.
To more effectively identify and manage reputational threats, businesses should strive for the fullest possible understanding of their risk environment, including third parties’ operational history and market reputation. This can be achieved in taking a more comprehensive view of the threat constellation via Strategic Threat Management which, among many other risk offsets, enables the strategic integration of both a third-parties monitoring and ABAC compliance program. A Strategic Threat Management framework can streamline third-party management and anti-corruption compliance by eliminating the need for ad hoc response mechanisms and potentially decrease the frequency of corporate crises—and the resource strain that accompanies these disruptions.
Author Biography:
Robert Chamberlain is a Senior Director in PwC’s Strategic Threat Management and Corporate Intelligence Practice. He has significant leadership and engagement experience in emerging and post-conflict markets and has worked across industry sectors in both the public and private sector. Key issues that Robert and his team focus on include the risks associated with corruption, sanctions, conflict, and the vast array of regulatory, policy, and business hazards that come with operations in foreign markets.
