Compliance risk and third party engagement in the Middle East region

November 2015 | SPOTLIGHT | RISK MANAGEMENT

Financier Worldwide Magazine

The Middle East is a fast growing region with increasingly important markets. Operating in the region is a profitable opportunity, but with a relatively underdeveloped legal and regulatory framework to protect and govern business, that opportunity comes with relatively high regulatory risks, especially for European and American companies.

With compliance and regulation gaining increasing importance at an international level, laws approved in one corner of the world can affect distant markets as they, by definition, feed down to a regional level. The Middle East is no exception.

The US Foreign Corrupt Practices Act (FCPA) and UK Bribery Act (UKBA) are the two most significant pieces of legislation with an international reach causing companies to impose important de facto compliance procedures when operating in the region. The long arm of the law is apparent – since 2005 over 30 FCPA actions have been related to the Middle East and North Africa (MENA) region and the UKBA, passed in 2011, is considered a more rigid version of the FCPA. Some of these actions have led to criminal prosecution and individuals serving prison sentences either within the region or elsewhere. Others, such as Alcoa World Alumina LLC whose subsidiaries paid over US$110m in bribes to Bahraini officials to influence negotiations with a government operated aluminium plant, settled. Alcoa paid a total of $384m to settle the case, the fifth largest FCPA settlement in history.

Good compliance both protects and helps business. Strong compliance policies and procedures prevent conduct that exposes the business, its owners and its employees to risk, including criminal prosecution either within the region or elsewhere because of compliance failings in the jurisdiction. Similarly, if a business can show a strong set of compliance procedures it will stand it in good stead with banks, suppliers, customers, investors and potentially people who may be interested in buying the business.

In the Middle East there are cultural sensitivities to take into consideration. Some aspects of the region’s business culture do not conform to internationally accepted business practices. Gifts, whether corporate or personal, are seen as normal in many places. In some cases gifts are considered necessary to establish contacts and to conclude business agreements. Payments often known as facilitation payments to public officials aimed at ensuring the prompt performance of a duty they are already bound to perform without complications are also not unusual. Furthermore, the lines between private and public interests are not always clear. For instance, in the oil-rich Gulf States laws do not distinguish between being a business person seeking to maximise profit and a public official. Many of those holding high positions are prominent and successful sheikhs or businessmen whose corporate interests are worth millions and who continue to run their business while in public office. Tribal and familial relationships make it even more complicated to take the conflict of interests into consideration. In other countries in the region, where the state is old and well-established, legislation may be in place but rarely applied. Bureaucracy increases the cost of business and non-official payments may seem like the only way to finish the required paperwork.

So how do businesses ensure compliance? They obviously want to receive the goods and services that they have contracted to receive and act commercially responsibly and lawfully both to protect and enhance their reputation. The starting point to do this is strong supply chain management and third party engagement – knowing the people you are contracting with, be they customers or suppliers. Would you want to do business with someone that has no track record in the region and no economic assets to speak of or that you can identify? Entering into contracts with individuals or companies of this type is always going to be high risk. Your business may well not get paid or receive the goods and services paid for. That is not to say that a company cannot contract with entities like this. It simply means that before doing so, due diligence must be done either by asking for references or other third party verification of good standing from others who have dealt with the party concerned to provide the necessary peace of mind required to move forward with them.

You need to be proportionate in how you go about your due diligence. For very large contracts companies may engage third party consultants to undertake due diligence on their behalf. More and more companies operating in the Middle East are resorting to due diligence services and reports before establishing a business relationship with local partners. They not only seek to understand their potential partners, and to gain knowledge of their involvement in any issues of concern. In addition, many companies are running background checks on their new recruits. At the other end of the spectrum companies ask a third party to complete a short questionnaire providing information about themselves. These represent different levels of due diligence, the key being implementing proportionate and appropriate policies and procedures.

Once the business is satisfied that the contracting party is good to do business with, the next stage is contracting with them. At this stage it is important to bear in mind another area of risk: enforcement of the contract in the event that something goes wrong. The first place that a dispute lawyer will look in a contract, when advising a business on its rights, is the governing law and jurisdiction provision. Put into context, there is simply no point agreeing to a contract that contains a governing law and jurisdiction clause that cannot be relied upon. A classic example is an English company entering into an agreement to supply goods and services to a KSA company and the contract is subject to English law and the jurisdiction of the High Courts in England. The UK company may feel extremely pleased that it has got its choice of governing law and jurisdiction clause in the contract. It is totally familiar with UK law and that particular court system and totally unfamiliar with the KSA courts and laws.

However, that UK company has failed to appreciate that an English judgment obtained in the English courts is extremely difficult (in fact almost impossible) to enforce in the KSA. Therefore, the fact that it has got the judgment is virtually worthless. Of course, that can change if the KSA company happens to have assets in the UK or indeed any different jurisdiction where a UK judgment can be enforced but otherwise the business has no hope of recouping its money.

In conclusion, the Middle East is a region of great opportunity, but do business prudently in the full knowledge of who you are doing business with and with a contract that is best suited to your specific requirements and your relationship with your contracting party. Managing risk should not be thought of as an optional extra. It should be considered as an important priority proportionate to the size and nature of the business that will both protect and help the further development of that business.

Damian Crosse is a partner at Pinsent Masons LLP. He can be contacted on +971 4 373 9749 or by email: damian.crosse@pinsentmasons.com.

Damian Crosse

Pinsent Masons LLP