Bakers' Paul Melling and Sunny Mann examine the growing compliance issues that come with the rise of the emerging markets

The emerging world has enjoyed an astonishing rise. UK businesses now generate more than one quarter (28.2%) of their revenues from high growth (emerging) markets (HGM) and a recent PricewaterhouseCoopers survey of FTSE 250 companies identified China (45%), India (42%) and Brazil (36%) as the principal markets for growth ahead of even the US, UK and Germany.

Meanwhile, another recent report by HSBC – The World in 2050 – suggests that by 2050, the emerging world will have increased five-fold and be larger than the developed world, with China being the world's largest economy alongside many other HGM countries in the top 25: India (3), Brazil (7), Mexico (8), Turkey (12), Russia (15), Indonesia (16), Argentina (18), Egypt (19), Malaysia (20), Saudi Arabia (21) and Thailand (22).

While the strategy of firms from the developed world to focus their growth strategies on HGMs is inevitable, it brings with it equally inevitable compliance and risk management challenges that in-house and external legal teams are being increasingly called to advise upon (both under the laws of the developed countries and the HGM countries).

Bribery risk

The greatest and most commonly encountered risk associated with an HGM-focused strategy is that of bribery. The anti-corruption non-governmental organisation (NGO), Transparency International, ranks countries around the world according to their perceived level of public sector corruption. In 2011, the index covered 183 countries, assigning scores from one to 10 points (below five indicates a serious level of corruption).

Based on the 2011 results, all of Latin America (other than Chile and Uruguay), all of Asia (other than Singapore, Japan, Taiwan, Hong Kong, Macau and Bhutan) and all of Africa (other than Botswana, Cape Verde and Mauritius) failed to score above five points (see index, right).

The risk of having to pay bribes to get business done in many HGMs is prevalent: from being granted a concession, an operating licence or a contract by an HGM government, to getting goods cleared at customs, obtaining immigration visas and being connected to the local electricity grid or telephone network.

Many enforcement authorities around the world (in particular, in the US, UK and Germany) have been getting increasingly aggressive about ensuring firms do not get an unfair advantage through paying bribes. The vast majority of the cases to date have related to bribes paid in HGMs.

Under the US Foreign Corrupt Practices Act (FCPA), settlements with the US Department of Justice (DoJ) have risen to $800m, (£494m) with eight of the top 10 highest settlements having occurred in 2010 and 2011. Further, reflecting the increasingly aggressive jurisdiction being asserted by the DoJ, eight of the top 10 settlements have involved non-US-headquartered firms.

Under the new corporate offence of the UK Bribery Act, any UK company and any non-UK company that conducts even a part of its business in the UK can face strict criminal liability for a failure to prevent a bribe that benefits the company. It does not matter that the bribe may have been paid by a third party (such as an agent, consultant, joint venture (JV) or JV partner), that the company was not even indirectly involved in the payment of the bribe or that it did not even know that it was being paid by the third party.

Given the new legislation in the UK, we can expect to see more cases and higher fines – there have already been fines and settlements of up to $49m (£30m) (again, mostly related to bribes paid in HGMs).

However, the risks do not lie just under the laws of the developed world. Pretty much all HGMs prohibit under their local laws the giving and/or requesting of bribes to/by public officials. Nigeria recently imposed a fine of $35m (£22m), China has launched a number of high-profile bribery investigations and India has been under pressure to revamp existing bribery laws. In Russia, recent amendments to its anti-bribery legislation provide for corporate liability and fines of more than $3m (£1.8m) (and up to 100 times the amount of the bribe).

Given the bribery risks, it is critical that companies develop and/or reinforce their compliance procedures in order to prevent bribes being paid (in particular, in relation to business being conducted in HGMs). A robust compliance programme can assist in preventing bribes being paid in the first place. However, even if a bribe is paid (for example, by a maverick employee), a compliance programme can result in reduced fines and, in the case of the new UK corporate offence, the existence of adequate compliance procedures can act as a complete legal defence against prosecution.

Other key risks

While bribery is the most significant area of concern, a number of other key risks should be factored into an effective compliance and risk management programme involving HGMs:

Antitrust/competition – HGMs are getting increasingly hot on competition compliance. Having introduced competition laws, countries like Brazil, India, China and Russia are now also enforcing them. For example, Brazil imposed fines collectively worth $1.4bn (£865m) for a cartel related to medical and industrial gases and the Indian authority has already imposed a fine of $126m (£78m) against a local property developer under the new Indian competition regime. However, it is important to note that the conduct of your employees and subsidiaries in HGMs can also expose you under the competition regimes of the European Union and the US, given their broad extra-territorial reach.

Trade sanctions – The United Nations, EU, US and many other jurisdictions have trade embargoes and sanctions in place against many countries (or people within such countries), including a number of countries predicted to be top 30 economies by 2050 (such as China, Egypt and Iran). Many other HGMs that are resource-rich are currently subject to sanctions, such as Libya, Iraq, Sudan, South Sudan, Syria, Burma, Ivory Coast, Tunisia, Guinea and Belarus.

