Look before you leap

Emerging market strategies

As companies continue to expand their activities in emerging markets — to produce products, deliver services, and sell to customers in these markets — many executives are concerned over compliance and integrity-related risks in these locations, which they believe are growing. Yet, few executives are highly confident that their companies have effective processes in place to identify and manage these risks when making investments or engaging third parties in emerging markets.

These are some of the key findings of Deloitte Financial Advisory Services LLP’s fifth annual "Look before you leap survey", which solicited the views of business executives on the approaches their companies are taking to address compliance and integrity-related risks in emerging markets.

Given the potential for compliance risks in emerging markets, companies should carefully conduct due diligence before making investments or engaging third parties and should consider performing ongoing due diligence of existing business relationships and third parties.

• 70 percent of executives said they were extremely or very concerned about compliance and integrity related risks when their company conducts business in emerging markets, while 71 percent believed these risks had grown over the last two years.
• Bribery of government officials was the issue ranked as the greatest compliance and integrity-related risk by 40 percent of executives, while 26 percent placed commercial bribery or kickbacks as their top concern.
• Most executives were not very confident in the ability of their company to manage compliance and integrity related risks. Only 38 percent of executives were extremely or very confident that their company had effective processes to identify and mitigate these risks when conducting mergers and acquisitions, while 34 percent had this level of confidence when their company made a Greenfield investment. With regard to third-party relationships, only 40 percent of executives were extremely or very confident in the ability of their company to manage these risks when engaging vendors and 36 percent were this confident when their company worked with third-party agents.
• Due diligence is more common when companies consider investment than when they engage third parties. 71 percent of executives said due diligence is always or almost always conducted by their company before conducting an M&A transaction or making a Greenfield investment. In contrast, only 43 percent of executives said their company always or almost always conducts due diligence before engaging vendors, while 49 percent said this was the case when engaging third-party agents.
• 72 percent of executives said their company uses an initial risk assessment to determine the72 appropriate level of due diligence.
• Only about half of the executives said their company conducts an extensive examination during due diligence of the possibility of bribery of government officials or of commercial bribery when considering M&A transactions or Greenfield investments in emerging markets or when engaging third parties.
• Among the challenges when engaging third parties in emerging markets, 45 percent of executives ranked adequately verifying information provided by business partners and third parties as one of their company’s top challenges. Other issues that were each ranked among the top three challenges by roughly one third of executives were conducting timely and sufficient due diligence, lack of required skills and knowledge among employees, and securing qualified local professionals and firms to gather relevant information.