Field trip: Conducting preliminary market visits

In the e-book we wrote as a guide to navigating corruption challenges in emerging markets, we talk in one chapter about the particular risks companies face when they enter new markets.

Those risks are illustrated by the SEC’s 2014 enforcement action against Smith & Wesson Holding Corporation.

According to the SEC, the firearms manufacturer began an effort to increase its sales by entering new markets in 2007. Most notably, in 2008, the company allegedly hired a third-party agent to help sell firearms to a Pakistani police department.

Members of Smith & Wesson’s international sales staff allegedly authorized the third-party agent to provide certain police officials with guns and cash gifts, and the company ultimately received a contract. The SEC further alleged that the company’s international sales staff engaged in similar conduct in Turkey, Nepal, and Bangladesh, though these efforts were unsuccessful.

In its settlement with the SEC, Smith & Wesson paid a $1.9 million fine and disgorged $128,892 in profits and interest. It also terminated its entire international sales staff.

Kara Brockmeyer, chief of the SEC Enforcement Division’s FCPA unit, said: “This is a wake-up call for small and medium-size businesses that want to enter into high-risk markets and expand their international sales. When a company makes the strategic decision to sell its products overseas, it must ensure that the right internal controls are in place and operating.”

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In our book, one of the steps we discuss to identify and assess risks in a new market is the Preliminary Market Visit.

The Preliminary Market Visit should include, at a minimum, meetings with the following third parties (tailored to the needs of the company’s anticipated operations in the new market):

• Transportation and customs clearing agents (preferably more than one)

• Local regulatory authorities

• Local representative(s) from the American Chamber of Commerce and/or American embassy, or their non-U.S. counterpart(s) for non-U.S. headquartered companies

• Local legal counsel (a branch office of an international firm or an internationally recognized and widely respected local firm)

• Local trade agencies or business organizations

• Real estate consultants

• Local distributors (as necessary)

The meetings should focus on topics including:

• Risks associated with the market and potential business models for entry

• Process for importation and distribution of products

• Customs fees assessed; transparency of such fees and available methods of payment

• Transparency of local legislation

• Penalties or unfair business practices that have an impact on international companies

• Local anti-corruption laws and initiatives

Once the assessment processes, including the Preliminary Market Visit, are completed, the company should prepare a written recommendation, including detailed findings, a risk assessment, and a recommendation on whether to continue or to defer the new market entry process.

The report should also include recommendations on how to control risks in the market and the proposed compliance oversight of the operations there, either regionally or through company headquarters.

A recommendation regarding entry into the new market should then be made to the appropriate decision makers within the company, who would then document their decision to approve, deny, or defer entry into the new market in light of the findings, risk assessment, and recommendation presented.

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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.