Critical infrastructure: Navigating compliance risks

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Experts at GardaWorld provide a compliance guide for navigating the complexities of vendor selection in emerging markets.

Emerging markets continue to offer growth opportunities for businesses worldwide, particularly in the critical infrastructure and energy realms.

These markets, characterised by rapid industrialisation and economic expansion, present attractive investment prospects, yet many multinationals see their best intentions fail.

With opportunities come significant compliance risks, particularly in the realm of security and risk management solutions, that are often, unintentionally, overlooked.

Vendor selection in developing regions is fraught with challenges – thorough vetting, due diligence, red flag checks, political exposure risks and compliance with local and international regulations, to name a few.

We, at GardaWorld, have navigated our share of complexities to facilitate our own operating footprint. In this article, we’ll provide some insights we’ve earned in more depth.

Challenges in vetting and due diligence

Selecting the right security vendor is crucial in emerging markets, where the landscape is often volatile and regulatory frameworks may be underdeveloped or inconsistently enforced.

A robust vendor selection process ensures that companies can safeguard their assets, employees and operations while adhering to legal and ethical standards.

Limited access to information – emerging markets often lack the transparency found in developed economies. Reliable information about potential vendors can be scarce, making it difficult to conduct comprehensive background checks, so obscuring critical details about a vendor’s financial stability, operational capabilities and past performance.

Cultural and language barriers – misinterpretations or lack of cultural awareness can lead to incorrect assessments and decisions. Companies must invest in local expertise or collaborate with local partners experienced in navigating these nuances.

Regulatory inconsistencies – evolving or inconsistent regulatory environments are characteristic of such markets. Keeping abreast of changes and ensuring that vendors comply with both local and international laws requires continuous monitoring and adaptation.

Red flag checks – conducting regular, unscheduled red flag checks is a critical component of the due diligence process. These checks aim to identify potential warning signs that could indicate higher compliance risks; oftentimes information is revealed through local networks rather than from official channels which necessitates additional verification. Common red flags include: Negative media coverage; lack of financial transparency; previous legal issues and opaque ownership structures.

Political exposure risks

Political exposure risk is particularly pertinent in the critical infrastructure sector in emerging markets where the lines between business and politics can be blurred.

Engaging with vendors linked to politically exposed persons (PEPs) can expose companies to scrutiny and accusations of corruption.

It is essential to: Utilise databases and tools that help identify PEPs and associates as information crucial for assessing the risk level associated with a particular vendor; understand the local political landscape and how instability or political changes might impact business operations; implement risk mitigation strategies to manage relationships with PEP-linked vendors, such as enhanced due diligence, continuous monitoring and clear contractual terms that outline compliance expectations.

Compliance risks

Compliance risks in emerging markets encompass a broad spectrum, including adherence to local laws, international regulations and standards. Key compliance challenges for any industry include:

  • Anti-corruption laws – compliance with anti-corruption laws like the Foreign Corrupt Practices Act (FCPA) and the UK Bribery Act is critical. These laws have extraterritorial reach and impose stringent requirements on businesses operating in high risk jurisdictions
  • Data protection and privacy – emerging markets may have varying standards for data protection and privacy. Companies must ensure they comply with local regulations while adhering to international best practices
  • Environmental and Social Governance (ESG) – stakeholders demand that companies demonstrate strong ESG practices, most notably with regards human rights and fair pay and labour conditions. Ensuring that your vendors adhere to ESG standards is essential for maintaining your corporate reputation and fulfilling stakeholder expectations

Effective vendor selection and risk mitigation strategies

  • Enhanced due diligence (EDD) – implement a rigorous EDD process for high risk vendors which should include in-depth investigations, site visits and ongoing monitoring to identify and address potential risks proactively
  • Local expertise – leverage local knowledge and expertise to navigate the complexities of the market through hiring local staff, partnering with local firms or engaging third party due diligence providers with a strong presence in the region
  • Training and awareness – ensure that all employees and stakeholders involved in vendor selection and management are trained on compliance risks and best practices. Regular training sessions and updates on regulatory changes are essential
  • Robust contractual agreements – draft clear and comprehensive contracts that outline compliance requirements, specify regular audits and inspections; reporting obligations and penalties for non-compliance
  • Continuous monitoring and review – A system of regular reviews and updates to the due diligence process are necessary to adapt to changing risk landscapes and regulatory environments

Navigating compliance risks in emerging markets requires a multifaceted approach encompassing thorough vetting, red flag checks, careful management of political exposure and adherence to compliance standards.

By adopting robust vendor selection and risk mitigation strategies and partnering with trusted vendors in the services with enhanced compliance risks like security and risk management providers, companies can safeguard their operations, protecting people and reputations, and ultimately, capitalise on the opportunities that these dynamic markets offer.