MANAGING THE BUSINESS RISKS OF CORPORATE SUBSIDIARIES IN A GLOBAL ENVIRONMENT
With the globalisation of many industries, it has become increasingly important for companies to manage the activities of their subsidiaries to minimise compliance risk. Managing risk is becoming more complicated, not only because of aggressive regulatory scrutiny, but also because some countries have passed laws meant to curb foreign competition to favour local businesses, or countries seek to illicitly gain improper access to technology. While companies need a presence in foreign markets to compete effectively, they must be watchful of the risk their local presence brings. In international investigations, the top-tier risks for multinational corporations operating in a foreign environment are detailed below.
Decentralised accounting system risk
When setting up or acquiring operations in a foreign country, companies face a problem of integrating multiple divergent accounting and reporting systems. It can sometimes take years to fully centralise systems, which prevents compliance officers at headquarters from fully understanding and monitoring subsidiary activity. Compliance cannot easily obtain access to contracts with third parties, examine outlier financial transactions or review vendor invoicing to determine whether compliance issues need to be addressed, such as with customs agents, immigration authorities, sales agents and distributors. Without ready access, unusual invoicing arrangements are more likely to occur, such as unexplained administrative or miscellaneous costs or a lack of descriptions of services rendered. Because these invoices cannot be reviewed at the time, these issues may continue for years before they are identified. Moreover, the subsidiary’s contracts may contain automatic renewal or evergreen provisions that do not provide an easy out under local law.
Oct-Dec 2023 Issue
Thompson Hine LLP