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Study: Confidence in Due Diligence Lags as Corruption Risk in Emerging Markets Rise

Jaclyn Jaeger | October 29, 2012

As companies continue to expand their activities in emerging markets, concerns continue to rise over compliance and integrity-related risks in these locations. Few executives feel 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.

According to the findings of a recent study by Deloitte Financial Advisory Services, 70 percent of 126 business executives surveyed 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.

With regard to third-party relationships, only 40 percent of executives were “extremely” or “very confident” in their company's ability to manage these risks when engaging vendors, while 36 percent were this confident about working with third-party agents.

The plurality (40 percent) of respondents ranked bribery of government officials as the greatest compliance and integrity-related risk, while 26 percent placed commercial bribery or kickbacks as their top concern.

Among the biggest challenges of 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.

“What our clients often find most challenging is really knowing who they're doing business with,” said Wendy Schmidt, global service line leader of business intelligence services for Deloitte Financial Advisory Services.  “Particularly with regard to third party relationships—such as distributors or agents—companies are looking for a cost-effective way to gather information on large numbers of payment recipients to mitigate risk and to prevent and detect fraud and corruption.”

Other common challenges respondents say their companies face in identifying and mitigating compliance and integrity risks with third parties in emerging markets are:

  • Inadequate staffing or budget (15 percent);
  • Lack of required skills and knowledge among the company's employees (12 percent);
  • Conducting timely and sufficient due diligence (12 percent);
  • Adequately verifying information provided by business partners and third parties (11 percent); and
  • Lack of senior management commitment (11 percent).

M&A Due Diligence

When entering into mergers or acquisitions, just 38 percent of executives indicate that they are extremely or very confident that their company has effective processes to identify and mitigate compliance and integrity risks.

The study also found that due diligence is more common when companies consider investment than when they engage third parties. Seventy-one percent of executives said their company “always” or “almost always” conducted due diligence before conducting an M&A transaction, or by locating company-owned facilities in those markets, known as 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. Seventy-two percent of executives said their company uses an initial risk assessment to determine the appropriate level of due diligence.

Despite rising anti-corruption risks, the pursuit of M&A deals is not expected to slow down. Over the next two years, 41 percent of respondents say their companies are likely to complete one or more M&A deals in emerging markets, and 28 percent say their companies are likely to make one or more Greenfield investments in emerging markets.

The Foreign Corrupt Practices Act and the U.K. Bribery Act also continue to highly influence companies' due diligence processes. More than half of respondents (56 percent) said that the UK Bribery Act prompted their companies to perform more detailed compliance and integrity risk assessments.

Chris Georgiou, partner in FCPA consulting for Deloitte FAS, says enforcement of both these anti-corruption laws “will keep corruption as a leading issue for multinational company executives for years to come.”