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Tuesday
Feb062018

Mich and Wack: Political risk analysis helps reveal local compliance risks

Of the lessons we have learned over the past few years, of particular importance is how to enhance the quality of compliance work by allowing for nuance and actual local insight. That is, understanding how bribery and corruption actually work in order to design programs that better ensure compliance.

If the problem is becoming more nuanced, then problem-solving approaches could use some of that nuance, too.

On the proactive side, this includes conducting country-focused corruption risk assessments and partnering forensic accountants with country analysts and experts to conduct transaction-testing based on identified country- and sector-specific corruption red flags. It also entails developing indicators and benchmarks based on aggregated understanding of actual local distinctions for corruption in specific sectors or industries.

On the reactive side, it involves using local insight and the understanding of government priorities and political pressures to forecast corruption crackdowns, government retaliation and other non-technical developments that are not flagged in most regular corruption risk assessments. Especially in emerging markets, these political risk factors will have major implications for companies seeking to conduct transparent business in a given country.

This approach has a number of tangible benefits for companies.

First, complementing corruption risk assessments with local risk insight allows companies to more accurately prioritize red flags and other areas of concern. Within a given country, differences in ethnicity, religion or language, cultural dissimilarities, geographic variations or regional nuance all affect local norms related to the actual local practice of corruption. Add to that the specific sector of any given client and the operation-specific levels of exposure (including government touch points) and it becomes clear why macro-level ratings fail to reflect the nuance of compliance risk on the ground.

Factoring local knowledge into benchmarking and red-flag identification processes gives companies a far more accurate depiction of where they should focus their efforts. Doing so also allows for cost savings as those efforts are prioritized more accurately and efficiently, enabling companies to direct scarce resources where they are truly needed and will have the greatest impact.

Second, companies all-too-frequently conduct risk assessments based on the notion of established “international standards.” The review of a specific entity’s controls and procedures, therefore, becomes at least somewhat inaccurate: while certain types of transactions lend themselves more easily to manipulation and are thus likely to be a focal point for compliance reviews, it is hard to understand how a company is set up to deal with local corruption risks related to these transactions if it is not understood how corruption actually works in a specific locality for a specific sector.

Finally, the extent to which corruption is or is not a major risk for investors -- especially in emerging markets -- does not depend only on how or whether corruption manifests in each specific country. As mentioned, it is also a function of the political priorities for that country’s government, including to what extent combating corruption is a priority at any given point.

Large scandals, political succession struggles and election cycles are all likely to influence how high up corruption crackdowns will be placed on the agenda. Geopolitical and other internal and external factors are also likely to influence the extent that companies can expect enforcement to be politicized (i.e., deliberately directed against their sector or their “country of origin”).

___

Nuanced views of realities on the ground not only come in handy for program reviews. They are also extremely useful during investigations or, in the worst case, during crisis management in connection with allegations that have surfaced.

Applying local-level knowledge enables companies to paint a more accurate picture of specific corruption dynamics. Combining this knowledge with a comprehensive map of various stakeholders for a given case and analyzing the likely paths forward and ideal strategies for engaging with and managing these situations can help focus investigations.

At the same time this local-level strategy can help companies stay informed about external developments that could influence how an investigation is likely to evolve and -- crucially -- how results will be received by key stakeholders (including authorities in the host country). Moreover, developing political risk scenarios will help identify potential pitfalls and prepare for worst case assumptions more efficiently.

By expanding the field of view beyond the immediate investigation at hand and incorporating local expertise, companies can seek to ensure compliance, anticipate antagonistic developments and prepare for and mitigate risk before it materializes.

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Brian Mich, pictured above left, is a Partner in Control Risks’ Compliance, Forensics and Intelligence practice in the Americas region. A former prosecutor, he has over 30 years of experience in the private and public sectors conducting fraud and corruption investigations. He previously served as senior counsel to the Independent Inquiry Committee, led by Former Federal Reserve Board Chairman Paul Volcker, investigating the Oil-for-Food Programme in Iraq. He can be contacted here.

Oliver Wack, right, is a Director of Control Risks and the head of its North America risk analysis and consulting team. He leads on the development of corporate market-entry and risk analysis and benchmarking programs, as well as the development and delivery of political and corruption risk analysis and consulting tasks for U.S. clients, with a focus on Latin America. He speaks fluent English, French, German and Spanish. He can be contacted here.

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