How Do We Support Corporate Compliance in a Democratizing Global Marketplace?

By Andrew Wilson, Center for International Private Enterprise

“Hoverboards” made by small Chinese factories and sold direct to consumers are just one example of the unique regulatory and compliance challenges of our increasingly democratic globalized economy. (Photo: Flickr / Ben Larcey)

Technological and regulatory advances like e-commerce, low-cost international shipping, and trade facilitation — simplifying the process of moving goods across borders — are ushering in a new era in the democratization of growth. Around the world, more people than ever before have the opportunity to launch businesses which directly reach customers everywhere.

By their very nature these opportunities allow entrepreneurs to circumvent the traditional barriers to market entry and growth. The potential rewards are great, but there are also risks — especially when it comes to compliance.

Recent scandals like the Unaoil case, in which a small but well-connected Monaco-based company is alleged to have orchestrated a web of suspicious deals and apparent bribes on behalf of major players in the global oil industry, have once again shone a spotlight on the challenges of promoting and ensuring corporate compliance in emerging markets.

Despite external certifications of its compliance practices and the fact that many of its clients were widely regarded as having strong third-party compliance programs, Unaoil appears to have been engaged for years in what was, at best, a pattern of shady practices on behalf of those clients.

The fact that this behavior only came to light after a massive trove of documents was leaked to journalists begs the question: if we have problems enforcing compliance in such a highly-scrutinized sector as oil and gas, what about the sectors of the global economy which operate outside of established oversight networks?

Recently, my organization, the Center for International Private Enterprise (CIPE), helped launch new initiative called the Global Alliance for Trade Facilitation, a public-private partnership promoting and assisting in the implementation of the WTO’s Trade Facilitation Agreement (TFA). Through this alliance, we are engaging with multinational firms that work with small and medium-sized companies across the globe, which are entering international markets as never before. What has struck me in CIPE’s discussion with these groups is the emergence of a new breed of international trader, and the challenge we face in building and promulgating new standards of corporate compliance that recognize the particular needs of this growing group of firms.

A recent report by eBay highlighted the degree to which e-commerce is driving small business growth not just in developed countries but in markets around the world. For their part, express carrier firms such as FedEx, UPS, and DHL increasingly point to small business shipments as a major element of their business model. This trend did not appear overnight and will take decades to play out. Still, we are seeing the beginnings of a shift in our global marketplace in which traditional value chains — where suppliers in emerging markets sell to multinational corporations who sell to customers in rich countries— will no longer dominate the flow of goods across borders. A reduction in non-tariff-barriers brought about by the implementation of the TFA will only accelerate this reorientation.

This democratization of growth would not be possible without the emergence of global standards and practices that create an ethical playing field for global trade, filling the voids at the national level where weak rule of law, corruption, and the absence of sound governance often incubate unethical corporate behavior. But there are limits to the efficacy and reach of these global standards.

The current patchwork of voluntary industry standards, consumer-driven codes, trade agreements, and sovereign laws (such us the Foreign Corrupt Practices Act or UK Bribery Act) works through global value chains and multinationals to raise standards and promote compliance. Indeed, the rise of compliance as a corporate priority has been an overarching theme in the globalization of trade for the last decade.

However, the emergence of these “market disruptors” — and I use the phrase in the broadest of terms to refer to any firm that is utilizing new tools to access new markets in non-traditional ways — presents a new challenge to the current models we use to develop and promulgate standards. A whole new army of entrepreneurs is entering the global marketplace, circumventing traditional value chains and the culture of compliance they bring.

How then do we better understand this sector, and develop approaches and standards that promote compliance? These disruptors are increasingly found in places or in economic sectors where rule of law standards are sub-par, so we can’t rely on national governments to enforce them, while their small size may allow them to fly under the radar of many international efforts.

We must also ask ourselves if our “one-size fits all” global standards are applicable for these small firms, and if they have the resources to comply in the first place. And if not, how do we encourage them along the road to compliance? Certainly an inclusive approach to compliance is preferable to one in which non-compliant firms remain in the shadows of the gray economy, undermining the rule of law, potentially harming the environment, consumers, and workers, and facilitating corruption.

The growth of these firms is one way to drive a movement to higher standards. As the commercial benefits of expanding one’s business in terms of investment, partnerships, and customer base become driving forces they begin to outweigh the limited advantages of lax or unethical business models. Thus, the “business case” for compliance is always the most compelling, and the most likely to encourage sustainable action. In CIPE’s experience, the threat of punishment, especially for firms in emerging markets, is a much weaker motivator.

Of course, sound regulation, a level playing field, and rule of law at the national level are the most effective means, but in a globalizing economy we must look to more effective tools to promote compliance in the short and medium term. Trade agreements, both bilateral and regional, are great levelers and can be effective mechanisms to ensure higher standards of compliance by both governments and companies of all sizes.

Looking to the future, assuming that we have implementable and sustainable standards, access to information becomes the next hurdle to clear. How do we engage these emerging economic players who by their “disruptive” nature often operate outside of existing business networks? The paradigm of value chain-driven compliance may not apply to them, they may not be members of business associations or chambers, and the ability of local civil society to reach them may be hampered by mistrust and poorly developed NGO/private sector networks. Rather than write these market participants off as unreachable, we should devote more time to understanding the information networks they operate in, and develop tools to reach them and encourage dialogue.

The answer may in fact lie in the same technology that drives the growth of these sectors. Due diligence firms are already exploring ways in which data on firms can be mined, aggregated, and sold onward at affordable rates. Associations and chambers must become more adept at using technology to reach these emerging firms. CIPE is increasingly focusing on creating affordable and grassroots-targeted programs that strengthen anti-corruption compliance. These are models which could be expanded to other areas such as labor or environmental standards. Web-based training, Massive Open Online Courses (MOOC’s), and other technology are also democratizing access to information on these subjects.

Understanding how these emerging firms access information and apply it will be the key to success in improving compliance programs in these emerging sectors. This requires that we, as organizations that care about building supportive standards in business, challenge ourselves to become more “disruptive” when it comes to our thinking about developing standards, outreach, and compliance.

Andrew Wilson is Executive Director (acting) of the Center for International Private Enterprise. Read more about the challenges of corporate compliance in emerging and frontier markets on our Corporate Compliance Trends blog.