Companies need task force to deal with potential problems.
Think domestic regulation is an irritating thicket? Get ready for the briar patch. Operating subsidiaries in foreign countries is creating such regulatory complexity that many companies may have to reassess how they operate overseas or face hefty fines and lost market share in critical areas of international business. Reacting to the global debt crisis, the global economic slowdown and increasing financial corruption, foreign governments have revamped regulations to stop fraud and protect their market share
of key industries.
Carol Beaumier, managing director of Menlo Park, CA-based risk management consultancy Protiviti, says the amount of regulations companies with foreign subsidiaries have to deal with has ‘compounded exponentially’. She points out that a single country’s regulations can affect how a company conducts business globally, and attempts at compliance must anticipate the potential of capricious enforcement. Global regulation, and its impact on a company and its subsidiaries, is a complex problem that demands a task force response, as no single individual or department can understand – let alone manage – all the details.
UK oil and gas company Cairn Energy’s attempt to sell a majority stake of its Cairn India subsidiary to Vedanta Resources demonstrates the level of regulatory challenges companies must confront. The deal is being held up by Indian regulators because the state-owned Oil and Natural Gas Corporation (ONGC) owns a 30 percent stake in Cairn’s oilfields in the state of Rajasthan. The two have a long-running dispute over royalty rates.
‘ONGC wants to rewrite the agreement,’ explains Sharmila Gopinath, head of research and website programs for the Asian Corporate Governance Association in Hong Kong. Regulators have slowed the Vedanta deal to pressure Cairn into a more favorable agreement with the state.
Not just for governments any more
While governments are certainly stepping up the level of red tape companies have to deal with, ‘it’s not just government regulations,’ according to Farok Contractor, professor of management and global business at Rutgers Business School. ‘There are also industry associations and standards in electronics and the food business, all of which increase the risk of a company tripping up.’
Regulation can also be a moving target. ‘In the last year, we’ve had some major regulatory changes in Brazil and Argentina that directly affect a multinational’s ability to do a global insurance program,’ says Elizabeth Francy Demaret, multinational client service directorfor New York City-based insurance broker and risk adviser Marsh. ‘All the wheels are moving at once, and in the last two to three years, there’s a lot more movement.’
‘I could give you a dozen examples, most of which have crept up in the last week or so,’ adds Laura Flippin, a partner in the Washington, DC office of law firm DLA Piper. The new UK Bribery Act, for example, has made its US counterpart, the Foreign Corrupt Practices Act (FCPA), seem meek, covering not only bribery of public officials, but also commercial bribery.
‘It reaches beyond the FCPA in not having the safe harbors and exclusions for certain run-of-the mill and ordinary conduct course of activity,’ says Stuart Altman, partner in the Washington, DC office of law firm Hogan Lovells. A strict liability standard means any employee, ‘whether a high-level officer or a low-level shipping clerk’, allegedly involved in bribery can make the company presumptively guilty of a felony, absent an acceptable rebuttal.
Given the severity of possible fines, companies might start to reconsider whether to risk continuing operations in the UK.
Regulation in some countries can be so cumbersome that it burdens the entire organization. ‘The cost of compliance in Brazil is twice that of everywhere else because there’s a filing every 10 days,’ says Dr Shan Nair, CEO of Singapore-based international expansion consultancy Nair & Co.
For a company with only a few dozen employees in Brazil, operating there may not make sense. ‘You might spend 20 percent of your time watching after the people in Brazil unless you get expert help,’ Nair says.
The motivation for regulation
Regulations aren’t dry words on paper; they represent what government or industry officials want to achieve. That can mean they become tools of a larger agenda – or a different one. ‘Argentina is in the process of enacting a new anti-money laundering law,’ says Carlos Gonzalez, a litigation partner at Diaz Reus & Targ in Miami. The country’s largely cash-based economy has faced criticism for being a money-laundering haven.
‘Whenever you have laws enabled on the heels of international criticism, the tendency is to over-enforce,’ Gonzalez says. ‘Who better to enforce on than the local subsidiary of a US company and, through that action, potentially sweep in officers and directors of the [main company] as well?’
Regulations can also be used to increase leverage ‘or just stall your efforts,’ says Fred Enochs, a partner with strategic advisory firm TD International. ‘We’ve seen that with work visa issues or environmental issues. They’re not necessarily valid or accurate, but they’re an attempt to extract some additional value.’ Examples like Atlantic Industries, a subsidiary of the Coca-Cola Export Corporation, only add fuel to the fire. Atlantic wanted to acquire China Huiyuan Juice Group, which held more than 40 percent of the fruit juice market in China.
Chinese regulators quashed the deal on antitrust grounds. ‘It had nothing to do with monopoly,’ Gopinath says. ‘It was a patriotic thing: Here’s a foreign company coming in and taking over a domestic brand.’
Multiple heads are better than one
Even when regulations are fixed and enforcement evenhanded, companies can have difficulties because of the changing nature of their businesses. ‘Many of the laws that affect insurance are not recent laws,’ says Suresh Krishnan, general counsel for the multinational client group of global insurance company ACE Group. ‘You have laws that were designed to regulate domestic insurance and those laws are being looked at with regards to how they affect cross-border insurance.’ Changing market practice must find ways to react to fixed laws.
The only way to deal with regulatory complexities is to bring together an interdisciplinary group that includes legal, manufacturing, marketing, HR, management and others, and the corporate secretary is an integral part of that effort. Advisers and local subsidiaries must watch regulatory developments and communicate them in a timely manner to the interdisciplinary group assigned to handle global regulatory matters. Once changes in regulations are identified, companies should conduct a risk assessment to determine the most effective ways to operate under the new rules and the best course of action to
decrease potential fines or other problems.
When dealing with changes in the FCPA and the UK Bribery Act, it would be wise for most companies to invest in training programs to make sure all employees, consultants and business partners that operate overseas understand what constitutes illegal behavior under the new laws. ‘The corporate secretary position is becoming integrated with risk management and compliance,’ Flippin says. It only hurts the company if ‘the person most keenly engaged with corporate record management’ isn’t part of addressing the global compliance problem.
