Compliance risks challenge business in the Middle East

Source: www.ibpcdubai.com

Some markets have avoided rigid laws and regulations as a comparative advantage. But that has changed lately. Compliance has gained in importance worldwide as laws approved in one corner of the world can affect distant markets. The Middle East is no exception.

The Middle East may not be a very stable region, but some of its countries are increasingly important markets. The region’s oil-rich states have accumulated large profits thanks to rising global energy prices over the last years. Business hubs, such as Dubai, have been showing signs of a rapid recovery after the 2008/9 financial crisis. But as more companies are moving into the region and more business relationships are being established with local partners, more laws and regulations become applicable to both parties.

Ironically, these laws are not necessarily the product of Middle Eastern countries. In fact, some of the regulations that have affected business in the MENA region recently have been discussed, elaborated and approved as bills and acts in the US Congress and the British Parliament.

The US’s Foreign Corrupt Practices Act (FCPA), which applies to companies whose securities are listed in the US among others, is a clear example. The FCPA’s legacy is mainly due to two famous provisions, the one concerning accounting transparency and the one that addresses the bribery of foreign officials. Signed into law in 1977 by former President Jimmy Carter, the purpose of this legislation was to make it “unlawful for certain classes of persons and entities to make payments to foreign government officials to assist in obtaining or retaining business”, after multiple investigations in the mid 70’s revealed bribes made by US companies to foreign officials. It was later amended in 1988 by the International Anti-Bribery Act which made it applicable to foreign firms and persons who, directly or through agents, cause a corrupt payment to take place within the territory of the United States.

Generally speaking, the FCPA implementation has been characterized by an increasingly broad geographic reach as well as an impact on a variety of industries. Furthermore, last year, cases have focused on individual prosecutions as well as indicated the role of third-party intermediaries in facilitating payments and improper benefits.

But one of the most important traits of the act’s enforcement is the increasing fines that are making it somewhat of a profitable business for US law enforcement agencies. In 2010, the concerned agencies in the US collected $1.8 billion in penalties, disgorgement and interest through negotiated settlements.

In 2013, the Department of Justice and Securities and Exchange Commission together collected over $635 million worth, which is far less than the 2010 figure, but almost two and a half times the total collected in 2012. As many companies have started to self-report in the last few years, high settlement amounts are expected to continue in 2014.

The FCPA is not the only law of its kind. The UK Bribery Act (UKBA) passed in 2011 is known to be a more rigid version of the FCPA. Unlike the FCPA, the UKBA does not require a company to know of bribery that has taken place for it to be an offence. Moreover, while the FCPA distinguishes between the bribery and facilitation payments, and tolerates the latter if accepted by the laws of the host country, the UK establishes no such distinction.

Since 2005, 29 FCPA actions have been related to the MENA region. Several factors might explain that. Like most emerging developing and under-developed markets, many of the MENA region countries, if not all, lack clear regulations and sufficient transparency provisions. In addition, some aspects of the region’s business culture are not in accordance with the generally adopted definition of integrated business practices.

Gifts, whether corporate or personal, are seen as normal in many places. In some cases, they are necessary to establish contact and conclude business agreements. “Grease” payments to public officials aiming at ensuring the prompt performance of a duty they are already bound to perform without coming up with complications, are also culturally accepted.

Furthermore, the lines between private and public interests are not always marked. For instance, in the oil-rich Gulf States, laws do not distinguish between being a business person, who seeks to maximize profit, and a public official, who works for the government. Many of those holding high positions are prominent sheikhs or businessmen, whose corporate interests are worth millions if not more, and who continue to run their business while in power.

Tribal and familial relationships make it even more complicated to take the conflict of interests into consideration. In other countries of the region, where the state is old and well-established, laws are perfectly written, but rarely applicable. Bureaucracy increases the cost of business, and non-official payments seem like the only way to finish the required paperwork.

In a global context of growing focus on company’s practices, these factors have had several consequences. The FCPA and UKBA cause companies to impose some de facto compliance procedures when operating in high risk regions, such as the MENA region. More and more companies operating in MENA are resorting to due diligence services and reports before establishing any business relationships with local partners. They do not only seek to understand their potential partners, but also to gain knowledge of their involvement in any issues of concern – specifically money laundry or terrorism financing.

In addition, many companies are running background checks on their new recruits. And almost all companies, of different sizes, are putting in place integrity policies implemented by specialized risk, compliance and legal officers. These are definitely not the sole consequences, but they are the most obvious.

Operating in the Middle East is a profitable opportunity. But it comes with high regulatory risks, especially for European and American companies. Taking the necessary precautions might be an expensive solution. However, in a region with several booming economies, such costs seem certain to pay off at a later date.

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Categories: Economics, Middle East/North Africa

Author:Ahmed Abou Taleb

Ahmed is a trilingual political analyst and security researcher with an experience in the news industry and a comprehension of media & PR dynamics. In his researches, he worked on conflict analysis, political violence as well as state and nation building. He also tackled the Sudan – South Sudan peace agreement and assessed its implication regarding security arrangements and public administration. He has published research on cyber security and the 21st century online “hackivist” groups. Currently, Ahmed is working on Security Sector Reform, Post Arab Spring transformations in the MENA region, Corruption & Risk Analysis in developing countries especially in the Middle East, Africa & South America. He is also very interested in Defense and the growing relation between security and development worldwide. Ahmed has received a graduate education in Business & International Commerce in Egypt and France. He then pursued political science post-graduate studies in France and graduated with a Master's of Comparative Politics from the Institute of Political Studies (Sciences Po Aix). He conducted field research in both Northern & Southern Sudan. He worked for Perception Communication, BBC Arabic and several Egyptian NGOs.

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