Field trip: Conducting preliminary market visits
Thursday, November 19, 2015 at 8:28AM
Keith Korenchuk, Samuel Witten and Arthur Luk in Bangladesh, Due Diligence, Kara Brockmeyer, Nepal, Pakistan, Smith and Wesson, Turkey

In the e-book we wrote as a guide to navigating corruption challenges in emerging markets, we talk in one chapter about the particular risks companies face when they enter new markets.

Those risks are illustrated by the SEC’s 2014 enforcement action against Smith & Wesson Holding Corporation.

According to the SEC, the firearms manufacturer began an effort to increase its sales by entering new markets in 2007. Most notably, in 2008, the company allegedly hired a third-party agent to help sell firearms to a Pakistani police department.

Members of Smith & Wesson’s international sales staff allegedly authorized the third-party agent to provide certain police officials with guns and cash gifts, and the company ultimately received a contract. The SEC further alleged that the company’s international sales staff engaged in similar conduct in Turkey, Nepal, and Bangladesh, though these efforts were unsuccessful.

In its settlement with the SEC, Smith & Wesson paid a $1.9 million fine and disgorged $128,892 in profits and interest. It also terminated its entire international sales staff.

Kara Brockmeyer, chief of the SEC Enforcement Division’s FCPA unit, said: “This is a wake-up call for small and medium-size businesses that want to enter into high-risk markets and expand their international sales. When a company makes the strategic decision to sell its products overseas, it must ensure that the right internal controls are in place and operating.”

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In our book, one of the steps we discuss to identify and assess risks in a new market is the Preliminary Market Visit.

The Preliminary Market Visit should include, at a minimum, meetings with the following third parties (tailored to the needs of the company’s anticipated operations in the new market):

The meetings should focus on topics including:

Once the assessment processes, including the Preliminary Market Visit, are completed, the company should prepare a written recommendation, including detailed findings, a risk assessment, and a recommendation on whether to continue or to defer the new market entry process.

The report should also include recommendations on how to control risks in the market and the proposed compliance oversight of the operations there, either regionally or through company headquarters.

A recommendation regarding entry into the new market should then be made to the appropriate decision makers within the company, who would then document their decision to approve, deny, or defer entry into the new market in light of the findings, risk assessment, and recommendation presented.

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Our e-book, Anti-Corruption Compliance in Emerging Markets: A Resource Guide, is available here.
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Keith Korenchuk is a partner in Arnold & Porter’s Washington, DC office. He counsels and advises global companies on regulatory and compliance matters worldwide, with a focus on compliance program effectiveness, compliance program implementation, operations and evaluation, and related regulatory counseling and advice.

Samuel Witten is counsel in Arnold & Porter’s Washington, DC office. He helps companies develop and implement FCPA compliance programs. He also represents clients in arbitrations at the International Center for Settlement of Investment Disputes. He joined Arnold & Porter in 2010 after serving for 22 years in legal and policy positions at the U.S. Department of State.

Arthur Luk is a partner in Arnold & Porter’s Washington, DC office. He  represents corporations; directors, officers, and executives; and "Big 4" accounting firms and individual auditors in investigations conducted by the DOJ SEC, and Public Company Accounting Oversight Board, and in securities class actions and shareholder derivative suits.

Article originally appeared on The FCPA Blog (http://www.fcpablog.com/).
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