When trying to determine how to allocate compliance resources across Asian markets, the more developed and mature markets such as Malaysia, South Korea, Japan and Thailand are often given only residual attention because they are deemed fairly easy places to operate in. But these seemingly “safer” Asian jurisdictions are, in fact, much more capricious and trickier than they appear on paper.
In Malaysia, one can hardly be faulted for thinking that doing business there ought to get easier in the coming years. The sight of a tearful former prime minister, Najib Razak, being hauled to court in late August to begin a massive corruption trial, coupled with promises of institutional metamorphosis by the ruling Pakatan Harapan coalition that swept to power last May, would seem to confirm that.
But think again. Malaysia’s relatively mature economy and strong performance on multiple international indices belie a complex operating environment. Malaysia is consistently the country in Asia that catches out our clients the most on the compliance front, often because the unspoken assumption is that Malaysia is somewhat like Singapore — when the reality is that the Philippines and Indonesia are closer to the mark.
That veneer of normality ends up in tatters when clients find themselves confronted with risks typically associated with a less developed economy: fraud, pilfering, collusion between security forces and organized crime, criminal intimidation, bribery and corruption, and regulatory zealotry driven by nasty racial politics and the promise of political gain.
Malaysia’s “culture” has in the past seen some companies adopt an attitude of complacency, along the lines of “this is how business is done in this part of the world.” But this is on a collision course with the new reality in the country, where a new sheriff — anti-corruption chief Latheefa Beebi Koya — supported by politicians who railed for decades against deeply entrenched graft in government, is laying down the law.
Latheefa has new weapons too. Corporate liability for bribery, including bribes paid by third parties acting on behalf of companies, will be enforced from June 2020. Companies may be inclined to leave local partners and third parties to handle licensing, permits and all routine dealings with authorities, but this strategy carries serious risks if there is no accompanying effort to ensure that those interactions steer clear of integrity pitfalls. In sum: underestimate the new Malaysia at your peril.
South Korea is another jurisdiction that has frequently been underestimated in terms of risk. Corruption in bidding tenders in some sectors remains a routine problem. Powerful family-controlled conglomerates, or chaebols, have been implicated in financial corruption, collusion with government officials, and tax evasion.
Turning to Thailand, it also has often thrown up surprises (not good ones) for our clients. Bribery and state-business collusion are still prevalent in public procurement, and have implicated prominent multinational companies in the past few years.
Companies have found themselves on the receiving end of threats of violence and criminal defamation suits by local partners and third parties in the midst of commercial disputes and contract negotiations. Immigration laws, interpreted broadly and arbitrarily exercised, can snare unsuspecting business personnel. There have been anecdotal accounts of personnel being detained for hours on suspicion of visa-related infractions.
These markets are not only riskier than they appear; enforcers are also being significantly empowered to crack down on non-compliance. South Korean President Moon Jae-in has markedly empowered regulators and prosecutors to pursue inquiries into violations of environmental or product safety rules. Court rulings on these cases have thrown up a toxic cocktail of extensive product recalls, sale restrictions and consumer lawsuits for multinationals operating there. In Thailand, graft-busters appointed by the former military government are now going after members of the generals’ political party. If even those aligned with the military aren’t safe, it spells bad news for foreign entities who have become comfortable relying on local, well-connected partners and intermediaries for political and regulatory protection.
The evolving situation in countries like Thailand and South Korea is a reminder that compliance under-investment in a market that might appear relatively more developed and mature can bring gradually escalating costs in terms of operational leakages, regulatory disruptions and reputational damage. Some of these can take years to fix.
Companies need to commit to a proper market risk assessment for the jurisdictions that they operate in (if they haven’t already done so), followed by a risk benchmarking exercise. They will then be able to ascertain which markets are facing significant or notable compliance gaps, and deploy sufficient compliance resources to address them.
The bottom line is clear: hidden risks in the so-called “safer” Asian markets are serious enough to cause significant business disruption. As regulators get hungrier, wiser and more powerful than before, the pro-foreign investment banner being waved across Asia may just be the matador’s cape.
Harrison Cheng, pictured above, is an Associate Director based in Control Risks’ Singapore office. He provides analysis and research on Southeast Asia for Control Risks’ Global Risk Analysis team. He can be contacted here.