Adriana Posada features in the IR Global & ACC collaboration Publication “A Jurisdictional Guide of how to Manage Risk in Multinationals”

QUESTION ONE – When representing a client with significant business activities in foreign jurisdictions, what are some key risk-related concerns that arise in a cross-border context and how can a parent company minimise such risk?

Colombia is part of the OECD since 2019, which is why it has committed itself as a country to follow the principles and guidelines dictated for multinational companies. Such principles and guidelines have been built taking into account the main risks to develop commercial activities.

Aligned with this, multinational companies based in countries that are OECD members should ensure that their subsidiaries comply with local law in general, and in particular with regard to legal obligations regarding the disclosure of information, human rights, employment and labour relations, environment, fight against corruption, science and technology, consumer law, competition and taxes in order to prevent adverse impacts.

As far as key risks are concerned, we have found that anti-bribery and anti-corruption (ABAC) risk is the highest for multinational clients. Many markets in emerging countries have high corruption levels, and it is difficult from a parent company’s perspective to have a clear understanding of the anti-bribery and anti-corruption risks that may be associated with a particular interaction at a local level. Outside counsel can provide assistance in identifying the key public entities/individuals that may be involved in a particular interaction and potential market restrictions. However, reliance on the local subsidiary’s understanding of the associated risks and how to mitigate them is also essential. The parent company cannot have a micro-management approach to everyday operations, but it needs to fully understand where the biggest risks are so the parent company’s management can be informed and fully aware of major decisions.

The second biggest risk, and one that is difficult to mitigate, is perception risk. Understanding whether an interaction should go on even if it is legally permissible when there may be a perception risk is also essential.

A risk that remains latent in Colombia is security, which implies that companies, in certain sectors of the economy, and in certain locations, may be subject to constraints by crime. Companies must have robust policies for prevention and safety management so that they do not violate the law.

Finally, potential interactions with restricted parties as per global trade controls lists is also a significant risk for multinational companies. Appropriate internal assessment and due diligence prior to any interaction with a local counterparty, as well as training on the matter, is necessary to avoid engaging with restricted parties and individuals. In Colombia, in particular, the risk of money laundering is considerable, and local regulations to control this are profuse and difficult to manage for a company that is just starting to do business in the country. Proper assessment by external counsel is key to avoid any risks.

Nevertheless, the aforementioned risks must be minimised through the establishment of periodic due diligence processes, which can determine the degree of compliance or non-compliance with regulations and any corrective measures needed to reduce the exposure to adverse impacts.

QUESTION TWO – What degree of control should a parent company have over its overseas subsidiaries? How does the degree of control impact the risk exposure level, and how can control issues be managed to minimise liability?

The general principle under Colombian Law is that commercial companies are not disregarded entities. Nonetheless, this principle has some exceptions, depending on the nature of the company, the kind of contracts developed by the company in the country, and the acts developed by the parent company or shareholders by which they could be considered or declared as joint liable for some obligations of the company.

Consequently, the parent company must have a sufficient degree of control that allows it to ensure that the activities carried out by its subsidiaries or shareholders are carried out in compliance with local laws and in such a way that no responsibility can be established for the parent either by participating in decisions that could lead the company to breach its obligations or by failing to take the necessary measures to prevent the management of the subsidiary from causing damage to third parties. For example, to prevent the company from entering into default payments of obligations that may cause it to enter into grounds for liquidation.

Among these measures, it is suggested that robust personnel selection processes be carried out so that the directors and officers of the subsidiary have knowledge of local law, clear criteria of responsibility for administrators and sufficient professional criteria that allows them to measure the risk that their actions might bring to the company.

In our experience, a proper local assessment of the areas where risks are more relevant, training, mitigation and clear internal processes, have a better incidence in prevention of risk. A robust tone at all levels, top, middle and bottom, with an emphasis on accountability also helps to make it clear for the local organisation that there is zero tolerance of risky activities.

QUESTION THREE – What constitutes the right balance between risk and liability for a company and its overseas subsidiary? What examples can you give?

Considering the responsibility that can be given to the parent for their actions or omissions in the management of the subsidiaries, under local law and international principles, in the classification of risks − financial, commercial, perception, legal, enforcement − it is clear that enforcement risks, regardless of the potential return of investment, should not be assumed.

But a thoughtful risk-taking assessment could yield an assumption of legal, financial, commercial or even perception risk, with a robust mitigation plan and, in particular, for legal risk, an opinion from external counsel with the potential interpretations of the law and which one would have a chance to better win in court.

Key considerations for multinationals operating in highrisk industries and jurisdictions:

Do not assume that foreign markets are/are not as sophisticated as developed ones. There are markets where certain areas are unregulated, or regulated in a more lenient manner, or are over-regulated, but this doesn’t mean that your assessment of risk should
abide by local rules exclusively. 

Understand the particularities of the given market and what is more relevant in their legislation for your industry.

Plan ahead. Your initial subsidiary may be small, but if your plans are to grow, or to have other subsidiaries in the rest of the country or region, you may need a different type of legal entity than originally envisioned. Make sure that your outside counsel is aware of these plans to better serve your needs.

Think before you incorporate, so you can select the legal vehicle that best fits your needs. That will allow you to better mitigate risk. It is far easier to create a company than to close one.

To read the full publication, please click here.