Emerging market countries have seen unbridled development over the last couple of years. They’ve transformed into economic powerhouses to accelerate global growth. High investor returns, rapid industrialization, multiple international trade agreements and pacts, substantial labor pools, job opportunities and untapped resources in these markets have made them frontrunners in generating business opportunities.
Projections from the International Monetary Fund and World Bank show that the GDP growth rate for emerging markets and developing economies has increased from 4.1 percent in 2016 to 4.5 percent in 2018 and is expected to reach 4.7 percent by 2019-2020.
Emerging markets have outpaced many developed markets, and the potential of future growth remains fairly bright. With soaring business confidence, many emerging regions have extensive opportunities available for global organizations that are looking to invest, develop and expand their operations. As per the World Bank report, some of the fastest growing nations in 2018 included Ethiopia, India, China, Ghana, Côte d’Ivoire, Philippines, Cambodia and Laos.
However, these markets have their own set of challenges: market volatility, geopolitical risks, weakening currency and fluctuations, complex local laws, cultural sensitivities and infrastructure concerns. The reality is that global multinational corporations entering, investing and expanding in emerging markets will have to be aware of relevant regulations, be familiarized with local complexities and implement global leading practices to tackle fraud and corruption risks.
According to EY’s 14th Global Fraud Survey, Corporate misconduct – individual consequences, an emerging markets viewpoint, more than 50 percent of respondents across emerging markets said that corruption is widespread, and about one-third supplied concerns about misconduct at their workplaces.
Respondents also expressed willingness to act unethically; 40 percent said that at least one of several unethical practices — such as offering entertainment, cash or personal gifts to win or retain business or misstating financial performance — is acceptable, if it helps to survive a downturn.
Additionally, 46 percent believed that to meet revenue targets they could justify either 1) backdating a contract, 2) extending the monthly reporting period or, 3) booking revenues earlier.
Regardless of these findings, the report highlights increasing support for transparency and prosecutions. Eighty-three percent of the respondents in emerging markets expressed support for prosecuting individuals because it would help deter future cases of fraud, bribery and corruption.
Global multinationals must be aware of local risk vectors before forging any partnerships or joint ventures. However, the report stated that 36 percent of emerging markets’ respondents aren’t assessing country-specific risks, and 25 percent aren’t evaluating industry-specific risks.
Following are some of the key risks that organizations need to address when conducting business in emerging markets.
Compliance with local laws to deter bribery and corruption
Doing business while maintaining transparency and ethical conduct has always been a perceived risk in emerging markets. A new entrant can encounter a plethora of domestic regulations that might be complex, unclear and difficult to obey.
Lack of — or weak — laws in local regions might lead to fraud, bribery or corruption. Local teams might — even unintentionally — violate 1) domestic legislation that is specific to a country or, 2) global laws such as the Foreign Corrupt Practices Act and the U.K. Bribery Act, which extend across multi-jurisdiction territories.
In both situations, a local organization might encounter significant enforcement action. Subsequent investigations can lead to increased regulatory scrutiny, lawsuits and even penalties.
For example, in one case, a global retail organization was in the middle of expanding operations across Africa, India and Asia. The global office charted the plan and sent teams to set up operations in each of the three locations. However, the teams faced a number of challenges as the domestic laws across each country — and sometimes even in states — were diverse.
After the initial struggles, the company sought local assistance from experts that could navigate through the complex matrices of domestic and international laws. They recommended putting an anti-bribery and anti-corruption framework in place, which addressed the local peculiarities under India’s Prevention of Corruption (Amendment) Act and Companies Act, Kenya’s Bribery Act 2016 and Malaysia’s Anti-Corruption Commission (Amendment) Act 2018. These provisions complemented the company’s international compliance requirements. With the framework and policy in place, the company was able to avoid a substantial scrutiny by the regulators and, correspondingly, millions of dollars in fines.
We’ve seen greater enforcement and prosecutions in emerging markets with, for example, India’s Benami Transactions (Prohibition) Act and the Fugitive Economic Offenders Act, 2018, plus China’s Anti-Unfair Competition Law. Recent anti-corruption measures also include Argentina’s new law in which individuals can be subjected to criminal prosecutions, Vietnam’s new penal code and Bulgaria’s New Anti-corruption and Forfeiture of Assets Act. Robust ground work to demystify the implications of local laws and embedding them in anti-fraud and compliance programs can promote sound governance.
