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Charting Political Risk

Tuesday 7 March 2017

The fact that the risk landscape is changing is one with which risk and compliance professionals should already be comfortable. And while it is true no sector or industry is immune to change, the question remains: what is driving that change?

Change is inevitable. Awareness of that fact, however, does not mean businesses are always prepared when change occurs. Sometimes, that change is too unpredictable and volatile.

Early last year, the BREXIT vote denoted the end of an era, and organisations in the EU and UK—in fact, businesses in general—suddenly found themselves considering the future ramifications for the way they do business.

From a compliance perspective, it became a question of how to ensure your organisation’s business interests are agile enough to remain compliant in the face of any potential regulatory changes.

Similarly, high now on the international political risk register is the new US administration, which simultaneously is rolling back regulations like the Dodd-Frank Act and rewriting or defaulting on international agreements, such as the North American Free Trade Agreement (NAFTA) and the Trans-Pacific Partnership (TPP).

President Donald Trump and the domestic and international political risk he poses was highlighted in almost every presentation at the recent
RISK MAP 2017 Breakfast put on by Control Risks. Jamie Rubbi-Clarke’s presentation was the exception; the Associate Director of the Asia Pacific region for Control Risks focused instead on cyber risks and the emerging cyber risks for 2017.


Political risk and populism
Jonathan Wood, Director of Global Issues for Control Risks, drew the link between rising business risks and the more insular approach of what Wood referred to as ‘Western Populism’. Wood noted the distinction between Western populism and the populism of emerging economies, is that Western populism has a particular focus towards anti-globalisation, while the populism of emerging economies has a tendency towards authoritarianism.

Populism in its own right can be seen as an inherent political risk. Wood saw this as a hostility to external influence, coupled with policy to roll back globalisation.
 “We have, for the first time in our 41-year history, raised our political risks in the UK from low to medium to reflect the BREXIT vote and its anticipated changes to the UK’s law, regulatory environment and international relations,” Wood said.
He added that there has been a general uptake in global political risk since the global financial crisis (GFC) and this has changed the political environment in some ‘core’ markets.

“Populist policy-making tends to be highly-personalised and often incoherent,” Wood explained. He added that there is a lot of this personalised and incoherent policy-making in the US.


Reputational risk and the volatility of populism
Organisations should also be aware of the reputational risks that ‘capricious populist governments’ can pose to organisations in these jurisdictions.

“This won’t necessarily come as a surprise to anyone with operations or business in the Latin America region, where foreign capitalists—and especially foreign investors and foreign companies—are criticised routinely and scrutinised for their involvement in the economy. This is something that is relatively new in the western context,” Wood explained.

He added that one of the things companies will have to look out for in 2017 is finding themselves on the receiving end of Donald Trump’s twitter account early in the morning. However, an article in
Business Insider Australia earlier this month seemed to suggest the impact of those tweets is subsiding.

While becoming the focus of these presidential tweets may seem remote for Australian businesses, it is important to note the rise of populist sentiments are not confined to the US. Even if we subtract populism from the local equation, there is no doubt that political statements can pose reputational risk to industry—something banks have learned recently.


Regulatory risk and Whistle Blowing Protections
Mark Pulvirenti, Control Risks Partner for the Australia Pacific, added more weight to the raft of regulatory risks organisations need to look out for, and addressed the much-discussed aspect of the Dodd-Frank Act roll-back. He also noted that while the Foreign Corrupt Practices Act (FCPA) may be a target of the Trump administration, its effectiveness is likely to continue. In addition, he noted the ‘opaque landscape’ of regulation in Asia, and how companies interested in working in that region should be aware of the risks.

Of special interest to Australian companies is the American approach to whistle-blowers and whistle-blower protections, which—despite the fear of regulatory roll backs—are still stronger and more comprehensive than what happens in Australia.

 “Whistle-blowers in this country have a very difficult time,” Pulvirenti said, “from dismissal to lengthy litigation, to an inability to obtain another job.” He added there has been a declared commitment from the Government to develop corporate and public sector whistle-blowing protections by mid-2018.


Whistle-blowing protections in the US
“The US issues bounties,” Pulvirenti explained, “and those bounties can range from 10-30% of penalties in excess of US$1 million. So, you are talking about exceptionally large numbers, in many cases.” He added these large bounties are coupled with protections from retaliation.

Pulvirenti noted the high bounty paid last year to a former BHP Billiton employee. At least partly as result of this case, Australian whistle-blowers have been observed reporting to the US in record numbers, with more than one report per week being made from Australia in 2016.

“What we are seeing this year, though, is that it will be one for inquiries and joint committees looking at issues around white-collar crime, foreign bribery and whistle blower protections,” Pulvirenti said.


For risk and compliance professionals
Quite often, it easy to get caught up in the minutiae of the regulations and the risks, but sometimes, it is necessary to step back and look at the wider political forces driving regulation because that can help provide risk and compliance professionals with foresight as to the level of flexibility required of the risk and compliance framework. This means considering political risk as a significant part of your risk register.


Speakers from the RISK MAP 2017 Breakfast. From Left, Jamie Rubbi-Clarke, Associate Director, Alecia Quah, Senior Analyst, Mark Pulvirenti, Partner, Cory Davie, Partner, Jason Rance , Senior Partner, Carla Liedtke, Director, Jonathan Wood , Director.