The sanctions can include a mixture of product and technology controls and restrictions on dealings with (or investments in) specific sectors, businesses and individuals. Sanctions developments need to be followed closely as they are very fast-moving and can be introduced with no or little prior warning (as happened with Libya) and can also be relaxed in a short space of time, which opens up business opportunities (as is currently happening with Burma).

State protectionism – When investing in or dealing with HGMs, companies should be mindful of the risks of state protectionism. A number of HGMs are notorious for expropriating property that is ultimately foreign-controlled or introducing discriminatory laws or subsidies that are deliberately designed to favour domestic industry. However, developed countries can take measures to protect their investors (see, for example, under investment protection, below) and engage in reverse protectionism against HGMs through, for example, introducing anti-dumping duties against foreign goods or countervailing measures to counter subsidies by foreign governments.

Local regulatory changes and conflicting requirements – Even if not discriminatory in nature, sudden changes to local laws and regulations in a whole host of areas (such as tax, environmental, planning, product content, etc) can impact on the value of an investment.

Companies must also occasionally balance conflicts between local laws in HGMs and laws of their home jurisdiction – for example, the Russian competition authority recently commenced an action against a foreign-controlled entity for abusive refusal to deal when the entity sought to terminate a distributor due to FCPA concerns and, similarly, local compliance with Arab countries' boycott of Israel could raise risks under US anti-boycott laws.

Intellectual property (IP) protection – Finally, a number of HGMs are renowned for difficulties in protecting and enforcing IP. For example, China is the single largest source of infringing products and one of the fastest growing markets for foreign brands, emphasising the need to protect rights in China. Accordingly, careful consideration should be given to how to effectively protect and enforce IP rights prior to investing in HGMs.

Enabling growth through an HGM strategy

Given the focus of international business on HGMs, in-house legal and compliance teams should be proactively considering a number of key steps to reduce legal and compliance risks associated with HGM strategies:

Prior risk assessment and due diligence – At an early stage, you should conduct a thorough review and due diligence in order to consider not only whether the proposed investment is feasible and lawful, but also that it would deliver a good return. Account needs to be taken of various laws (tax, trade, customs, merger control, competition, foreign investment rules, IP, etc) in both the HGM and the developed world.

Investment protection – In order to maximise the longer-term safety of the investment, consider structuring the investment to benefit from any available protections against expropriation, discriminatory conduct and intrusive regulations under relevant Bilateral Investment Treaties (which entitle investors to bring claims for compensation direct against the host state) or World Trade Organisation agreements.

Knowledge of the local laws and culture in the HGMs – It is critical to have local on-the-ground advisers in the HGM who can counsel you on an ongoing basis in connection with the local laws, regulations and cultural issues that will impact on the running of the business. Not only does having strong local advisers allow you to operate in full compliance with local requirements, but it will also give you a better chance to stay ahead of the curve in terms of changes to the local business and legal environment.

A robust compliance programme – Given the compliance risks associated with entering HGMs, it is vital that companies implement a robust global compliance programme to protect the company against compliance failings under the laws of both the developed world and HGMs. Baker & McKenzie has distilled the expectations of regulators in different regions/countries (US, Europe and Asia) across different subject areas (bribery, antitrust, trade and data protection) into five key themes (see table, right).

• Leadership – Without the buy-in and commitment of the board and other senior managers, no-one else will take compliance seriously. Leadership commitment to compliance is a central requirement.
• Risk assessment – Given that regulators expect companies to develop compliance programmes that respond to the individual risk profile of a company (which will vary according to the sectors, countries and third parties encountered), the initial step is to undertake an exercise that allows you to identify and assess the various risks faced.
• Standards and controls – Based on the risk assessment, the company can then devise measures that adequately mitigate the risks identified – from third-party due diligence protocols (for bribery and trade sanctions purposes) and guidelines for attending trade associations (for competition purposes) to M&A due diligence (in relation to all compliance risks).
• Training and communication – The compliance message needs to be fully disseminated throughout the business through training, codes of conduct and compliance manuals so that all employees and third parties acting on the company's behalf (such as agents) are clear on what is expected of them.
• Monitoring, auditing and response – Finally, there should be ongoing and periodic self-reviews and health checks to verify ongoing compliance. Moreover, companies should have an investigations protocol that they can rapidly implement in case they uncover suspected wrongdoing – investigations teams should include local experts from the HGMs who can help to conduct the investigation in a manner that takes full account of local legal requirements and local cultural sensitivities.

The compliance challenge in HGMs should not be underestimated, but there are solutions (as outlined above) and countless examples of companies that have been enormously successful in these markets while successfully managing their risk. These solutions take time and effort but do bear results. What is more, companies in HGMs seeking to raise foreign capital or obtain foreign investment are themselves beginning to see that compliance is good for business. Increasingly, therefore, such legislative developments as the UK Bribery Act are having a positive impact upon the ethical business environment in these markets.

Paul Melling is the founding partner of Baker & McKenzie's Moscow office and a member of the firm's European compliance practice steering committee. Sunny Mann is a compliance partner in the firm's London office and a member of its India focus group.

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