Whistleblowers to the rescue
Whistleblowers are a crucial element in identifying cases of corporate and individual misconduct, especially in transnational operations. Organizations investing or expanding in emerging economies have to institute whistleblowing mechanisms, encourage reporting without fear of retaliation and take appropriate action under applicable regulations.
For example, a global media and entertainment corporation, headquartered in the U.S., expanded its operations in Asia. In line with its internal policy, it set up a whistleblowing mechanism with multiple channels of reporting. The corporation’s global team — in consultation with local experts — went a step further and ensured that the hotlines, which an independent vendor managed, were in multiple languages such as Mandarin, Cantonese, Malay and other dialects to encourage employees to voice their concerns.
The corporation conducted regular trainings and awareness campaigns with global and local instructors. Close monitoring and analysis over two years showed that more than 60 percent of tips came through the hotlines; 80 percent of those were legitimate. Thus, the compliance and anti-fraud team was able to take timely and appropriate action.
EY’s 14th Global Fraud Survey reports that employees might feel constrained to blow the whistle because of various factors: One in four respondents in emerging markets cited loyalty to their company as a reason to not flag concerns and about one in five said it was because of loyalty to their colleagues. Organizations should therefore strive to foster a positive work environment, encourage commitment to maintain high ethical standards, and implement and periodically monitor global compliance and whistleblowing programs to unearth and mitigate impending threats.
Digital disruption to tackle vulnerabilities
Emerging markets have seen a significant uptick in technology adoption — particularly mobile and digital disruption. The promises of artificial intelligence, robotics and blockchain spur organizations to continue capitalizing on technology if they want to expand. However, of course, they’ll have to counter vulnerabilities to prevent cyberattacks on customer’s confidential personally identifiable information (PII) and digital assets.
They can mitigate cyber risks by deploying the latest forensic data analytics tools and strengthening incident-based cyber-response capabilities. Many governments are helping curb cybercrime by introducing initiatives and reforms. For instance, in 2017, South Africa introduced a new cybercrime bill, and Malaysia is planning to introduce new cybersecurity laws under its national security council.
Organizations in emerging markets will have to cautiously deal with the assimilation and protection of all data, especially customers’ PII. With the EU’s General Data Protection Regulation and California’s Privacy Law kicking in, organizations will have to conform to global standards of data privacy and protection. Also, consider domestic laws and guidance such as India’s proposed Personal Data Protection Bill, Chile’s proposed Data Protection Act and China’s Information Security Technology Personal Information Security Specification.
Addressing third-party threats
Organizations often have to depend on third parties — vendors, agents, contractors — as intermediaries and touch points because of complexities in supply chains, cross-border operations, licenses and permissions, transport and logistics.
New entrants into emerging markets should be cautious when transacting with these vendors to curb risks and take adequate measures to establish the credibility of third parties in line with compliance frameworks. Organizations can conduct a 360-degree validation process (an extensive review of the public domain information, reputation check, allegations history, litigation records, etc.) when identifying potential vendors, screening and selecting them. This is an important step before an organization starts working with any third party for business. Additionally, the organization can set up a periodic monitoring mechanism to mitigate future risks.
For example, a global mining and minerals organization had identified Latin America and Africa as pivotal markets to drive its next wave of growth. The organization conducted initial due diligence and commenced operations. However, a few months down the line the organization identified bribery and corruption concerns. It conducted a proactive vulnerability assessment. The third-party checks identified many problems such as kickbacks paid by a vendor to select employees for favors, conflicts of interest, nepotism and bid rigging. The organization’s background checks of vendors also highlighted their irregular payments, cash bribes and offers of entertainment to secure lucrative projects and environmental clearances.
The EY 14th Global Fraud Survey notes that one in five respondents in emerging markets didn’t conduct background checks on third parties as part of their forensic due diligence programs. So, third-party due diligence is extremely crucial for global corporations governed by international anti-corruption regulations. Integrity due diligence frameworks for business associates and employees, checks of conflicts of interest, staff rotations, and continuous training and awareness campaigns can identify red flags and mitigate risks.
Emerging economies can be lucrative and risky
With fraud becoming more complex and sophisticated, organizations can tackle risks in emerging economies with robust assessments of threats’ landscapes, formulation of resilient anti-fraud and compliance strategies and timely monitoring of processes and activities.
The above article first appeared in ACFE’s FRAUD magazine – January/February 2019 issue.