Mohamed Agamy features in the IR Global & ACC collaboration Publication “A Jurisdictional Guide of how to Manage Risk in Multinationals”

QUESTION ONE – When representing a client with significant business activities in foreign jurisdictions, what are some key risk-related concerns that arise in a cross-border context and how can a parent company minimise such risk?

There are significant risks associated with going international such as:

The Regulatory Risk

The main way to evaluate any business activity under a specific country is to look at the risk around changes to local laws. A country that has a poor legal system or frequent changes in legislatures is a high-risk from a legal standpoint. The uncertainty of regulations exposes any business to regulatory risk. For example, a country without clearly defined intellectual property laws makes it difficult for foreign software companies to protect their investments. Changes in banking laws may limit the company’s ability to repatriate money to the home country or may limit access to funding as well. Some other examples of risk exposure linked to laws such as tax, labour, incentives and investment privileges may affect profit margin or could cause losses.

Currency Risk

Fluctuations of foreign currency and the existence of black markets can diminish profits for shareholders of the mother company when converting back to the home currency. If an analysis is made on such risk, it may mean that the rewards of making an investment turn into a nightmare. This is what makes one country different from another when it comes to long-term investments. Foreign currencies of stable governments are less volatile than those less-developed countries. Hedging strategies could mitigate some of the currency risks, but it depends on the kinds of businesses and how adaptable they are when hedging the local currency in the global market; particularly those activities with high-cost expenditures or heavy operational costs.

Taxation Risk

The potential for new tax laws or interpretations to result in higher than expected taxation. In some cases, new tax laws can completely disrupt the business model of an industry.

Political and financial instability

Many companies working oversees are opposed to outsourcing in various areas of business practices. Political issues and sanctions, in particular, tend to affect investments. Countries hit by sanctions on trade are deemed as a high-risk investment, even in essential sectors such as healthcare and utilities. Moreover, if any company is involved in human rights abuses, it may be subject to bad publicity and lost business opportunities.

Therefore, it’s crucial to determine the political climate of the country investors wishes to enter as well as analysing the political situation before signing any agreements, avoiding liabilities or burdens.

QUESTION TWO – What degree of control should a parent company have over its overseas subsidiaries? How does the degree of control impact the risk exposure level, and how can control issues be managed to minimise liability?

The parent company must monitor its subsidiaries, ie the companies over which it exercises control (capital or otherwise). It must also monitor its employees, agents, subcontractors and vendors. The due diligence process should maintain over each step in the work-flow that control the subsidiary activity. For sure, it depends on how is the commercial and corporate relationship.

However, setting a highly established strong audit policy with full compliance rules and government regulations is the real clue to keep the business safe from retaliation rather than be exposed to certain threats.

However, the definition of control varies according to the sort of laws. Governance and control systems are essential for any organisation to keep the company’s integrity in the event of a violation by any misconduct happened from its employee’s officers, and/or even its subcontractors.

QUESTION THREE – What constitutes the right balance between risk and liability for a company and its overseas subsidiary? What examples can you give?

In order to constitute the right balance for a company, to mitigate risks and not to fall in further liabilities, the parent company shall control the subsidiaries with a full scheme of compliance policies and procedures. Tracking every transaction or owing a duty of care over each transaction or action done by employees, officers, agents and subcontractor is impossible from a reality perspective.

However, the day-to-day operations, including taxes, asset management, finance transaction, procurement and/or dealing with government are always the hot spot of risk exposure, when it comes to internal management risks. External risks are relevant more on the contractual relations or the business structure from the corporate aspects.

We can advise that there are like three Steps to limit liabilities and mitigate risks by the following main pillars:

  • Structure your business properly; how you structure your business is a critical decision. Whether to register a branch or establish a limited liability corporation is not a business decision in our opinion unless to get proper legal and tax to advise first. For instance, provides good protection for most small-medium companies or sole-proprietorship businesses after expanding the business they were stuck in legal matters based on improper decisions when the company has been established.
  • Protection of the intellectual property is a must for any business to take care with no waiver; the business patent, trademark, copyright should be safely and legally registered. Companies shall fight to protect their intellectual property as well as their assets from being stolen.
  • Reviewing every document/correspondent/contract/commitment from a legal standpoint in addition to that get the right the subject matter expert consultancy before attempting to respond.
  • Training should be conducted periodically to raise and refresh the awareness of risk exposure; mainly for the compliance matters, anti-trust, anti-competition, etc.
  • Companies shall have at least two annual reviews over their subsidiaries, with extensive audit and health check-up from a legal and compliance standpoint, rather than the financial aspects.
  • Companies shall have at least two annual reviews over their subsidiaries, with extensive audit and health check-up from a legal and compliance standpoint, rather than the financial aspects.

Key considerations for multinationals operating in highrisk industries and jurisdictions:

The main keys to evaluating the international regulatory risk factors for any business everywhere are:

  • Perform a risk assessment before doing business in the country; including but not limited to; tax exposure, foreign currency, intellectual property rights, anti-fraud and anti-corruption measures, legislations structure and change in laws, political stability and foreign investments rights and immunities.
  • Establish a compliance policy and efficient internal control.
  • Assess local oversight and perform random training to all employees.
  • Integrate third parties, including business partners, joint ventures, agents, sub-agents, consultants, and other third parties.
  • Conduct health check-ups with audit and monitoring Red Flags.
  • Identify available resources of the right experts and well-talented staff.

To read the full publication, please click here.

Contributing Advisors