Having a business that operates in high-risk countries, or that deals with a high-risk sector, can be an expensive choice for your business. Not only do you have extra costs to cover due to increased transaction fees, but your business will be watched with hawk-eyes to ensure that nothing illegal stems from your trading. Therefore, it is important to future proof your company when dealing with high-risk countries.
A study by the World Bank estimated that an extra 10% is added to the cost when doing international business, this is due to the possibility that your transaction might be seen as a bribe or a form of corruption. The danger of doing business in high-risk countries is the increased potential of inviting transactions that might be seen as fraudulent or corrupt.
Risks are usually specific to each country, its political and economic structure and to each industry. Industries that are susceptible to high levels of corruption include for example oil and gas, defence, logistics, telecommunications and pharmaceuticals.
Gaining access to and staying in these industries often involves public procurement contracts and licenses issued by state authorities. The challenge for businesses like these is identifying what to focus on and where, in order to manage those risks and future proof their company.
How to build and future proof your company in a high-risk country
It is important to identify the risks from both a preventative and business perspective in order to allocate your compliance resources appropriately. Then you’ll know where the risks are the greatest, the countries and businesses that could cause harm to your business and harm your business prospects.
Poor business prospects include customers who pose sanctions and export control risks. You need to take into account the regulatory risks they introduce to your business. When you are aware of the risks that your business faces, it will allow you to better manage these risks for future proofing.
Enhanced due diligence
The EU Anti Money Laundering Directives (AMLDs), developed by the European Union, states that all EU based businesses must collect relevant official documents from official sources such as government registers and public documents rather than from the organisation in question.
If a trading partner is located in a high-risk country, the company must conduct enhanced due diligence on the business. This involves additional searches to include the purpose of the transaction, the payment method and expected origin of the payment.
Ultimate beneficial owners
In cases where physical verification is not possible it is vital to establish who the ultimate beneficial owners are, whether they are your customers, partners, suppliers or connected to you in another business relationship. It is important to actually know who you are dealing with.
Some countries in the EU have granted public access to their Ultimate Beneficial Owners Register (some do require a cost) where you can make sure of who will be classified as an owner in which country. It is important to ensure that you follow these guidelines to ensure that your company stays within regulations.
Many businesses have sophisticated internal compliance systems, using proprietary software to perform due diligence tests. The programmes are designed to allow businesses to perform the enhanced due diligence, know your business and know your customer (KYC) checks.
However, for small to medium sized companies it tends to be more cost efficient to use external resources or support.
A valid country risk assessment should rely upon credible sources and needs to be developed independently without the influence of profitability. Mitigating risk doesn’t eliminate risk, but it can help you to make an informed decision regarding leaving or remaining in a market.
Although there is no such thing as a perfect compliance system, if your company uses a rational risk based process that includes a good country risk assessment it will provide future proofing for your company should a violation of the compliance system be detected.