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?
Nowadays the approach of multinationals has changed. Increasingly, there is less attention on local people and more focus on monthly financial reports. Numbers are important but often they do not help in understanding the reasons for them and what measures to take. Good results may hide risks that may impact outcomes in the medium- to long-term.
Every country has different characteristics and, as such, even if the risks may be similar to the degree of risk may vary drastically.
The choice of good local directors and executives is key together with effective interaction and supervision by group directors with international experience and a clear insight into the group vision. Local legal and tax/accounting counsel directly reporting to the shareholders is very important to understand the vision, fix the priorities, allocate the right budget and develop the right framework with appropriate measures. With the correct rules in place, the risks can be managed.
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 degree of control should be proportional to the type of risk and exposure to it. A careful risk analysis carried out early in proceedings helps to identify the major risks. Once a risk is identified, we usually discuss with the client how to manage it and if it is not possible to eliminate it at least minimise it and/or to keep it under control. It is not possible to avoid risks or to annul them. What a company should avoid is discovering a risk afterwards.
In a way, business is like life. You do not wish your children to be exposed to risks, but you know that this is not possible. Your goal is not to wrap your children in cotton wool, otherwise, they will not “bloom”. We strongly advise companies to carry out a preliminary check and set up a plan to make sure the necessary measures are taken to mitigate risk.
Companies must set up with the support of counsel a mix of controls and various types of alerts and at the same time have an in-house or external team that regularly but randomly check the processes and their application in particular during periods of pressure.
QUESTION THREE – What constitutes the right balance between risk and liability for a company and its overseas subsidiary? What examples can you give?
Companies need to accept the fact that risks always exist and decide how to manage them. In order to grow, a company must sometimes make brave decisions, even accepting failure. It is not only a matter of balance but of consciousness and preparation. Once they are ready to face risks, we prepare companies to take the appropriate measures. In this way, the risk still exists, but it is minimised and manageable if a problem arises.
Recently, we handled an important fraud case involving different countries. A significant amount of money landed, unauthorised, in China. We helped the corporation, by reacting in hours. We blocked new unauthorised transfers, made investigations into the facts, made criminal complaints in different countries and interacted with district attorneys, made Mareva injunctions, cooperated with diplomatic bodies in different jurisdictions and supervised strategy. The first outcome was to block almost the entire amounts fraudulently transferred in China. The intermediary result, thanks to proper insurance coverage, was that the corporation recovered the lost amounts in a reasonable time period. The final result was that the client understood the importance of our advice to carry out a risk analysis and to take the appropriate measures.
Key considerations for multinationals operating in highrisk industries and jurisdictions:
Focus on people. The right person at the right moment can transform a problem into an opportunity.
In-depth risk analysis. Do not enter a dark room, switch the light on beforehand.
Trusted local legal and tax/accountant counsel. Get the right advice: local knowledge with international experience is key.
Ready-to-manage process in place. Be always ready as if it was the day before the hurricane.
Recovery plan. A stitch in time saves nine!
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