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Mitigating the risks of doing business abroad

Prevent corruption in emerging markets with appropriate strategies

When doing business in any foreign jurisdiction, Canadian companies should ensure their business strategy aligns closely with local cultures, languages, business practices and regulations. Unlike expansions into developed economies such as North America and Western Europe, a move into emerging markets comes with an added layer of risk, particularly in the realm of corruption and bribery.

"While many markets such as China have been working to adopt more rigorous legislation to curb the incidence of local corruption, recent actions on the part of North American regulators are signalling that these changes may not be happening quickly enough," says Peter Dent, a partner in Deloitte's  Forensic and Dispute Services practice.

 "[There's now] a willingness by U.S. regulators to prosecute companies engaged in corrupt practices simply because they are listed on a U.S. exchange."
— Peter Dent





This is especially true in the U.S., where the joint regulators of the Foreign Corrupt Practices Act (FCPA) — the U.S. Justice Department and the Securities and Exchange Commission — are collaborating more closely to prosecute cases of foreign corruption.

In 1999, Canada enacted similar legislation to help prevent and punish instances of domestic corruption by Canadians working abroad. The   Corruption of Foreign Public Officials Act (CFPOA) covers three main offences: bribing a foreign public official, laundering property and proceeds, and the possession of property and proceeds. However, while this legislation is rarely enforced, Canadian businesses should pay attention to how stepped-up FCPA enforcement can affect their activities.

In the last few years, U.S. regulators have taken an expansive jurisdictional view commencing FCPA enforcement actions against companies operating outside the U.S. "A recent case indicates a willingness by U.S. regulators to prosecute companies engaged in corrupt practices simply because they are listed on a U.S. exchange," explains Dent. This includes any interlisted Canadian corporation. Repercussions of an FCPA violation could include substantial fines, including disgorgement of profits, debarment from government contracting, delisting from exchanges, court appointed monitoring, civil lawsuits, and imprisonment.

Adopt appropriate risk management strategies
To avoid these penalties, it makes sense for Canadian organizations to have certain strategies in place to comply with FCPA standards before they expand their international reach. In developing a risk management plan, it is important to understand that your company can potentially be held responsible for corrupt practices engaged in by your business partners, foreign subsidiaries and even local distributors. Organizations can no longer claim to be "blind" to the practices of their business partners and others with whom they do business.

For this reason, Canadian companies must conduct in-depth investigative due diligence of potential joint venture partners and other third parties with whom they plan to do business globally. Businesses can safely adhere to FCPA standards by using data interrogation techniques and through scrutinizing all agency and distribution agreements. To cover governance liabilities, companies must review internal audit reports to assess the effectiveness of existing controls, and examine proposed partners' compliance policies and procedures.

Beyond due diligence actions, your organization should also:

  • Assess the established business practices among the countries where you plan to conduct business. Bribery is still a common part of doing business in many emerging markets. Make informed decisions on whether you can succeed without engaging in bribery.
  • Put a strong compliance program into place to prevent corrupt practices. Recent enforcement actions show that regulators are more inclined to limit FCPA penalties and in some cases defer prosecutions where companies have made honest efforts to set up appropriate compliance programs.
  • Negotiate the right to audit. You should thoroughly review your potential partners, inspect their books and even examine their sub-contractors and agents.

Doing business in emerging markets is likely to remain fraught with peril in upcoming years. Organizations that take proactive measures to mitigate common risks will be well placed to reap both the financial and strategic benefits of international expansion.


How Canadian companies can comply with FCPA enforcement 

Regulators often learn of FCPA violations through whistleblowers, self reporting from companies who discover FCPA issues while engaged in M&A due diligence, FBI and SEC investigations and complaints from competitors.

Canadian companies listed on US exchanges should take steps to prevent corruption by adopting enterprise-wide compliance programs. To structure an effective program, you should:

  • Outline all applicable foreign laws and regulations and the approach to  comply with them
  • Establish standards and due diligence screenings for all reputable business partners and agents
  • Assign overall responsibility to a compliance officer
  • Provide all staff with compliance training and effective reporting mechanisms
  • Ensure quick investigation of allegations and reporting to authorities