U.S. businesses may want to operate abroad for many reasons. Examples include opportunities to grow their customer bases, diversify revenue streams, establish competitive advantages and reduce production costs. Amid all the potential benefits, however, lie some serious risks, including fraud. Business customs and laws can vary widely by country. So before you start operating abroad, perform thorough due diligence.

Corrupt business customs

Corruption is a business risk in every country, but in some countries, it’s widespread. For example, if you want to build a factory, you might encounter officials who expect cash bribes or local politicians accustomed to excessive wining and dining in exchange for their cooperation. If you’re importing or exporting goods, customs officials might solicit bribes to process shipments faster or to mischaracterize their origins or contents. Companies may also face liability under U.S. anti-bribery laws for improper payments made abroad.

One common scenario encountered by U.S. companies operating abroad is pressure to hire friends, family members and associates of government decision-makers. These job candidates may be unqualified for open positions and may expect light (or no) responsibilities. What’s more, you might be pressured to pay them above-market rates so that they can give the official who “recommended” them a kickback.

Legal and financial protection

Foreign laws may offer less protection than U.S. businesses are accustomed to, particularly for intellectual property (IP). Weak IP laws or minimal enforcement might enable other companies to use your logo, patents or trade secrets without consequences. Litigation to fight such activities can be expensive, and claims may be difficult to prove. And if you do attempt to sue, a foreign legal system could treat your business differently than it treats locally owned companies.

Large banks and other financial institutions generally have people, processes and technology to prevent fraud. But smaller foreign banks sometimes struggle to prevent sophisticated fraud schemes, including cybertheft. This could result in thieves gaining access to your business accounts and proprietary assets.

Steps to reduce risk

If you decide to operate abroad, you can help reduce fraud exposure by engaging legal and financial professionals familiar with your destination country. Your advisors can inform you about such critical matters as the culture, business practices, politics, labor conditions and regulatory environment.

Work with your advisors to identify possible fraud risks and evaluate the effectiveness of your existing internal controls. (Once you’re up and operating in the country, you can add or revise controls as necessary.) Also conduct thorough due diligence on all potential suppliers, business partners and major customers in the country before giving them your money, products or trust.

Develop hiring policies and programs for foreign-based employees, including antifraud training. Make sure your employee handbook specifies that activities such as accepting bribes will result in termination.

Pros and cons

There may be other downsides associated with operating abroad, including tax, currency exchange, regulatory, infrastructure and political disadvantages. Before deciding to expand globally, contact one of our experts at (888) 388-1040 to help you find foreign opportunities and minimize threats.

Annette Benson, CPA, CFE and Partner comments,

“Expanding operations internationally can offer tremendous growth opportunities, but U.S. businesses must be vigilant about the heightened risk of fraud and legal exposure abroad. Proactive due diligence, understanding local business customs, and implementing strong internal controls are essential steps before entering any new market. Engaging advisors with local expertise can help navigate unfamiliar regulatory environments and protect your business from costly pitfalls.”