In the recent Latham & Watkins webcast, Avoiding Trouble in Emerging Markets (And What to Do When Trouble Finds You), Latham partners Robert Sims and Margaret Tough were joined for an informative panel discussion by Samantha Parish, a senior manager at Deloitte, and Michael Ward, the former chief compliance officer at Adobe Systems and the former vice president of compliance systems and investigations at Cisco Systems. The expert panel discussed current issues such as conducting effective risk assessments in challenging markets, addressing red flags in M&A transactions, and maintaining effective compliance programs. The panel also provided important guidance on internal investigations and voluntary disclosures.

In this Q&A interview, Sims offers highlights from the discussion on risk assessments. For more information on risk assessments, as well as the other topics covered during the presentation, the full webcast is available for download through December 23, 2014.

Why is it important to conduct a risk assessment when entering an emerging market?

Sims: Conducting a risk assessment is increasingly important when a company enters a new marketplace or it’s already in a market, but becomes aware of significant enforcement activity, either in a particular industry or in the countries in which it does business. For example, if there are large Foreign Corrupt Practices Act (FCPA) cases or investigations in a particular industry or country, it is likely time to perform a risk assessment, if one hasn’t already been done.

Generally speaking, risk assessments are not always specifically mandated by law, but they are important tools to manage and minimize risk. If properly done, a risk assessment will help identify potential compliance issues, fill gaps in existing compliance procedures, help a company tailor its compliance program for a particular market, and help a company get more favorable treatment from a prosecutor or court if there is a compliance problem down the road.  

What do companies need to focus on when conducting a risk assessment?

Sims: Companies have to evaluate their risks broadly. It is important to avoid a myopic view, for example, focusing solely on FCPA risks in a country in which fraud, trade secret theft or other potential compliance problems are substantial risks. It is important to consider risks broadly across the legal and compliance landscape and do a deep dive with diligence and analysis to assess these risks.

In some markets, it may not be possible to address substantial enforcement risks fully with contract provisions, such as reps and warranties or indemnification provisions.  Some may be deal breakers. For example, Latham was involved in a deal some years ago in which a client conducted an initial risk assessment before it acquired a company in a new market. The client ended up walking away from that deal after it became clear that the target company could not import goods without making illegal payments to local customs officials. The client determined that it could not allow this practice to continue once it acquired the target company, but it was not at all clear that the target business would be viable without the illicit payments.   

Among the important issues a company has to consider are:

• The reputation and enforcement environment of the new market
• How the company is getting into that market (e.g., acquisition, new office, etc.)
• The level of involvement with  third-party consultants, sales agents, distributors,  and the like
• The nature and scope of the company’s likely interaction with foreign government officials

A company should conduct a risk assessment as early in the process as it can. But particularly in high-risk emerging markets, it can be valuable to perform a risk assessment at any stage.