Compliance resources in Asia: feeling safe and being safe aren’t the same thing

When trying to determine how to allocate compliance resources across Asian markets, compliance teams may find themselves drawn to widely-traded perceptions of these countries. Those that get more attention typically fall into two baskets: those that are visibly grittier and more byzantine to navigate (such as Indonesia, the Philippines and Vietnam), and those that stand out more for their size and potential (China, India).

Then there are the rest – the more developed and mature markets such as Malaysia, Thailand, South Korea, Japan and Taiwan – that are given residual attention because they are deemed fairly easy places to operate in. Here’s where we beg to differ: these seemingly “safer” Asian jurisdictions are, in fact, much more capricious and trickier than they appear on paper. To avoid nasty surprises, companies should commit appropriate compliance resources to them.

The malaise in Malaysia

Malaysia is one such example. One can hardly be faulted for thinking that doing business there ought to get easier in the coming years. The sight of a tearful Najib Razak (PM from 2009-18) being hauled to court in late August to begin a massive corruption trial, coupled with promises of institutional metamorphosis by the ruling Pakatan Harapan coalition that swept to power last May, would seem to confirm that.

But think again. Malaysia’s relatively mature economy and strong performance on multiple international indices belie a much darker and complex operating environment. Malaysia is consistently the country in Asia that catches out our clients the most on the compliance front, often because the unspoken assumption is that Malaysia is somewhat like Singapore – when the reality is that the Philippines and Indonesia are closer to the mark. That veneer of normality ends up in tatters when clients find themselves confronted with risks typically associated with a less developed economy: fraud, pilfering, collusion between security forces and organised crime, criminal intimidation, bribery and corruption, and regulatory zealotry driven by nasty racial politics and the promise of political gain.

The reality on the ground in Malaysia has in the past seen some companies adopt an attitude of complacency along the lines of “this is how business is done in this part of the world”. But this is on a collision course with the new reality in the country, where a new sheriff – anti-corruption chief Latheefa Beebi Koya – supported by politicians who railed for decades against deeply entrenched graft in government, is laying down the law. And there’s no better place to start, given that a 2018 study by Latheefa’s anti-corruption agency revealed that one fifth of civil servants still think it’s acceptable to take bribes.

The sheriff has new weapons too. Corporate liability for bribery, including bribes paid by third parties acting on behalf of companies, will be enforced from June 2020. Companies may be inclined to leave local partners and third parties to handle licensing, permits and all routine dealings with authorities, but this strategy carries serious risks if there is no accompanying effort to ensure that those interactions steer clear of integrity pitfalls. A slew of federal legislative plans to bolster enforcement powers also awaits parliament: forcing companies to reveal beneficial owners, improving whistleblower protection and setting up a special court to expedite corruption cases. In sum: underestimate the new Malaysia at your peril.

Spending less can cost you big

“Safer” Asian markets like Malaysia are arguably just as challenging as their more prominent counterparts, often more so. Just ask anyone who has done a lot of business in South Korea. Corruption in bidding tenders in some sectors, such as defence contracting, remains a routine problem despite government crackdowns. Family-controlled conglomerates, or chaebols, wield significant influence over the economy and have been implicated in financial corruption, collusion with government officials, illegal transfers of wealth and tax evasion. Samsung and Lotte Group, two of the largest chaebols, have seen top executives sentenced to jail for bribery in return for political favours during the tenure of former president Park Geun-hye (2013-17).

Thailand has also often thrown up surprises (not good ones) for our clients. Bribery and state-business collusion are still prevalent in public procurement, and have implicated prominent multinational companies in the past few years. Companies have found themselves on the receiving end of threats of violence and criminal defamation suits by local partners and third parties in the midst of commercial disputes and contract negotiations. Immigration laws, interpreted broadly and arbitrarily exercised, can snare unsuspecting business personnel – even occasional business travellers doing 24-hour stopovers. There have been anecdotal accounts of personnel being detained for hours on suspicion of visa-related infractions. Since March, foreigners working in Thailand have had to contend with a renewed government intent to enforce a regressive immigration law that obliges them (or their landlords) to report whenever they leave their permanent residence for more than 24 hours (and when they return) – all in the name of ‘national security’.

These markets are not only riskier than they appear; enforcers are also being significantly empowered to crack down on non-compliance. In South Korea, President Moon Jae-in has markedly empowered regulators and prosecutors to pursue inquiries into violations of environmental or product safety rules. Court rulings on these cases have thrown up a toxic cocktail of extensive product recalls, sale restrictions and consumer lawsuits for multinationals operating there. Meanwhile in Thailand, graft-busters appointed by the former military government are now going after members of the generals’ political party. If even those aligned with the military aren’t safe, it spells bad news for foreign entities who have become comfortable relying on local, well-connected partners and intermediaries for political and regulatory protection.

The evolving situations in Thailand and South Korea are a reminder that compliance under-investment in any market can bring gradually escalating costs in terms of operational leakages, regulatory disruptions and reputational damage. Some of these can take years to fix.

Getting your hands dirty (to get them clean)

It may seem overwhelming. But it is possible to devise a strategy to best deploy your compliance resources across your Asian markets. If you haven’t already done so, commit to a proper market risk assessment for the jurisdictions that you operate in, followed by a risk benchmarking exercise. You will then be able to see how your risk exposure differs from market to market, and which markets are facing significant or notable compliance gaps. “Diversity in Asia” is a cliché for a good reason: it’s true. From India to Japan, from Australia to Vietnam, there is no homogenous Asian market – every country will have a different risk profile. These differences matter when you are trying to determine which market gets more (or less) of your time and money. So line up your markets, and take care to include the “safer” markets alongside the shoo-ins that usually grab your day-to-day attention and the international headlines.

Beyond the standard variables specific to the company (such as exposure to government clients, prevalence of third parties in their business model), you should also consider taking into account external operating environment factors in the risk assessment. These might include domestic market size, the specific sector(s) that you operate in, the presence (or absence) of powerful incumbents who might feel threatened by a foreign entrant, the prevalence of corruption and fraud, whether key stakeholders and regulators with significant powers to make or break your business are well-disposed to your presence, and the consistency and strength of local regulatory enforcement. And do not forget that any risk assessment is also only as useful as it relates to the reality on the ground, which means that resources also need to go into regular monitoring of the markets to catch compliance trends that may gain momentum and impact your business in the medium-to-long term.

The bottom line is clear: the hidden risks in these “safer” markets are serious enough to cause significant business disruption, and regulators are getting hungrier, wiser and more powerful than before. The pro-foreign investment banner being waved across Asia may just be the matador’s cape. Companies need to appreciate underlying market risks and to deploy sufficient compliance resources to address urgent gaps. When it comes to the “safer” countries, appearances can be deceptive and assumptions can be costly.

 An edited version of this article appeared on FCPA Blog.