October 04, 2017

Global organizations are becoming increasingly aware of the need to effectively manage regulatory and compliance risk, to understand local business practices, to be fully informed on regulations including corruption legislation, and to fully investigate the practices of both the business itself and partnering organizations. Those that fail to address risks to global integrity, and fail to perform due diligence on the people and companies with which they choose to partner, face significant financial losses in the form of fines and other legal costs, along with a disparaged brand that impacts future customer acquisition, retention and loyalty.


The financial risks tied to integrity risk can be staggering. For example, in July 2016, the Department of Justice (DOJ) filed civil forfeiture complaints against 1Malaysia Development Berhad (1MDB) for $540 million in assets. Combined with penalties levied earlier, this amounts to $1.7 billion in proposed forfeiture, as a result of allegations that 1MDB officials, their relatives and business partners embezzled over $1 billion and misappropriated over $2 billion more in funds intended to help the Malaysian people.


This case has had broad implications. The global conspiracy utilized a complex web of shell companies in Singapore, Switzerland and the United States, as well as legitimate companies worldwide. For the legitimate firms implicated in the scandal, their involvement was made possible by weaknesses in their own controls and processes and resulted in heavy fines. Many of the financial institutions implicated in the 1MDB investigation were widely considered to have strong cultures of compliance and robust procedural due diligence. Nonetheless, their failure illustrates why compliance frameworks must constantly evolve.


In the US, increased interest in the Foreign Corrupt Practices Act (FCPA) and asset seizures means the DOJ and SEC are likely to continue pursuing aggressive litigation. To those unfamiliar with the FCPA, compliance can be complicated, and with possible changes to the FCPA on the horizon, staying up to date with enforcement can seem daunting. It is unclear whether the Trump administration will continue this trend of heightened enforcement. As some argue President Trump’s appointment of Jay Clayton as SEC chairman seems like a signal that FCPA enforcement may be on the decline. Clayton was involved in a 2011 report that criticized FCPA enforcement and represented Och-Ziff, the first ever hedge fund subjected to FCPA penalties. However, the possible benefits of voluntary disclosure combined with high monetary rewards for governments, point to continuing FCPA enforcement. And, as more companies rely on new markets and partnerships for growth, the threat posed by violations remains very real, especially as other nations expand enforcement.


Importantly, the 1MDB case and others illustrate a growing trend in global accountability. Whereas in the past, America has been the vanguard of anti-corruption and corporate transparency, international views are shifting. In 2016, both France and South Korea implemented new or strengthened policies on corruption both at home and abroad. Additionally, in 2016 Brazil announced a number of high-profile investigations which resulted in a signed settlement between the Dutch oil and gas company SBM Offshore NV, Brazilian prosecutors, and the state-owned oil company Petróleo Brasileiro SA. Allegations of corruption in this case cost SBM $342 million. 


Countries like Ukraine and Kenya are enacting new laws designed to crackdown on bank secrecy, tax evasion, and corruption while 68 countries (not including the U.S.) recently signed a ‘super treaty’ aimed to battle corporate tax evasion. As other nations become more and more transparent and begin to hold companies to higher, more exacting standards, it is increasingly important for American companies to comply fully with national and international laws to protect their employees, business interests, and reputation.


Geopolitics and compliance are much more intertwined than a decade ago. Macro and micro analysis allow companies to make decisions that make sense on the ground and on the global stage. Due diligence when acquiring new assets, entering new markets, or expanding business is of ever-increasing importance.