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Here's a plan for managing corruption risks in emerging markets

In prior posts I noted both Kazakhstan’s successes and failures in improving its business environment and examined the possible reasons for Kazakhstan’s contradictory performance. I also provided tips for American companies contemplating potential investments in Kazakhstan or other emerging markets.

Here are additional tips that could help American investors compete successfully in Kazakhstan and other emerging markets in an FCPA-compliant manner.

Know your rights

Kazakhstan law, just like the law in most countries, provides companies with certain substantive and procedural rights. For instance, government inspections must follow specified procedures and must be completed within set timeframes. Companies have various rights during the inspection process and can appeal to higher level bodies or to the state prosecutor or a court if their rights are violated. Be ready to remind the state officials of your rights and of any limits on their actions if they try to overreach.

Hire the best local employees and advisers

Your accountants, lawyers, and personnel may be your best defense against overzealous or corrupt local officials. They will know their home country’s legislation, business climate and political developments better than anyone and can navigate the best legally-permissible course of action in complicated situations. Hire the best and the brightest and don’t try to pinch pennies on local wages. But make sure you have properly trained your people concerning their obligations under the FCPA, and let them know FCPA violations will not be tolerated.

Be prepared for a government audit
Corporate audits are common -- most take place in accordance with a specified schedule published by the state authorities, although in some circumstances the government can order an unscheduled inspection. Kazakh tax authorities seek to audit all taxpayers at least once within the five-year statute of limitations period, but may do so more frequently for certain groups of taxpayers. Know your rights and obligations in case of a government audit. Be prepared by making sure all documents are well organized, and that all company activities are defensible under the prevailing local law.

You can’t win them all
State inspectors often have performance quotas. They are usually armed with statistics about prior audits of companies in your industry and have expectations about finding specific violations. If the inspectors don’t find any problems, they may fear the appearance of malfeasance or, even worse, that they are on the take. So they have great incentives to find violations.

Smart companies in emerging markets know that it may be better to keep their powder dry to fight big sanctions rather than litigate small fines. Sometimes it’s better to lose a minor skirmish but win the war. If your staff has successfully defended the company on most key issues and the only thing stopping the inspector from concluding the audit is a small fine or interest charge payable to the state budget, it may be better to concede the matter, pay the fine to the state, and let the inspector move on merrily to greener pastures.

I’ll provide some additional tips in the next post.


Alex Nisengolts is a Chicago attorney focusing on cross-border M&A, electronic discovery, and investments and operations in Kazakhstan. He first traveled to Kazakhstan in 1994 as a legal advisor on a USAID-sponsored legal reform project and has been involved in Kazakh matters for the past two decades, for U.S. and Kazakh law firms and as a manager and senior manager for a Big Four international accounting firm. He can be reached here.

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