The New Age of Regulatory Risk – Is Your TMT Business Prepared?
Deloitte Insights video
Increased regulatory scrutiny, international expansion and speed to market could create a perfect storm for technology, media and telecommunications (TMT) companies. Regulators recently announced they are examining the actions of tech companies doing business in Asia and may hold those companies liable for the actions of third parties they are working with. Tune into this episode of Deloitte Insights to learn how companies can increase transparency and mitigate risk.
Joe Zier, partner, Deloitte Financial Advisory Services, LLP
Sean O’Grady (Sean): Hello and welcome to Insights. Regulators from the United States Department of Justice and the Securities and Exchange Commission stated they are examining the actions of tech companies doing business in Asia, as the result of a number of industry-specific investigations and disclosures currently before them. To understand how this announcement may alter business behaviors, we are joined by Joe Zier a partner in Forensic and Dispute Services within Deloitte Financial Advisory Services LLP. Mr. Zier is also the National Technology Sector Leader, as well as the West Coast Foreign Corrupt Practices Act Leader for Deloitte Financial Advisory Services. So, Joe right off the bat, what is causing this attention?
Joe Zier (Joe): The attention is largely due to the tech companies beginning to expand internationally. If you take a look at the international environment outside of the U.S. there is a high degree of corruption, different cultures that you are dealing with continually. The tech companies move fast, they take things to market quickly and all of a sudden, they are finding themselves exposed. They are exposed to different cultures, corruption, etc. The regulators in the U.S. on the other hand are paying much more attention to corruption and therefore the two have come together. The regulators have started paying attention to tech companies doing business in Asia.
Sean: Now that keys on my next question for you and why specifically tech. Clearly, there is a lot of different industries that are getting into emerging markets, why this?
Joe: There are several reasons for that. The first reason is that tech companies are highly dependent upon chains of third parties to do business — distribution systems, supply systems, etc., much more so than most industries. The regulators have moved through and spent time with the energy sector, they have done the pharma, the life sciences sector, etc., and as part of that they started seeing an increase in third parties being used to do perhaps inappropriate things because now there is a large number of third parties being used by the tech companies they are now focused on tech using the experiences with third parties that they have gotten previously.
Sean: Now let us go there, because part of these new regulations state that if a third party is working for you, you now are liable for them or may be liable for them. How is that changing the game and what the companies need to do to be more transparent and visible in these emerging markets?
Joe: It has caused a lot of fear in companies. For example, large tech companies may have 10,000, 50,000, or even more than a 100,000 third parties. If you are now liable for the actions of one of those third parties you know that puts the fear into you, you know significant fear. What do you do about that, how do you mitigate your risk, how do you control the potential liability arising from that? So, a lot of companies are looking at that with some caution. So, it could be just one party of those 10,000, 50,000, or 100,000 that gets you into trouble, significant trouble.
Sean: Well to use your own words, what do you do about it if you are an emerging tech company or the tech company that is in an emerging market right now, what is going on and what should that company be thinking about?
Joe: Currently, companies are looking at two approaches. The first is how do I get better transparency in my third parties, how do I understand what their business is, and two how do I force them to comply with things? So, a lot of companies are beginning to look at the more effective risk assessment. When they begin to onboard third parties, are we doing the right things to identify those parties, their owners, etc., and make sure that they are the right people? Secondly, they are trying to setup systems where there is greater transparency in terms of the actions. Thirdly, they are looking at how to do ongoing risk assessment with those parties. Are those parties doing business, which could get me into trouble in the future?
Sean: Do you mind if we talk for a second about the UK Bribery Act, I have a few specifics for you here and that is that Russia, China, and India have all signed amendments now to their anticorruption laws. How is that changing the game for those companies that are on the ground in those markets?
Joe: It has caused a bit of trauma for the U.S. companies. Historically, those countries you mentioned had focused on the bribe receivers, so they have gone after the bribe receivers. The Foreign Corrupt Practices Act in the U.S. is being about the bribe payors. Over the last few years China and Russia in particular have taken the approach that it’s really is foreign companies doing business in those countries, their countries, that are causing bribery to become endemic. The end result is they are beginning to go after them. In the tech industry, most of them are U.S. companies doing business there and therefore they are now under attack. Under a new wave of regulation, they are being blamed for causing corruption.
Sean: Let us talk specifically about China. What kinds of specifics do we need to know for companies that want to find more culturally effective ways to work in that model, in that culture?
Joe: China is a particular favorite of mine. I use it often as an example of how companies should be able to manage culture. Too often, we as U.S. companies tend to take our own culture, or corporate culture and say it works everywhere in the world. That is our code of conduct.
Sean: That is centricity.
Joe: Yeah absolutely, you know the reality is that local culture always triumphs corporate culture. China is a classic example of that. I have a company that is experimenting with different ways of taking, for example, code of conduct rather than just taking the existing code of conduct and saying — thou shalt comply with it. They twisted it and put a Confucianism type of approach to it in China and all of a sudden found that the adoption rate was much higher. The compliance rate was higher. They just reframed how they sold it. So it created an awareness amongst other companies that maybe there is a different way of accommodating culture without changing the core values that you are doing business with, very powerful. There are other things, you know, dealing with corruption for example. One of the companies that I know had a wonderful way of avoiding corruption. They had some very senior executives come over and took photos with the premier and posted those pictures in the front all over the entranceway, and the end result is that all the middle-level functionaries realized there was strong relationship value for that company with senior executives or senior government or political figures.
Sean: So the implementation is visual.
Joe: Very, very powerful. There are other things as well, very practical ways. You know investing in the local population versus just going in to make money. The important thing is that companies have to realize that you have to balance and accommodate the culture versus just overlay the culture with your own style.
Sean: Thank you very much for that. My last question for you is about the UK Bribery Act and what I would like to know is do U.S. companies need to train their employees differently to now work with UK-based employees. Is there any training? Are there any differences there, your thoughts?
Joe: Yes absolutely. As you probably are aware of the UK Bribery Act, it came into effect in July of 2011 and it had a different series of criteria around it. One, it introduced the concept of commercial bribery and not just bribery of government officials. Two, it created a guidance or it espoused guidance with respect to risk assessment of third parties, due diligence on third parties, and more importantly it introduced the concept of having an effective system of process and control to prevent bribery, both as a defense and as a potential charge. So companies I think are beginning to realize that while there is very little practical application yet of the Act by the UK regulators that it drives some very, very common sense areas that they should be training the employees in. I think it is very important for companies to realize that they have to understand how business is actually done on the ground. You know whether it is China, Russia, or Latin America they have to understand that business is done a certain way, it is different than in U.S., it is different than corporate culture both on the normal side and the abnormal side, i.e., what are your employees going to be exposed to on a day-to-day basis, if you don’t understand that you are never going to be able to protect yourself and you will be at risk.
Sean: So predict the need for customization depending on the market.
Joe: Absolutely, always be customized based upon the culture, the geo, and the way business is actually done.
Sean: Well thank you very much for this conversation. Appreciate having you on the show.
Joe: It is my pleasure.
Sean: Okay, you have heard some of the regulatory details of doing tech business in Asian markets from our conversation with Joe Zier. If you would like to learn more about Joe or any of the topics discussed on today’s broadcast, you can find that information on our website, it’s www.deloitte.com/insightsus. For all the good folks here at Insights, I am Sean O’Grady. We will see you next time.
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