Home – How Globalization Increases the Need for Due Diligence for All Industries

How Globalization Increases the Need for Due Diligence for All Industries

Posted on 10-07-2016 by Ulyana Androsova

 Financial services, energy, construction, pharmaceutical and biomedicine—these highly-regulated industries must undertake robust due diligence and risk monitoring. Did you just breathe a sigh of relief because the company you represent doesn’t fall into the highly-regulated bucket? Think again. Globalization means that companies of all sizes and across a wide range of industries need to develop the appropriate due diligence procedures to mitigate strategic, financial, reputational—and, yes, even regulatory—risk. 

 What’s Behind Globalization?

Globalization isn’t new, of course. It has, however, increased significantly in recent decades. The accelerated pace of globalization boils down to several factors.

  • Trade Agreements—While sometimes controversial, trade treaties like the European Union, North American Free Trade Agreement and the Association of Southeast Asian Nations reduce barriers to trade, opening the door to new opportunities.
  • Transportation Improvements—Air travel expanded post-WWII, and except for during a brief period in the early 1970s—during the oil crisis—it has continued to grow as technology allowed for advances in the cost of manufacturing and improvements in the size and speed of planes. In addition, the use of steel containers to transport goods via enormous cargo ships, trains and trucks has reduced the cost of delivering products to every corner of the world.
  • Communications Technology—It is easier than ever before to communicate and share information across the globe, thanks to the internet and a full range of smart devices. This has also lowered the cost of doing business; you can have ‘face-to-face’ meetings with colleagues, business partners and clients using Skype or any number of virtual meeting cloud-ware solutions.

As a result of these and other advances, your company does not have to be a multinational giant to feel the impact of globalization. As we saw during the sub-prime mortgage crisis in the U.S., for example, the global nature of the financial system meant that major banks in other countries felt the impact. You need to stay alert to potential risk now, more than ever, because it can come from places you might not expect.

 Screening for Third-Party Risk

A highly-regulated industry like banking conducts due diligence as a result of ‘Know Your Customer’ (KYC) regulations designed to detect and protect against money laundering. But in today’s fluid, global business landscape, your customers represent only a fraction of the entities and individuals you need to know. And anti-money laundering (AML) compliance is just the tip of the iceberg too. Let’s take a look at why globalization has increased different types of risk you face.

  1. Strategic Risk—Staying competitive in a global business landscape requires that you have efficient processes in place to support fast, data-driven decision making. Want to expand into new, potentially lucrative, markets? Many companies are finding that their biggest opportunities lie in developing nations with fast growing economies, such as Brazil, Russia, India, China and South Africa. But the potential for high rewards is accompanied by high risks—and all you have to do is look at recent newspapers—or some of our blog posts on Brazil—to realize that due diligence is your best defense when you want to move into new territories that rank high in terms of political, economic, social, technological, legal or environmental risk.
  2.  Financial Risk—In highly-regulated industries, financial risk is most closely associated with financial penalties, debarment and loss of business when a company is found to have violated laws related to anti-bribery and corruption. But increasingly, regulators are not just focusing on big businesses in those regulated industries. In fact, two years ago, an FCPA enforcement action against Smith & Wesson over bribes paid by international sales consultants led the SEC’s chief of FCPA Enforcement Kara Brockmeyer to say, “This is a wake-up call for small and medium-size businesses that want to enter into high-risk markets and expand their international sales. When a company makes the strategic decision to sell its products overseas, it must ensure that the right internal controls are in place and operating.”  The company paid $2 million to settle the action and was required to report on its FCPA compliance efforts for two years as well. “The changes have had ‘a material adverse effect’ on foreign sales, the company said,” the FCPA blog reported.
  3. Reputational Risk—Increasingly, it’s not just regulators that put companies under a microscope. Today’s customers have greater visibility into business dealings given the constant flow of news (and rumor) that gets delivered to their in-boxes, news aggregator apps and social media pages. And they are holding companies to higher ethical standards than ever before. Consumer outrage over child labor in the complex supply chains of chocolate manufacturers led to a class-action lawsuit filed in California, which passed its Transparency in Supply Chains Act in 2010. Other companies have experienced customer boycotts over use of forced labor in fishing, fashion and coffee production. And as you well know, negative news doesn’t just lead to a PR challenge—it directly impacts stock values and depresses revenue.

 So, you aren’t in a highly-regulated industry. But as you can see from above, regulatory risk appears in each of the areas above—and it isn’t limited to only certain companies.  If you want to grow your business, you must navigate a complex tangle of international compliance requirements covering bribery, corruption, modern slavery and more. And as the examples above show, simple third-party screening falls short in providing the type of supply chain transparency needed in a global business landscape.  Is your due diligence process ready?

 3 Ways to Apply This Information Now

  1. Watch our YouTube video to learn more about how Lexis Diligence® supports an enhanced due diligence process.
  2. Download 9 Steps to Effective Third-Party Due Diligence for helpful tips.   
  3. Share this blog on LinkedIn to keep the dialogue going with your colleagues and contacts. 

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