Frequent travelers know the value of pre-trip research. Having a good country guide—whether personal or paperback—can be the difference between enjoying the finest a region has to offer and getting caught in a tourist trap.
The TRACE Bribery Risk Matrix aims to be such a guide—not for restaurants and historical sights, but for the corruption risks you’re likely to face when doing business abroad.
At the most basic level, each country has a risk score between 1 and 100. The bigger the score, the more caution is warranted.
But just as savvy vacationers review a range of details about their destination, ethical entrepreneurs should understand the different factors that can make a country more or less bribery-prone. The Matrix therefore includes sub-scores to tell you how well or poorly each country maintains the conditions for discouraging bribery demands:
Robert Clark is the Manager of Legal Research at TRACE, a globally recognized anti-bribery business organization headquartered in Annapolis, Maryland. He has been responsible for the ongoing development of the TRACE Bribery Risk Matrix following its original publication in 2014, and is the chief designer of the Matrix Data Browser.
Local agents and intermediaries are essential for most companies that want to break into new foreign markets. They can help to navigate bureaucratic mazes, understand regional customs, and secure introductions to important decision-makers. It’s important to realize that the qualities that make an intermediary attractive to a company often are the same as those that make the relationship risky.
You know about bribery risk—the serious harm that can follow from an intermediary’s use of corrupt means to pursue a company’s goals. Consequently you need to conduct due diligence on your third parties. But the reality is that not all companies have the same resources available for the task.
The categories of information collected during a due diligence review, and the level of scrutiny and detail required, will vary depending on the risk level of the relationship. But due diligence can be streamlined and shared. All due diligence reports have similar baseline components: beneficial ownership, qualifications, ties to the government and reputational screening. Also, most commercial intermediaries work with several multinational companies. Third parties are often willing to undergo--at their own cost--a single due diligence review that meets international requirements. They can then choose to share the report with all of their business partners, avoiding the wasted effort of duplicative due diligence reviews.
TRACEcertification is an enhanced due diligence review that provides detailed and actionable insights into a candidate’s business operations, reputation and beneficial ownership. In addition, TRACEcertification requires candidates to complete anti-bribery training and adopt a Code of Conduct addressing bribery, if one is not already in place.
The TRACE Intermediary Directory is a free, publicly searchable database of these pre-vetted and trained small- and medium-sized enterprises worldwide. All companies listed in the Intermediary Directory have completed the TRACEcertification review or renewed their verified report within the last year. The intermediaries own their due diligence reports and can share them with all of their business partners. You may request and obtain TRACE Certified Due Diligence reports in the Intermediary Directory at no cost.
There is no such thing as “fool-proof” due diligence. While robust due diligence can help companies understand the level of risk that a third party is likely to bring, a clean past is no guarantee against future misconduct. Relationships have to be managed and suspicious conduct audited. Due diligence is a process, not an event, but a TRACEcertification report is a robust first step relied upon by hundreds of multinatationals.
Pia Vining is Senior Director of Due Diligence at TRACE, a globally recognized anti-bribery business organization. Prior to joining TRACE, Ms. Vining was a litigation specialist in the tax department of a major U.S. law firm. She graduated from the University of Helsinki, Faculty of Law, and holds an LL.M. degree from The George Washington University Law School.
Cross-border business is ripe for corruption. The best way to address corruption issues is to be prepared in advance. Put in place a robust anti-bribery policy and procedures, set clear expectations for personnel, and remove or minimize perverse incentives. Let employees and representatives know that your company really means what the policy says, and give them direct access to compliance professionals. Become aware of local laws, regulations, and business environment. Find local trusted compliance champions to help navigate the complexities of foreign markets.
If you do receive a bribe request, follow a STAR approach:
STOP. Don’t agree to a bribe: even small bribes tend to snowball. Don’t make hasty decisions or seek shortcuts. If a bribe has already been offered, take steps to stop it. Give the bribe taker an opportunity to stop and reconsider (“Are you asking me for a bribe?” or “I’ll have to discuss this with my management”).
THINK …TALK. Consult company policy and procedures. Involve your management, legal and compliance departments. When unclear, determine whether the request is indeed legal and appropriate. Strategize on the best approach.
ACT. Say “No.” Ask to speak to their manager or supervisor. Make it relatable (“I will lose my job” or “U.S. companies are under a microscope from U.S. authorities for overseas bribes”). Be clear that you can only resolve the issue through legal and ethical means. Explain why the bribe taker should care – mention aggressive enforcement by U.S. and local authorities, scrutiny by the media, large fines and prison terms. Deflect – blame strict internal controls, lawyers, internal audit, your boss, etc. for your inflexible no-bribes stance. Seek help from the local American Chamber of Commerce, Business Ombudsman, U.S. Commercial Service, or local government hotlines or law enforcement.
REFLECT. Keep detailed records and supporting documentation. Draw lessons from the incident to avoid similar requests in the future.
