Risk Landscape in South America
20 May 2020 15:10
- Risk & Compliance
- Risk Management
- Anti Money Laundering
- Due Diligence
- Sanctions & Watchlists
Weighing risk and opportunity in Latin America
Despite recent Foreign Corrupt Practices Act (FCPA) enforcement actions, there are signs of more positive engagement with governance and compliance in Latin America. Emerging markets offer attractive opportunities for investors, but businesses aiming to capitalize will need to prioritize robust due diligence, risk monitoring and risk mitigation to minimize exposure and protect investments and reputations.
A high-risk / high-opportunity region
Private equity investment in Latin America is predicted to reach new highs in 2019 as the scale of infrastructure need and increasing privatization proves an attractive proposition for international companies. This potential must be weighed against the risks of engaging with an historically-risky and volatile investment environment.
Perceived corruption in Latin America is persistently high. Transparency International’s most recent Corruption Perceptions Index (CPI), saw countries in the region post an average score of 44 out of a possible 100, compared with an average of 66 in the strongest performing region, Western Europe.
This is partly due to ongoing criminal investigation, “Operation Car Wash”, which uncovered widespread corruption in Brazil. The investigation found evidence of corruption involving eleven countries, resulting in Brazil’s state energy company, Petrobras, being fined $1.78bn for systematic bribery of politicians.
While headline-grabbing cases underline the risks for businesses in the region, they also indicate a turning point. Corruption on this scale will no longer be tolerated by the FCPA. Individuals and organisations previously considered untouchable are coming under scrutiny. Growing media freedom in the region is bringing the issue to public attention, raising expectations of transparency and accountability from corporations and government departments.
Regional politics embrace anti-corruption
Recent years have seen the introduction of measures including: corporate criminal liability for corruption offences; alternative resolutions and leniency aimed at encouraging co-operation by affected companies; and legislated corporate compliance programs. In Mexico, Brazil and Colombia candidates for all parties put anti-corruption at the heart of their 2018 election manifestos.
Brazil’s 2014 Clean Company Act makes companies liable for corrupt actions undertaken by employees. The Act specifies offences such as the finance, payment or subsidy of a prohibited act; bid rigging and fraud in public procurement; and bribery or attempted bribery of Brazilian or foreign politicians. Brazil now mandates that companies entering certain contracts with the State of Rio De Janeiro have compliance programs in place, a requirement that extends to foreign companies.
Sweeping reforms that came into force in 2017 are the foundation of Mexico’s ‘Anti-corruption System’. They include new oversight, enforcement and investigation mechanisms, as well as a leniency system for those that self-disclose bribery. Despite much fanfare at launch, however, implementation has been slow. It has yet to be seen whether appetite for enforcement will endure long-term.
Argentina’s Law on Corporate Criminal Liability came into force on 1 March 2018, bringing with it a strong emphasis on compliance programs. The law makes provision for exemption from liability for entities that voluntarily disclose violations, make appropriate financial restitution and, crucially, can prove that they had a suitably robust control and supervision system in place before the relevant offence occurred. “Corporate integrity programs” therefore represent an essential undertaking for companies aiming to mitigate risk of exposure to criminal consequences relating to corruption offences in the territory.
In cross-border terms, the new draft text for the US-Canada-Mexico trade agreement contains an entire chapter focused on regional corruption. The parties are required to implement anti-corruption legislation, protect whistle blowers and promote strong governance and compliance programs.
Finally, the growing influence of the Organisation for Economic Co-operation and Development (OECD), to which Brazil, Chile, Argentina and Mexico all now belong, is encouraging more robust enforcement. The OECD recently published its action plan of integrity for good governance in Latin America and the Caribbean, which it says is “a comprehensive agenda that could help countries in the design, advancement and implementation of National Integrity and Anti-Corruption Strategies.”
Taking a compliance-led approach
All of this means investors in the region must place monitoring and risk mitigation programs at the core of their business strategy. Companies engaging with state-owned entities need to factor the high levels of risk exposure they face.
Three factors for businesses to bear in mind in the region:
Third party due diligence
Identifying and mitigating third party risk in suppliers and business partners is a central part of compliance programs. This may be more difficult and/or costly to accomplish due to the relative immaturity of corporate reporting and the lack of reliable, publicly available company information in the region.
Political risk monitoring
The World Economic Forum’s global risk report 2018 found business executives in Brazil, Mexico, Peru, Chile and Colombia saw failure of national governance as the leading risk factor to doing business. Each new administration introduces a raft of new legislation, often differing significantly from the previous government’s approach. These changes inevitably affect both local and foreign investors and must be tightly monitored.
Local knowledge is key
understanding the nuance of local business customs is paramount to adapting a compliance program for the country in question. For example, in Mexico it is common to use “gestores” who facilitate licences or permits from government officials. They may be legitimate intermediaries or consultants with experience of the system, but they may also be directly connected to government officials and therefore constitute a significant compliance risk.
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