Entity management: global heat map

Four experts run down the hottest issues and which areas are risky for international subsidiary management, and why

In order to produce a mid-2014 heat map summing up current challenges, Corporate Secretary  contacted four experts on global entity management. This is not meant to be a comprehensive  world atlas of risk, nor should it be seen as simply conflating risk with emerging markets.

‘When talking about risky places to do business, the typical reaction would be to start listing regions of high corruption or political instability, or maybe regions with high exposure to climate change or natural disasters like earthquakes,’ says Luc Brandts, founder and chief technology officer of BWise. Like the other experts canvassed here, however, Brandts balks at dwelling too heavily on those factors.

‘There is an element of risky business that  is actually at the opposite end of the scale: doing business in the western economies,’ he points out. ‘There are many countries where regulations are so strict that companies need to be really sure they’re compliant, or else they may get themselves into  serious trouble – financially and/or reputationally.’

Corporate secretaries, who are often responsible for managing the governance affairs of both  domestic and international subsidiaries, need to be wary of both kinds of trouble, no matter where they are doing business. Kevin Penzien, president of Citco Corporate Services, points out that even though a multinational company’s global entities are usually limited liability-type private companies subject  to fewer disclosure and corporate governance requirements than corporations, there are often challenges presented by the uniqueness of the rules and regulations in each foreign jurisdiction.

THE EXPERTS

Luc Brandts, founder and chief technology officer, BWise

BWise, a governance, risk and compliance software company  founded in the Netherlands in 1994, was acquired by NASDAQ  OMX in 2012. Brandts, a former business consultant, manages the development of BWise’s products.

Jennifer Branham, compliance counsel, Verbatim

Verbatim is a global compliance specialist owned by law firm Orrick Herrington & Sutcliffe. Branham, who heads up Verbatim’s team  at Orrick’s operations center in Wheeling, WV, has experience in  compliance matters in more than 80 international jurisdictions.  Before Verbatim she worked for Samsung in South Korea. nbsp;

Sally March, principal at Drummond March

Now a compliance and ethics consultant based in London, US-born March worked in the former Soviet Union for more than a decade and, after its breakup, in Russia and Kazakhstan. She currently helps to develop the Society of Corporate Compliance and Ethics’  international track and advance its training programs in Europe.

Kevin Penzien, president, Citco Corporate Services

Based in Citco’s San Francisco office, Penzien works with US-based clients on statutory compliance for their international subsidiaries. He previously worked for the Brazilian-American Chamber of Commerce.

WESTERN EUROPE

‘By no means is it certain that you’ll be OK when you’re active in one highly regulated region and start in another region, because regulations may be different and reporting requirements may be different. Doing business in France, with its strong labor laws, or doing business in Germany, with its strict data protection laws, is different from doing business in the US, with its specific requirements. Regulators are not bound to one country; conducting an act of bribery in a region that is well known for it may lead to fines in the UK, as just one example.’ – Luc Brandts

‘There’s a perception in the US that the EU has achieved harmonization, and that therefore EU law is like federal law, but it’s not. Privacy and data protection are always front of mind here, and data protection laws in European countries have always been more stringent than in the US. I think we’ll converge, but in the meantime North Americans need to know there’s a different expectation in Europe.’ – Sally March

BRAZIL

‘Operating in Brazil continues to present  significant challenges in subsidiary maintenance. Foreign quota holders must maintain domestic representatives as well as a local subsidiary  representative. These functions carry significant legal liability, and traditional law firms are generally unwilling to allow members to serve in this  capacity. It can be difficult to find candidates who are suitable for the foreign shareholders, and the prevailing wisdom mandates that powers of  attorney necessary to preserve these functions should be executed at least annually. Given that powers of attorney executed abroad require authentication by the local Brazilian consulate, the process to remain in legal compliance can be costly and time-consuming.’ – Jennifer Branham

UNITED ARAB EMIRATES

‘The UAE continues to be a hub for investment in the Middle East and North Africa. Although most US companies establish subsidiaries in one of the two major ‘free zone’ areas (Dubai’s Jebel Ali Free Zone Authority and Airport Free Zone), challenges include a process for legalization of necessary documents that is very specific to the UAE. Also, when appointing a director/manager to your local subsidiary, documentation of his/her formal education is required and the local authorities will verify whether the director candidate is suitable for such a position. Some free zones require all corporate  registrations to be processed via an online portal account. Thus, each subsidiary needs to be in compliance with all requirements, deadlines and payments to keep its portal account active – and if the portal account is blocked, no registration can take place unless it is unblocked.’ – Kevin Penzien

RUSSIA

‘The difficulties of doing business in the former Soviet Union depend on what industry you are in. In minerals, energy or telecommunications, for example, the risk of corruption and money  laundering is very high. If you are in a business that depends on goods or equipment passing through Russian customs, the risk of corruption is very high. In Russia, political risk is obviously high – particularly recently, with the situation in Ukraine so volatile and sanctions being imposed. Political risk also takes the form of arbitrary enforcement of the law, particularly tax rules.’ – Sally March

CENTRAL ASIA

‘In Kazakhstan and other countries of central Asia, not only are there risks of corruption and arbitrary enforcement of the law, but it is also important to understand the political, personal and family interests of the president and members of the government. A common challenge in all  of these countries is the small and interrelated circle of decision makers. Unless this matrix of people and their interests are well understood, the risk of commercial and legal missteps is great. It’s like a three-dimensional corporate chessboard.’ – Sally March

CHINA

‘Recent updates to Chinese company law warrant attention, as  various agencies and provinces are changing requirements concerning capital investment for wholly owned foreign enterprises. On the face of it, this has the potential to actually simplify regulations for foreign enterprises and could be a very good turn of events in the long term. In the immediate future, companies may need to expend additional resources to clarify requirements for annual inspections and capital verification reports in order to make sure they remain in compliance with all applicable regulatory institutions until the new requirements have been sufficiently streamlined.’ – Jennifer Branham

‘China presents many of the same challenges as central Asia in the sense of political, personal and family interests affecting business relationships, plus due diligence on business partners is complicated by the fact that family relationships are not obvious from names. If your company is dealing with the government, there is also the risk of surveillance and commercial espionage.’ – Sally March

HONG KONG

‘Changes to Hong Kong’s Companies Ordinance bear some  additional risk as one long-standing feature – availability of a  corporate director – terminates later this year. Companies that fail  to appoint a natural person to the board within the next six months become liable for daily fines thereafter.’ – Jennifer Branham

INDIA

‘There’s a lot of focus right now on the corporate governance overhaul embodied in India’s Companies Law 2013. It affects aspects of corporate governance ranging from the mandated fiscal year to the composition of boards of directors. Because implementation has only recently begun, it’s difficult to anticipate the specifics of how the law will be enforced, so diligent companies will have to invest extra attention and expense to comply strictly in the meantime.’ – Jennifer Branham

‘Some of the updated rules effective from April 2014 include: all Indian companies are now required to have at least one India-resident board director; for the first time the duties of directors have been defined by law; and each company’s annual return and board report has been amended and requires more detailed disclosures. Unfortunately, these revised statutory obligations apply to existing as well as new subsidiaries, so US corporate secretaries must begin planning amendments to get their corporate governance practices in line with the changed rules.’ – Kevin Penzien