In the first of our 3-part series, we look at the risks – and the rewards – of doing business in high-risk and volatile jurisdictions.
Conducting business in Complex Environments and High-Risk Jurisdictions is risky but could be advantageous if well managed, and professionally advised. In such states, corruption can be widespread and getting things done, arduous, frustrating, and even dangerous. With specialist legal support, an advantage can be developed that will serve well when setting up in similar markets around the world.
Assess the pros of doing business in a high-risk jurisdiction against the cons. Limited infrastructure and poor communications networks will make operating difficult and expensive. The local economic conditions like high unemployment and an unskilled workforce can be barriers. Complex environments may have unexploited potential, but the risks of terrorism, internal conflict and civil unrest will exist. Other risks include crime and corruption.
Unstable or ineffective governments create a political climate that will be unable to protect business interests. Anti-foreign sentiment will make doing business abroad especially challenging. No foreign trade policy will mean the necessity of navigation through the nuances of allying with government officials.
Sudden changes in laws in a high-risk jurisdiction will expose businesses to regulatory risk. Changes in banking laws may limit the ability to repatriate money or may restrict access to funding.
Fluctuations in a high-risk country’s currency can reduce profits. The currencies of stable governments are less volatile than those of less-developed nations. A Currency hedging strategy can mitigate the impact of currency risk. Methods for hedging currency risk are forward contracts, spot contracts, and foreign currency options.
Hedging strategies can mitigate some currency risk; however, profitable business can be hostage to the whims of the local market. An abrupt change in monetary policy will also negatively affect currency exchange rates.
Attractive opportunities can be found in countries with high levels of risk. As such, companies need to make sufficient preparations to ensure meeting ethical and legal requirements to operate in foreign countries. Many companies create comprehensive compliance processes. Creating a compliance system is an initial and on-going risk assessment in order to identify, assess, monitor and manage risks, including financial crime and money laundering risks.
It is generally not possible to eliminate all risks. However, it can mean making an informed choice or taking measures to remain in that market at a minimised risk level. The establishment of an effective compliance system can be challenging, but starting with professional guidance from a specialist law firm with experience in high-risk jurisdictions and environments is only a phone call away…
Business operations in the more moody parts of the world can face a broad spectrum of threats to their employees. Vast tracts of these countries can be controlled by fluctuating coalitions of warlords and local bullies. Power vacuums create potentially lethal uncertainty. They also aggravate more commonplace risks, from life-threatening driving conditions to the spread of diseases.
It is possible to succeed in such environments and have operational capabilities to make the local security and national political deficiencies work, without resorting to illicit means.
Relationship building with local government is an essential strategy.
There are four main approaches:
- Gaining political influence in a country can be used to influence regulatory structure. Such as, lobbying to reduce corruption or, networking to reason for special regulatory rules.
- Where there is limited regulation, the local political structure can be avoided. Instead, focus on the creation of self-regulating associations, which effectively shift the decision-making power from local government to industry and the stakeholders.
- In countries with strong centralised government, there can be less political options. Such nations often have highly bureaucratic regulatory laws. In this instance, it is useful to network with influential officials and launch joint ventures involving local companies. Influencing politicians can lessen the risk of regulatory barriers.
- With no political connections and where local regulation has little or no impact, it is important to proceed carefully so as not to break anti-corruption laws at home and risk reputational damage.
The world is arguably more dangerous. The potential for profit and growth is often found in complex environments and high-risk jurisdictions. Businesses will take more risks in dangerous and unstable countries. Some of the world’s desirable resources are in the world’s most inhospitable places, and that can drive businesses to expand to countries that may not want them there, or whose leaders seek to extricate special payments.
Accordingly, if you’re planning to do business in a high-risk jurisdiction, or enter into sales, distribution or licensing agreements with principals in volatile regions, or even export your products and services, and perhaps personnel, engage Proelium Law to help familiarize with security, political, and economic risks, and provide business information. Guidance on threats like terrorism, political violence, civil and sub-state conflict, regional instability, strategic competition, interstate relations, armed conflict and domestic military activity, regime stability and legal security, as well as foreign government interference in economic and financial affairs can be provided.
Understanding the political and security-risk environment in a country or region involves going deeper than Google. Companies that adapt best are those that seek to understand the history, culture, and current situation of the target market.
Understanding political and security risk is a continual effort. Simply researching these issues at the time of entry is not sufficient. Events evolve rapidly, and companies that are aspiring to deploy a business effort in a high-risk environment need to regularly reassess the situation to understand how it is changing and mitigate for potential effects.
It is crucial for businesses considering operating comprehensive strategies to manage and mitigate geopolitical risk. They should undertake extensive due diligence of target country, respective judicial system and the legitimacy and trustworthiness of potential local partners. Aspiring global businesses should also monitor developments closely and regularly to identify challenges before they become acute and have crisis-management strategies in place from day one, rather than developing them when the crisis emerges.
Barry ET Harris MBE is a consultant for Proelium Law LLP. He is also a British Army veteran who combines operational experience with extensive commercial consulting, executive, and management expertise gained in complex environments and high-risk jurisdictions worldwide.
If you seek to enter an emerging market, take Proelium Law with you. The rules for doing business in high-risk jurisdictions are never the same. For a no-obligation discussion please contact us at [email protected] or call us 020 3875 7422.
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