Illya Antonenko, Data Protection Officer and Counsel for TRACE, a globally recognized anti-bribery business organization. Prior to joining TRACE, Mr. Antonenko practiced law for fifteen years in a number of leading U.S. law firms and in-house. His practice included assisting clients with FCPA compliance matters and investigations, cross-border transactions, and general corporate issues.
Expanding business into international markets is often key to a successful growth strategy for both small businesses and large enterprises. While going global presents endless possibilities for growth, it also raises serious compliance risks that if overlooked, can quickly offset the benefits of reaching new customers.
One of the biggest, and less obvious, challenges of doing business overseas, particularly in emerging markets, is corruption. U.S. companies doing business abroad must comply with the U.S. Foreign Corrupt Practices Act (FCPA) which prohibits companies or individuals from paying bribes to foreign government officials to obtain or retain business. FCPA violations can lead to significant corporate penalties, reputational damage and jail time for individuals involved in the misconduct.
Any company, regardless of size, sector or business model, will at some point need to engage with foreign officials when establishing operations overseas. Such business interactions raise the possibility of being asked for a bribe. Before you take the leap into new markets, you should be sure your company is prepared to manage bribery risks and ask yourself the following compliance questions:
Addressing these questions at the same time that you make the business decision to enter a new market may ultimately be the difference between success and failure. If you don’t know where to get started, there are several resources and organizations including TRACE that can help.
Virna Di Palma is Senior Director of Global Strategy & Communications at TRACE, a globally recognized anti-bribery business organization. Prior to joining TRACE, Ms. Di Palma produced international trade and anti-bribery compliance conferences worldwide and was also a researcher on counter-terrorism strategies for a London-based think tank.
The International Trade Administration (ITA) has released their new Market Diversification Tool (MDT) that can help you identify potential new export markets using your current trade patterns.
Just enter what products you make and the markets to which you currently export and the MDT crunches the numbers to rank potential markets you may want to consider. It brings together a host of product-specific trade and tariff data and economy-level macroeconomic and governance data to provide a picture of which markets make sense for further market research.
MDT takes basic information from exporters and uses 11 different indicators to run calculations on those inputs in order to produce a ranked list of recommended markets with scores for each country. The ranked list can prepare exporters for more in-depth research and find partners in new markets.
Visit https://www.export.gov/marketdiversification to access the tool and sign up for a free webinar on how to use it. For additional information, please e-mail firstname.lastname@example.org.
Congratulations, you’ve made your first international sale. Now what should you be concerned with? Well not to scare you, but your primary focus should be on getting paid and how you go about that depends not only on you, but the buyer as well.
For example, let’s pretend for a minute that you’ve met a buyer online and they have agreed to purchase $500,000 of services or equipment from you. You’re excited because your average domestic sale is $25,000 and this represents a huge win for you and your company. The overseas buyer expresses to you that they would like to pay you 60 days after they have received the services or equipment from you and they have promised you much more business in the immediate future.
Before you commit to such a buyer, you should be stepping back and asking yourself the following questions:
Making your next sale is critical, but getting paid is key to your export growth!
-Scott Forster, DEC Member/ Treasurer Emeritus
U.S. COMMERCE ASSISTANT SECRETARY RECOGNIZES MARYLAND-DC DISTRICT EXPORT COUNCIL AS “DISTRICT EXPORT COUNCIL OF THE YEAR”
WASHINGTON D.C. – U.S. Commerce Assistant Secretary Ian Steff joined the U.S. Commercial Service Baltimore to recognize the Maryland-DC District Export Council (DEC) for its significant contribution to helping Maryland and DC firms sell internationally. In 2017, Maryland firms exported over $11 billion to foreign markets including Canada, Germany, and the UK, among others.
Utilizing its vast network of experienced chief executives, lawyers, and consultants, the District Export Council successfully supported Maryland companies through international business counseling, mentoring small and mid-sized companies, and supporting overseas trade missions.
Bobby Patton, CEO of Gaithersburg-based manufacturer of Unified Communications, Cloud, and IoT-enabling solutions, Patton Electronics, said “The volunteers on this DEC are among the best in their respective fields, giving their time and energy to help other Maryland businesses develop their own export market competence.”
This past year, the Maryland-DC District Export Council received and administered its first federal grant, created a private sector affinity network, discussed trade policy with Maryland Congressional leaders, and served as a key member of the Maryland Partners in International Trade alliance supported by Maryland Department of Commerce and the University of Maryland.
“The DEC should be applauded for its new partnership with the State of Maryland to support the state of Maryland’s Defense Diversification Assistance Program (MDDA) by providing training and services to help eligible defense dependent companies expand internationally,” said Baltimore U.S. Commercial Service Director Colleen Fisher. Awarded by the U.S. Department of Defense’s Office of Economic Adjustment, the Defense Diversification grant is designed to mitigate potential, adverse changes in federal defense spending.
“Twenty-six companies graduated from the DEC-supported ExporTech program over the past three years. Of these graduates, twenty-one companies have since reported results or engaged in market exploration with the Commercial Service,” Commerce Assistant Secretary Steff said.
