Risk Management and Due Diligence: What You Need to Know When Trading Overseas

Acuity Law Alliance Partner Graham Welland talks us through the importance of due diligence when looking at trading overseas.

Key contact: Declan Goodwin

When you’re looking to grow your business, it’s easy to see the opportunities that trading overseas can bring. The potential to access new markets and expand your customer base can strengthen your business, making you less reliant on fluctuating domestic economic conditions and demand, and turbo-charge the bottom line.

Governments often actively encourage small businesses looking to diversify overseas. The UK government, for example, provides financial, support, training and resources, oiling the regulatory machine by creating free trade agreements (FTAs) and regional partnerships to reduce tariffs, ease market access and simplify trade with UK-based businesses. The Department for Business and Trade supports small businesses to utilise FTAs, and provides guidance, market intelligence and networking opportunities to help small businesses explore potential abroad.

But trading internationally also comes with commercial and legal challenges. Operating in foreign jurisdictions could mean:

• Juggling multiple legal and regulatory systems that are different to the UK’s
• Confusion in obtaining the correct documentation, such as licences and permits
• Understanding unfamiliar supply chain and contractual requirements
• Working with companies that have an opaque structure, particularly in high-risk countries
• Understanding local tax systems and obligations
• Navigating cultural, behavioural and philosophical differences.

What are the risks?

1. Loss of contracts with key customers
2. Falling foul of legislation such as the UK Bribery Act, the Foreign Corrupt Practices Act, or EU transparency laws
3. Fines for local regulatory or legal non-compliance
4. Non-financial costs of regulatory or legal non-compliance, such as time and resources spent on investigations and remedial actions
5. Adverse publicity and reputational damage, with knock-on impact on share price, customer base and revenue

Remember: your liability may also extend to actions performed by third parties.

“International markets and jurisdictions often have local customs, practices and laws which can be vastly different to those of the UK,” says Declan Goodwin, Commercial & Technology partner at Acuity Law.

He adds: “Taking advice from local experts and advisors that have guided similar businesses will help ensure you’re not blindsided by a scenario that you hadn’t accounted for.”

Conducting thorough due diligence (the process of investigating and verifying information about a company or investment opportunity) on potential business partners is also essential to reassure your shareholders and suppliers, mitigate risks and stay competitive.

“You need to be proactive in identifying areas of vulnerability and look at the big picture of compliance obligations, including sanctions, anti-bribery, criminality, ethical and adverse media – it’s not just financial,” says Graham Welland, CEO of GW Consulting International (GWCI), a risk, compliance and business intelligence consultancy (and Acuity Law alliance partner).

“Conducting thorough due diligence will mean that you will understand the risk involved and can prioritise based on evidence and proportionality. Then, you need to implement guardrails, monitor them – and review them regularly.”

The four types of risk

Graham, an expert in preparing risk reports and conducting due diligence, advises that businesses consider four types of risk:

1. Geographic risk: operations in sensitive and high-risk countries.
2. Business partner risk: use of third-party agents, distributors, logistics providers, and customs agents.
3. Public sector risk: interactions with governments.
4. Contractual risk: tendering processes.

He explains: “Red flags are not necessarily an indicator that anything untoward will occur, but the identification of one or more red flags raises the risk profile of the relevant third party should pique your interest to find out more about the person or company.”

Red flags in practice

Examples of red flags for third-party business partners include:

• A reputation in the market for corruption or an otherwise unsavoury reputation.
• They request unusually high commission or large, non-standard fees.
• They have a family relationship with a public official or government agency or are otherwise politically exposed.
• They have investors or beneficial owners that were not disclosed.
• They describe a special relationship (or “influence”) with government officials.
• The transaction involves unusual contract terms or payment arrangements, such as requests for payments in cash or “special” invoices.
• Payment requests:
  • made through third countries, without sound commercial reasons
  • to third parties
  • directed to shell and off-shore companies
  • directed to two or more accounts
  • made urgently or ahead of schedule
  • made using poorly documented invoices, including vague descriptions and improper documentation of expenses.
• A client or public official insists a particular third party is used.
• They do not have a website.
• There is a lack of published information about the third party where such information could be expected to be available.
• The Information about the third party is not verifiable.
• The role or function of the third party is unclear and/or the work plan is vague and/or suggests undue reliance on contacts or relationships.
• There are minimal or no office or staff, or less than adequate facilities or staff to perform the work.

Graham’s top 5 due diligence tips:

Graham distils his top tips for investigating risk before partnering with businesses abroad:

1. Check sanctions lists – these change frequently
2. A simple check on the company website will tell you a lot
3. Ensure you always check original or official documents
4. Always be mindful of privacy implications when dealing with personal information
5. Check the past history of any potential commercial partner – but watch out for fake news.

For more information on protecting your business when trading abroad, or partnering with international businesses, contact our Commercial & Technology team, or GWCI.