Best Practices

Compliance in Emerging Markets: Your Business Model (Part 2)

The term “emerging markets” is extremely broad, and includes countries with very different histories and cultures, risks and challenges. What those challenges and risks mean to your organization may depend on your business model and industry. 

In Part 1 of this blog series, we discussed how to carefully assess your target country or region and identify the challenges you’re likely to face. In this article, we discuss ways of mapping out the risks for your business model in a specific emerging market.

Step #2: Map out the Risks for your Business Model in your Industry

Besides looking at general corruption risks in an emerging market, you’ll want to pay special attention to specific aspects that apply to your business model and/or industry. Key factors to assess include:

  • The role of the local government;
  • Regulatory bodies and regulations that govern your industry; and
  • Your reliance on third parties. 

Each emerging market is different, and the local government can be involved in a variety of different ways, depending on your business model and industry. The government could be a business partner or a customer – for example by acting as the prime contractor on a large infrastructure project. Each role carries risks for corruption and bribery. Yet, doing direct business with a foreign government is not the only way that a company can run afoul of laws that prohibit offering or providing bribes to foreign government officials, such as the US Foreign Corruption Practices Act (FCPA) or the UK Bribery Act (UKBA). 

The local government could also function as a regulator: Be sure to identify and familiarize yourself with the regulatory bodies and the regulations that will govern your industry in your target market. When investing in a foreign country, several routine business operations may involve government officials and present companies with a potential corruption risk. These may include; registering your company to do business, obtaining visas or any other permits, hiring local agents or other local third parties, etc. Keep in mind that some sectors are more difficult to navigate than others, for example the financial and the health industry may be more regulated than others. The critical point is that your business activities abroad will most certainly involve foreign government institutions in some form, even if you do not directly engage in government procurement activities. 

Let’s take the example of Brazil where corruption is very likely in the areas of tax administration, natural resource sectors and public procurement, as shown in the Brazil Country Report. In terms of public procurement, “irregular payments and bribes are highly common” and “government officials frequently show favoritism to well-connected firms and individuals when deciding upon policies and contracts.” If your business plan calls for participating in Brazil’s public procurement, you will have to carefully consider the means by which to mitigate these high risks and have a significant local presence or representation.

In addition, consider how much your business model relies on distributors and other third parties. Business models that rely heavily on third parties are likely to encounter additional risks of corruption and bribery. Carefully choose which third parties to work with and make sure they have no history of corruption. Emerging markets typically have close ties between government, finance, power and business, and getting government approval can be a touchy subject. You might just need licensing to open a store, for example, but to get that licensing, you’re going to be dealing with third parties to get access to the people you need in the government. Whether it is government officials or third parties, identifying all of your company’s potential contacts is crucial in allowing you to begin assessing which of these contacts present the highest corruption risks. 

Want to learn more? In Part Three of this blog series, we’ll explore how to implement an effective compliance program for your specific market.

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