Minimize Fraud Risks When Operating Abroad

By: Tony LaNasa

June 21, 2023

Expanding operations into foreign countries can help U.S. businesses reduce labor and operating costs. It can also provide them with access to new markets and potentially higher profits. You may be attracted to a country by a plentiful labor supply, significant tax benefits or government incentives. But, beware: Some foreign business environments present serious fraud risks. Before you make the decision to cross borders, familiarize yourself with the country’s culture and laws.

Threats Everywhere

Corruption is a business risk in every country, but in some countries, it’s omnipresent. For example, if you want to build a factory, you could encounter officials who expect gifts to “grease the wheels” or local politicians who are accustomed to excessive wining and dining in exchange for their cooperation. If you import or export goods, customs officials might solicit bribes to process shipments faster.

Other common fraud risks can involve:

Hiring employees. You could face pressure to hire friends, family members and associates of government decision-makers. These job candidates may be unqualified for open positions and you might be pressured to pay them above-market rates so that they can give the official who “recommended” them a kickback.

Cybersecurity. Hacking is particularly common when businesses employ individuals who don’t understand or simply don’t follow cybersecurity best practices. Not only can a cyberattack harm overseas operations, but once criminals compromise that system, they can use the knowledge to attack your other IT assets.

Intellectual property (IP). Some countries provide only limited legal protection of IP — or may not enforce laws that are on the books. This means rival companies could use your logo, patents, trade secrets and other IP without approval. Litigation can be expensive and claims may be difficult to prove. To make matters worse, if you do attempt to sue, a foreign legal system could treat U.S.-headquartered businesses differently from locally owned companies.

Banking. Large financial institutions generally have people, processes and technology to prevent fraud. But smaller banks in a foreign country may struggle to prevent sophisticated fraud schemes. This can result in thieves gaining access to your business accounts.

5 Steps

For many businesses, the benefits of operating across borders outweigh the fraud risks. Even if, after performing a risk/benefit assessment, you decide to go ahead and establish foreign operations, take these five steps to minimize fraud exposure:

Engage legal and accounting professionals who have clients and contacts in your destination country to inform you about the culture, business practices, politics, labor situation and regulatory environment.
Identify the fraud risks you’ll likely face and evaluate the effectiveness of your internal controls when confronted with them. Once you’re up and operating, add or revise controls as necessary.
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 activities (such as accepting bribes) that will result in termination.
Scrutinize your IT and data security defenses and work with experts to remediate any shortcomings.

Of course, every country has a unique set of fraud risks. You’re likely to find operating environments most similar to that of the United States in counties such as Canada, Australia, Japan, the U.K. and in the European Union. In developing countries, authorities may be more willing to turn a blind eye to corruption and courts may not be as friendly to the interests of businesses and business owners.

Don’t Let It Deter You

From bribery and kickbacks to cybercrime and IP theft, there are probably going to be new fraud risks if you decide to operate abroad. These risks shouldn’t necessarily deter your business expansion plans. But you should invest in additional internal controls, ramp up due diligence and work with knowledgeable advisors. Contact us for more information and advice.