Managing Risk in Global Investments

Organizations with an eye toward global growth, particularly in emerging markets, have to contend with heightened compliance and integrity risks. According to a recent Deloitte survey, corruption issues led more than 60 percent of companies to renegotiate or terminate deals in the past three years. In an increasingly regulated environment, doing your homework is key.

Tune into this episode of Deloitte Insights to learn more about managing risk in global investments.

Guests:

• Greg Swinehart, National Managing Partner of Deloitte Forensic, Deloitte Financial Advisory Services LLP
• Wendy Schmidt, National Leader of the Business Intelligence Services practice, Deloitte Financial Advisory Services LLP
• Clint Stinger, Principal,  Anti-Money Laundering and Economic and Trade Sanctions practice of Deloitte Financial Advisory Services LLP

Transcript: Managing Risk in Global Investments

Sean O’Grady: Hello and welcome to Insights. A recent Deloitte survey found that almost two-thirds of companies said that Foreign Corrupt Practices Act and anticorruption issues or potential violations of economic and trade sanctions led them to renegotiate or terminate deals in the past three years. Here to explain what is going on in the emerging market M&A field are three guests. We have Greg Swinehart the National Managing Partner in Deloitte Forensic for Deloitte Financial Advisory Services. We also have Wendy Schmidt the National Leader of the Business Intelligence Services practice in Deloitte Financial Advisory Services, and we have Clint Stinger a Principal in the Anti-Money Laundering and Economic and Trade Sanctions practice of Deloitte Financial Advisory Services. Folks first and foremost thank you very much for joining us and the fact that over 60 percent of firms have said that they have had to back away or renegotiate from deals that is pretty big and I would like to get into that in a moment but first Greg tell me about this survey, why did we choose to conduct it?

Greg Swinehart: Well as any multinational corporation looks for ways to expand in emerging markets we see increasing integrity and compliance risk and none of us should be surprised at that. We know that in emerging markets that the regulatory regimes, the enforcement mechanisms, and the compliance culture are just not at the levels that we see in developed economies. So to get more insight into this we at Deloitte conducted our fourth annual Look Before You Leap survey. In that survey we talked to approximately 500 business professionals in the U.S., Canada, and Mexico to gain their thoughts on the question how do you look before you leap.

Sean: Thank you very much for that and I would like to jump into some of these key findings. Clint I would like to begin with you and what has the survey revealed about M&As and other transactions in emerging markets.

Clint Stinger: One important finding, as you mentioned in your opening, is the growing impact of economic and trade sanctions requirements on emerging market M&A. Now these requirements have been put in place by the U.S. and other governments to deal with some of the most pressing issues we face globally like the spread of nuclear weapons. Now 62 percent or nearly two-thirds of our respondents said that they had identified an economic or trade sanction issue that caused them to either cancel or renegotiate a deal. Now that is a big number particularly when you think that that is across industries. If you look at the higher risk industry like financial services the numbers are even higher. In our survey over 70 percent of financial services firms reported increased risk concerns in this area over the last three years. So bottom line is these requirements are cross bordered, they are complex, and because they deal with very important issues to the international community they are also the focus of regulatory and enforcement action.

Sean: Wendy what about you, what’s your take on what’s going on in these emerging markets?

Wendy Schmidt: I think one of the issues is that there has been a dramatic increase in SEC enforcement over the last couple of years. In 2004 there were five enforcement actions and in 2010 there were 74 enforcement actions. Record finds, you know, in the last eight of the largest ten finds where FCPA violations were levied.

Sean: Now Wendy I would like to stick with you, clearly the study is revealing that something could go wrong if a company chooses to go into an emerging market M&A deal but I don’t think that is going to stop companies from trying. So with that in mind what can someone draw from this study? What are the major takeaways if they are going to go in?

Wendy: I think companies are going to keep trying. I think as the study shows that good percentage of people are going to be deterred from entering into certain transactions in emerging markets but I think that companies are getting the message that they need to do their homework. They need to make sure that they are in compliance with the FCPA and that they do due diligence on their third parties or acquisition targets prior to entering into a new business transaction.

Sean: Now my final question is going to be for all three of you and Greg we’ll begin with you and we’ll just keep the positive vibe going here and that is what are your thoughts on best practices for those who read this study and again would like to enter into these emerging markets?

Greg: Well what we have learned from our survey is that the respondents really understand that their own reputations are critically important but more importantly is that they now understand that the reputations of their counterparties whether that be a vendor, a joint venture partner, or a potential acquisition is just as important to their strategic objectives. So they essentially are learning the cliché that perhaps that we all know that we are often times judged by the company that we keep.

Sean: Clint your take.

Clint: Really two things to keep in mind, first we see a prepared acquirer is considering these risks throughout the deal cycle. They are looking at compliance and integrity risk when they select a partner or target. When they do due diligence and when they integrate their acquisition. Secondly, the importance of involving a broad range of business units and departments in the diligence process are more likely to uncover risk issues and you will facilitate that future integration by doing so. Finally also the importance of using external advisors where necessary and particularly in emerging markets where you may not internally have the history or the local insight in a particular emerging market that you really need to leverage some third-party resources to look into your acquisition.

Sean: Wendy you final thoughts on the study.

Wendy: I would agree with Clint. I would also add that for U.S. companies doing business abroad that they should have a centralized U.S. focused group that monitors compliance with the FCPA because we have found that sometimes local subsidiaries don’t follow the rule of the law and really need some help from the home office and I think bottom line and the study shows and 85 percent of the responds said that due diligence issues, compliance issues, and integrity issues are of utmost concern. I think that bottom line the study shows that 85 percent of the respondents are very concerned about compliance and integrity risks and are going to do their homework and that due diligence key.

Sean: So make sure you are watching your own back. Folks thank you very much. We have been talking about the importance of looking before you leap when it comes to emerging market M&A deals with Greg Swinehart, Wendy Schmidt, and Clint Stinger all of Deloitte Financial Advisory Services. If you like to learn more about Greg, Wendy, Clint or any of the topics we discussed on this broadcast you can find them and many more on our Web site, it doesn’t change, It is www.deloitte.com/insightsus

For all the good folks here in Insights, I am Sean O’Grady. We will you see next time.