New markets: Where to start your risk assessment

We wrote an e-book as a guide to navigating corruption challenges in emerging markets.

As practitioners and compliance officers know, there is no one-size-fits-all compliance program that a company can simply adopt or pull off the shelf.  This is particularly true in emerging markets though, as we explain in the book, there are programs, controls, and tools that meet common international standards and the expectations of governments worldwide.

The book also provides a framework for companies with anti-corruption programs in place to assess existing programs and facilitate modifications in response to evolving risks.

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Because compliance is a risk-based process, controls must be designed and implemented in reasonable proportion to available resources. Without this balance, one of two things will happen: either important risks will not be mitigated, or the efforts expended for compliance will create a burden that frustrates broader goals.

One chapter of our e-book talks about evaluating risks of entry into new markets.

After a potential new geographic market entry is identified, preliminary desk research should be conducted to assess anti-corruption risks.

While the research should focus on the particulars of the market and the opportunity being considered, the following is a non-exhaustive list of questions for assessing the new market:

• Are international companies allowed to conduct business in the country?

• What is the local attitude toward investments from multi-national companies?

• Do many multi-national companies operate or invest in the country?

• What local competition is there? Is there any government regulation of competitors?

• What is the process for company registration?

• Does the country require licenses or permits to conduct business? How long is the approval process?

• What is the process for imports and exports?

• Are there any requirements that international companies use local companies to assist with the business (e.g., local companies to import/export products or to distribute them)?

• What are the key areas of corruption in the country? Is the provision of kickbacks a necessary component of doing business in the country?

• What areas of industry are government-owned?

• Are there many state-owned enterprises?

• Is it common for government officials to own or operate private businesses (e.g., customs officials owning clearing agents)?

• Are there any local anti-bribery laws or initiatives?

• How does the judicial system operate?

• Are there other regulatory or political challenges to doing business legally?

• What is the business model being proposed and how will that model be implemented in the country?

Resources that should be consulted include:

CPI and BPI Indices: Review the Transparency International Corruption Perceptions Index  and Bribe Payers Index for the new market. The Indices will provide a starting point for the country’s perceived corruption risk.

Media Sources: Review readily available media sources to evaluate the new market. If possible, the reviewer should conduct these searches in the local language. Searches typically will include using the country’s name and key words such as “corruption,” “FCPA,” “bribery,” and “fraud” as search terms.

Trace Compendium: Perform searches using the country’s name under the categories of “Nationality of Foreign Officials” and “Corporate Headquarters.” If applicable, perform a search under the “Enforcement Agency” category for the appropriate enforcement agency associated with the country.

Embassy or AmCham Reference: Request information on corruption risks and the business regulatory environment from the U.S. Embassy and the American Chamber of Commerce Abroad (“AmCham”) in the new market under consideration.

Commercial Service Report: If available and time permits, request a U.S. Commercial Service Report on corruption risks and the business regulatory environment for the new market under consideration.

Investment Climate Statement: If available, review the Investment Climate Statement for the new market, issued by the U.S. Department of State. This report provides background regarding the overall investment climate, receptiveness to foreign investment, transparency of the regulatory system, corruption risks and anti-corruption resources.

Watchlist Search: Conduct a Watchlist search using services such as Dow Jones. The search should include the name of the proposed new market and any key individuals or companies with whom the company will interact, if this information is known.

Research into peer companies doing business in the country, and the business model the peer companies use, may provide useful insights.

The goal is to gain a preliminary understanding of the country’s local regulatory environment and its receptiveness to international companies. For each step of the research, the reviewer should retain a copy of the relevant research and notes detailing the steps taken and individuals consulted.

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In the next post, we’ll cover early warning signs, and how to handle preliminary market visits.

Our e-book, Anti-Corruption Compliance in Emerging Markets: A Resource Guide, is available here.

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Keith Korenchuk is a partner in Arnold & Porter’s Washington, DC office. He counsels and advises global companies on regulatory and compliance matters worldwide, with a focus on compliance program effectiveness, compliance program implementation, operations and evaluation, and related regulatory counseling and advice. 

Samuel Witten is counsel in Arnold & Porter’s Washington, DC office. He helps companies develop and implement FCPA compliance programs. He also represents clients in arbitrations at the International Center for Settlement of Investment Disputes. He joined Arnold & Porter in 2010 after serving for 22 years in legal and policy positions at the U.S. Department of State.

Arthur Luk is a partner in Arnold & Porter’s Washington, DC office. He  represents corporations; directors, officers, and executives; and “Big 4” accounting firms and individual auditors in investigations conducted by the DOJ SEC, and Public Company Accounting Oversight Board, and in securities class actions and shareholder derivative suits.