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  • December 20, 2016

    Practical Tips on Compliance Reviews for Clients with Overseas Operations

    Conducting a compliance review for clients with overseas operations provides an added level safeguard and comfort and brings a whole new level of understanding to local operations from a risk and compliance perspective. Matthew Koch provides practical tips for conducting a compliance review of foreign operations.

    Matthew A. Koch

    Providing advice to clients with overseas operations presents additional levels of complexity. There is a new layer of local laws, additional compliance requirements, concerns about local controls and potential for bribery, and social responsibility concerns.

    There is no shortage of news about bribery and other compliance settlements for global companies. The U.S. Securities and Exchange Commission lists 21 enforcement actions under the Foreign Corrupt Practices Act (FCPA) so far in 2016 (including a $412 million settlement by Och-Ziff and a $2.2 million settlement by Och-Ziff’s CEO).

    From a business perspective, compliance violations can lead to supply chain interruptions, loss of sales and reputation, or even the inability to operate in the host country. Training and contract provisions are an important part of the compliance process.

    Conducting a compliance review can provide an added level safeguard and comfort, and bring a whole new level of understanding to local operations from a risk and compliance perspective. This article briefly outlines some practical considerations from conducting a compliance review of foreign operations.

    The Compliance Review – One Size Doesn’t Fit All

    A compliance program needs to be targeted to the specific risks of the company.1 Similarly, a legal and compliance review of a company’s foreign operations needs to be targeted to the business scope, regulatory context, and risk portfolio of your company or client.

    A key factor, when considering what a legal and compliance review of foreign business should look like, is the country your client is operating – the potential operational or compliance risk will be vastly different depending on the country. Some countries have a higher risk for potential bribery, others for recordkeeping violations, and others for labor conditions. According to Transparency International, which has provided a country corruption index since 1995, the corruption perception risk of operating in Denmark, Singapore, or Hong Kong is much lower than operating in Venezuela, the Ukraine, or Sudan.

    Matthew A. Koch Matthew A. Koch, U.W. 1998, is general counsel and vice president of Corporate and Legal Affairs for Direct Supply, Inc. in Milwaukee. He previously served as the interim leader of Direct Supply’s Product Supply Chain and is a former president of the Wisconsin Chapter of the Association of Corporate Counsel.

    In addition to the country environment, you also need to consider the nature of your company’s or client’s business there (e.g., government sales, financial services, manufacturing, or in-country distribution, etc.) whether your company/client is public or private as well as the scope and size of operations (e.g., sales, revenues, number of employees, etc.). You likely will have a different approach to a legal and compliance review depending on how long the foreign operations have existed, the experience of local management, and the availability of local consultants.

    Again, there is no perfect checklist, but rather a need to take a holistic look at the foreign operations within the context of your or your client’s business and determine the key areas on which you will want to focus time, attention, and resources.

    Areas of Potential Concern

    As a general matter, there are some subjects that normally come to mind when thinking of what a compliance and legal review should look like. As noted, the areas of potential concern for your client or company will depend on the particular country and scope of operations with public companies often having many additional considerations.

    • Bribery and Corruption
      Certainly, bribery and corruption are one of the top concerns for U.S. businesses doing or considering business abroad. According to Price Waterhouse Cooper, almost a quarter of their non-U.S. survey respondents in their 2016 Global Economic Crime Study reported experiencing alleged bribery or corruption.

      FCPA and other anti-bribery regulations continue to be a key enforcement consideration for U.S. and other enforcement agencies. Even if your organization is not directly engaged in government sales in a foreign country, you will still want to consider appropriate policies, controls, and reviews with respect to nongovernmental customers, dealers, and distributors, your supply chain, and interactions with local regulators.

    • Accurate Records
      Internal controls are also generally high priorities on most lists whether they are asset management, banking and cash controls, procurement processes, or human resources and payroll protections. Whether your client or company is public or private, you will want to ensure you have appropriate and accurate accounting records as well as employment, tax, operating, and other licenses and records.

    • Elements of Social Responsibility
      Whether regulatory, contractually or ethically, you will want to incorporate an element of social responsibility into your review, such as local labor conditions and safety of the workplace.

    You will, of course, have particular areas of potential concern depending on the regulations governing your particular client or company – your review may include conflict mineral considerations, customer contract requirements, export (or deemed export) obligations, protection of personal information, FTC requirements, and so on. Again, these can vary significantly depending on your company or client, industry, and customers.

    Putting Together the Right Team for the Review

    Once you have scoped your compliance review needs, the next step is to put together a team that can help conduct the review. The ‘team’ may be one individual sent to conduct the review. (This is how the process started in our company’s case – I put together a proposed compliance and legal review and then conducted the review in connection with local management.)

    While it will depend on your particular client’s or company’s needs and resources, the legal (or compliance) and finance resources will likely be an important part of the team. Public companies (my employer is privately held) will have different needs and specializations for who conducts the review –something that goes beyond the scope of this article.

    In addition to legal and finance, you may want to consider a member of your human resources team. Depending on the nature of your company’s or client’s business, if you plan to visit any of your own or any contract manufacturers, you may also wish to partner with your operations or quality teams if they will not be attending with you. Security and forensic resources may be important depending on whether there is a due diligence or investigatory element to your review.

    You’ll also want to consider the role of local consultants such as your in-country law firm, your local accounting and audit firm, any human resources or payroll consultants, and so forth. One resource that can often get overlooked is your insurer (or insurance broker). Depending on their size and expertise, your insurer can be a valuable resource as you think about your company’s or client’s risk portfolio in any particular country.

    So What Does a Compliance Review Look Like?

    Again, there isn’t a one-size-fits-all approach. In my particular case, I’ve been fortunate to work for a company that with a strong compliance program, a principled tone at the top, and a commitment both at home and abroad to ethics, integrity, and compliance. As noted, we started initially after our China offices opened with a member of our legal/compliance team working directly with our Asia Pacific management team.

    As our operations have expanded in China, we have partnered with our finance team to co-lead the compliance review. This generally means that we will send an attorney and an accountant to conduct the review (or on a staggered cadence). There has also been a certain degree of cross training – for example, an attorney may help review and reconcile accounting records and inventory if a member of the finance team is not on the trip.

    I’m afraid that there isn’t anything particularly glamorous about the in-country review. After a 16-hour flight, often with connections, you need to go through immigration and customs (as with any international travel of course). After a few hours of sleep, we often have started the next morning with an office visit – reviewing and confirming most recent records and documentation, updating information about licenses, employees and taxes.

    There are meetings with local consultants – attorneys, accountants, insurance brokers, local HR and payroll services, and so on. We will spend time with local management and generally try to do some form of training with employees or a subset of employees. There are factory tours and questions about supplier licenses and ethics policies. We also try to visit customers when possible and take stock of items sold to customers on the tour. In a little over a week or so, we may visit a half a dozen cities and a few countries concluding in a report to our Audit Committee and management.

    No Magic Bullet

    There is no magic bullet, of course, for an international compliance review. But understanding the needs and complexities of your international operations, and developing a process and cadence for your review should help you demonstrate that you’re engaging in good due diligence, committed to ethical practices and hopefully create a stronger relationship between your legal department (or firm) and the local in-country operations.


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