The Maryland-DC District Export Council, one of more than 60 District Export Councils throughout the United States, is a volunteer organization of approximately 30 local business leaders appointed by the U.S. Secretary of Commerce. MD-DC DEC members use their extensive knowledge of international business to educate and counsel local firms on how to export overseas.
One of our DEC members, Ellicott Dredges, LLC was featured in Mega Machines on the Science Channel:
Congrats to this "mega" Baltimore export! A really great piece on Baltimore, MD and Ellicott Dredges. So proud to have them as an active member of our DEC and the export community in Maryland!
Welcome to the niche world of offset and countertrade policy and program execution. Termed ‘offset’ in the US and ‘countertrade’ in much of the rest of the world, it is the 21st Century’s sophisticated form of barter. In essence, a country publishes a policy that requires foreign companies to invest in the country in exchange for a major procurement. The devil is in the details.
To start, the WTO and its predecessor organization, the GATT, have a regulation that supposedly prohibits governments from levying offset in government contracts except for reasons of national security. This would presumably (and in practice generally does) restrict the practice of offset to defense related products. However, many countries have government-owned enterprises in the civil sector and, for major infrastructure projects (think rail, ports, extractive industries) will levy – formally or informally – offset requirements.
Since 80+ countries require offset in either a formal or an informal policy, companies going abroad should at least be aware the potential exists. Normally there is a kick-in threshold value for a contract below which offset is not required. The most common threshold values are between $5M and $20M of contract value, though a sizable percentage go as low as $1M. Once a threshold is crossed, the next issue is the value expected for the offset. The most common range is 20% to 80% of contract value (e.g., $100M contract, $50M offset required at 50% offset). However, 100% of contract is fairly common, as is ‘negotiable deal on deal.’
How, you may ask, can a company be expected to offset a contract at 100% of value? This leads to the concept of project multipliers. Some areas of investment or purchase will be rated more important by a country than others. For these projects, they will provide a 2x, 5x, even 10x multiplier to the actual value proposed. For example, if local work / employment is desired, and a company offers to place $1M of work with local companies, a country may give a 5x multiplier, making that work ‘worth’ $5M in offset credit.
The challenge is that no two offset polices are alike, just as no two countries are alike. All have different requirements, goals, local industries and interests. So, on approaching a country for a major deal (i.e., over $1M), it behooves a company to research the potential offset policy to be ready to comply. This is especially important, as offset has a cost. Countries typically will not allow offset to be costed in a proposal. Therefore, a company must build into its proposal the cost of offset carefully hidden in the numbers. The worst-case scenario is to be in the lead position for landing a major international program … and to be asked, prior to contract award, “So, what does your offset proposal look like?” No time to research, no chance to re-price to cover the costs. The only bleak choices are to refuse the contract, or go ahead and hope the costs of the offset program are well within the projected profit margin.
Research offset before you go. Many countries have increasingly transparent offset policies, and there are several organizations (Global Offset and Countertrade Association, Defense Industries Offset Association to name two) and a host of consultants who can help.
Dr. Alan S. Colegrove, P.E., Ph.D., President, Offset Collaboration, Incorporated
The Section 301 Trade Measures - In Plain English
In August 2017, the President asked for an investigation into certain practices by China regarding the alleged theft of U.S. intellectual property. On March 22, 2018, the investigation concluded that China’s practices target and harm U.S. companies. To pressure China to stop, the President proposed an additional duty of 25 percent on 1,333 tariff lines representing $50 billion worth of imports. This means that a product valued at $100 is assessed an additional charge of $25 at the U.S. border. The money collected is deposited in the U.S. Treasury.
An interagency committee held hearings and accepted written comments on whether to implement the additional tariff. They considered whether imposing duties on the imports would (1) help eliminate China’s practices or (2) harm U.S. small- or medium-size businesses and consumers. 515 tariff lines of the proposed 1,333 were removed, and the final list represents a total of $34 billion worth of imports. Because the President proposed a tariff affecting $50 billion, a second list of 284 tariff lines representing $16 billion was proposed. When the first list (List 1) went into effect on July 6, China retaliated against $34 billion of imports from the United States. This prompted the President to propose an additional tariff of 10 percent on $200 billion worth of imports from China. The tariff was increased to 25 percent to match the tariffs affecting Lists 1 and 2. In the interim, 5 lines were removed from List 2. Here is where we are (as of September 5, 2018):
Venable is actively advising clients affected by Lists 1, 2, and 3, and we have helped clients argue successfully to remove certain tariff lines from these lists. As supply chains and costs of production are shifting under the weight of this increasingly expensive trade war, we stand ready to assist and advise on the impact affecting corporate sourcing, M&A, FDI, and other core business decisions. We are also following closely other issues impacting business, such as the 232 Steel and Aluminum tariffs, NAFTA 2.0, and the revamp of the Committee on Foreign Investment in the United States (CFUIS) rules. We would be happy to assist you or field an introductory call to explain – in plain English – what is happening and how it affects your business.
Alex Koff, Partner
Contributors and Writers are members and associates of the MD/ DC District Export Council. The views expressed do not necessarily represent the opinions of the MD/DC DEC.