RiskMap findings: Asia MNCs battle regulatory risks

In its report on trends in global risk and security, Control Risks warned companies in Asia need fresh approaches to their anti-corruption risk management strategies.

Control Risks Australia Pacific managing director Jason Rance (pictured) told StrategicRISK the key threat to multi-nationals is a growing dissonance between their globalised strategies and regional, multi-jurisdictional approaches to markets and the increasingly nationalist agendas of governments.

“Companies looking at a ‘geomarket’ or seeking to target ‘the booming Asian middle class’ have to contend with a China using anti-corruption investigations as a stick to shift national industrial policy, an Indonesia that still remains too beholden to self-defeating economic nationalism, a Thailand rewarding economic spoils to local companies that supported the coup, or a Malaysia that increasingly designs investment policy around narrow patronage groups,” Rance said.

Control Risks highlighted in its report several cases in 2014 where regulators in China enforced anti-bribery and anti-monopoly rules. While domestic companies were also targeted, the report said it is clear foreign companies are now ‘fair game’.

A Changsha court last year fined GSK nearly RMB 3bn ($491m) for commercial bribery and imposed prison sentences on local company executives.

Meanwhile, in the technology and communication sectors, Microsoft, Qualcomm and InterDigital all faced investigations last year from the State Administration for Industry and Commerce (SAIC) and the National Development and Reform Commission (NDRC) in China.

Rance said these incidents highlight the need for companies to have in place scenario plans that take into account potential changes in the national and broader geopolitical landscape.

China and regulatory risk

In its report, Control Risks said China’s ongoing regulatory crack-down requires companies to prepare for increased scrutiny on tax avoidance, product safety, food and drug safety plus environmental violations.

Rance told StrategicRISK multi-national companies are combatting regulatory compliance risks by mapping government and industry stakeholders relevant to their businesses and monitoring key regulatory changes and trends in enforcement.

Companies have also begun auditing their supply chain for compliance risks and training key staff on how to respond to dawn raids by different regulatory agencies.

“Some companies however still underestimate how serious the government is in strengthening regulatory enforcement and risk being caught off guard by investigations,” Rance said. “These investigations could have serious consequences for their operations in China and abroad, ranging from fines to reputational damage, to suspension of operating licenses.”

ABC policies a ‘positive’

The report suggested that well-communicated zero-tolerance policies on anti-bribery and corruption (ABC) could be a net positive for business performance.

However, tightening regulatory scrutiny could only be a win for companies doing business in China if the government genuinely wants to see a more consistent application of the law, according to Control Risks’ Rance.

“In the short-term, companies need to invest in ensuring both their own internal compliance with rules and regulations as well as in understanding compliance risks relating to their suppliers, distributors and other business partners,” he said.

What can risk managers do?

Risk managers can be drawn into focusing on ‘big ticket’ risks - like terrorism and pandemic disease - which might not actually be of critical relevance to their businesses, Rance said.

The majority of businesses should instead identify the main risks to their business, which could range from legal attacks from local competitors, to supply chain fraud or payment of bribes in licensing processes.

“Risk assessments can involve reshaping a business model which may have served in prior years, but is now inappropriate in the context of the current risk environment,” Rance said.

“One example may be the overreliance on middle-men and agents within a sales structure or supply chain, often found to be weak links in a company’s anti-bribery and corruption measures,” he said.

Risk managers should also ensure their company’s ABC measures are understood across the whole organisation.

“Training for in-country teams is vital to ensure commercial and compliance objectives, rather than potentially sending local employees conflicting messages.”

 

Political risks in South-East Asia

In terms of political and security risks facing the South East Asian markets this year, Control Risks said Singapore and Indonesia are the least likely to experience turbulence.

Speaking on Indonesia’s year ahead, Rance told StrategicRISK: “While Indonesian President Joko Widodo has faced political pressures from his own party over his choice of police chief, he has so far been able to insulate key aspects of his reform agenda from such headwinds.”

Politicking is likely to be most heated in the Philippines, Rance said. “The southern Philippines, always a hotspot, has flared once again, threatening a potential spike in violence.”

Finally, Rance said Thailand retains the potential to “go very wrong” in the year ahead fuelled by uncertainty surrounding royal succession and the terms of any return to democracy.