Navigating risks in emerging markets.
As companies continue to expand their activities in emerging markets — to produce products, deliver services, and sell to customers in these markets — many executives are concerned over compliance and integrity-related risks in these locations, which they believe are growing.
Yet, few executives are highly confident that their companies have effective processes in place to identify and manage these risks when making investments or engaging third parties in emerging markets.
These are some of the key findings of Deloitte Financial Advisory Services LLP’s fifth annual "Look Before You Leap survey" (the “Survey”), which solicited the views of 126 business executives on the approaches their companies are taking to address compliance and integrity-related risks in emerging markets. Survey participants represented a wide range of industries including financial services (29 percent), manufacturing (25 percent), and information technology and telecommunications (12 percent). Roughly three quarters of participating companies were headquartered in the United States, with other companies headquartered in Canada, Europe, Asia, and Latin America.
Many companies are investing in emerging markets through mergers and acquisitions (M&A) as well as by locating company-owned facilities in those markets (“Greenfield investment”). In addition to expanding their footprint directly, many companies are increasingly engaging third parties located in emerging markets — such as vendors and a variety of other third parties including service providers, sales agents, distributors, channel partners, and intermediaries.
The benefits of expanding into emerging markets can be significant to lower costs, tap a wider pool of skilled labor, improve the ability to respond quickly to changes in demand, and gain access to new customers. Yet, the compliance and integrity-related risks can also be significant. Before investing or engaging third parties, companies should consider implementing processes to manage risks such as corruption, money laundering, terrorist financing, connections to organized crime, criminal activity, and violations of economic and trade sanctions.
Given the potential for compliance risks in emerging markets, companies should carefully conduct due diligence before making investments or engaging third parties and should consider performing ongoing due diligence of existing business relationships and third parties.
As enticing as opportunities in emerging markets may be, the Survey results suggest that “look before you leap” should be the watchword as companies plan their emerging market strategies.
Key survey findings
- Seventy percent of executives said they were extremely or very concerned about compliance and integrity related risks when their company conducts business in emerging markets, while 71 percent believed these risks had grown over the last two years.
Bribery of government officials was the issue ranked as the greatest compliance and integrity-related risk by 40 percent of executives, while 26 percent placed commercial bribery or kickbacks as their top concern.
- Most executives were not very confident in the ability of their company to manage compliance and integrity related risks. Only 38 percent of executives were extremely or very confident that their company had effective processes to identify and mitigate these risks when conducting mergers and acquisitions, while 34 percent had this level of confidence when their company made a Greenfield investment. With regard to third-party relationships, only 40 percent of executives were extremely or very confident in the ability of their company to manage these risks when engaging vendors, and 36 percent were this confident when their company worked with third-party agents.
- Due diligence is more common when companies consider investment than when they engage third parties. Seventy-one percent of executives said due diligence is always or almost always conducted by their company before conducting an M&A transaction or making a Greenfield investment. In contrast, only 43 percent of executives said their company always or almost always conducts due diligence before engaging vendors, while 49 percent said this was the case when engaging third-party agents.
- Seventy two percent of executives said their company uses an initial risk assessment to determine the appropriate level of due diligence.
- Only about half of the executives said their company conducts an extensive examination during due diligence of the possibility of bribery of government officials or of commercial bribery when considering M&A transactions or Greenfield investments in emerging markets or when engaging third parties.
- Among the challenges when engaging third parties in emerging markets, 45 percent of executives ranked adequately verifying information provided by business partners and third parties as one of their company’s top challenges. Other issues that were each ranked among the top three challenges by roughly one third of executives were conducting timely and sufficient due diligence, lack of required skills and knowledge among employees, and securing qualified local professionals and firms to gather relevant information.
Read the complete “Look before you leap” survey report, to learn more about the survey findings. Download your copy, via the blue, "DOWNLOAD" button, under the title of this page. [Go to top of page.]
This publication contains general information only and Deloitte Financial Advisory Services LLP is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor.
Deloitte Financial Advisory Services LLP shall not be responsible for any loss sustained by any person who relies on this publication.
Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.