Exploring Reverse Due Diligence for International Joint Ventures and Subsidiaries: 9 Critical Focus Areas
Reverse Due Diligence isn’t just a management task; it’s a proactive exploration of a company’s inner workings, spotlighting risks and gaps in day-to-day operations. Whether it’s your business strategies, HR policies, legal compliance, or tax matters, it’s all under scrutiny.
Now, picture this: a company with overseas joint ventures and subsidiaries. In this scenario, the canvas of reverse due diligence expands significantly. You’re not just safeguarding your interests but also those of your global partners.
In this article, we unravel the web of complexities and explore critical focus areas where potential risks may lurk, ready to challenge the company’s success and the well-being of its worldwide affiliates.
Critical Focus Areas
During the process of reverse due diligence, it is essential to look into the following critical focus areas:
Given the diverse regulatory landscape that varies among companies and countries, ensuring full compliance with all pre-requisites is crucial when establishing a foreign business. Take, for instance, the United States, where the procedure for commencing a company can significantly differ depending on the chosen state or city for incorporation, as well as the intended scope and location of operations. Maintaining operational compliance can present a formidable challenge with 50 distinct States, each governed by its unique set of rules and regulations.
Additionally, the Australian government’s Modernising Business Registers program has introduced a director ID requirement, which complicates the process, especially for foreign directors without online access, leading to civil and criminal penalties for non-compliance.
In light of these factors, it is imperative to conduct thorough due diligence in relation to the incorporation conformities of a company, as compliance requirements can be intricate and multifaceted.
2. Licenses and Registrations
Before any company embarks on its journey, securing the right licenses, permits, and registrations is the key to success. These essential prerequisites vary not only by location but also by the nature of the business or activity. For multi-jurisdiction businesses, business license compliance is vital. Yet, it often falls by the wayside. In the USA alone, a staggering 65% of license registration requirements change every year, while enforcement against violations is on the rise. In Australia, businesses in the construction sector navigate a labyrinth of 11 distinct procedures just to secure construction permits.
Non-compliance risks fines, penalties, arrests, and business closures. Reverse due diligence enables companies to pinpoint the licenses and registrations they need while flagging any non-compliance issues before they become showstoppers.
3. Employment and Labour
The ever-evolving regulatory landscape in employment law poses a complex challenge for multinational corporations striving to stay compliant. In most countries, a written employment contract is mandatory, especially for specific types like fixed-term contracts.
Equal pay regulations vary, with many nations enforcing equal pay for equal work and prohibiting discrimination, primarily based on gender. Some places, like certain U.S. states, require salary range disclosure during hiring.
Expanding into Spain involves navigating tricky employee contract terminations with associated severance fees, typically calculated at 33 days of salary per employment year. Germany limits employee leasing to a maximum of 18 months, after which permanent hiring or termination is required. Expanding to Australia means facing Fringe Benefit Tax implications for certain employee benefits, even if provided by a third party.
Each country imposes its own set of holidays and leave requirements, complicating paid time-off management. Brazil, for instance, mandates employers to provide thirty calendar days of paid leave after twelve months of service. Additionally, policies addressing issues like sexual harassment become mandatory in several countries. Conducting due diligence is essential to prevent costly compliance lapses when it comes to employment laws across the globe.
4. Data Privacy
Pop quiz: Who is accountable for compliance and data privacy in a company? Is it a) the security department, b) the IT department, c) the legal department, d) the compliance group or e) all of the above?
If you answered “all of the above,” you possess a good understanding of the intricate realm of compliance and data privacy! While compliance is a complex topic, it becomes even more complicated due to the mosaic of regulations enacted by countries, regions, states, and industries. Do you know that 71% of countries protect data privacy by establishing legislations?
In the United States, data privacy is on the radar of 35 out of 50 states. Notably, California, New York, Colorado, Connecticut, Utah, and Virginia have implemented comprehensive consumer data privacy laws. These laws share common elements, such as requiring privacy policies, granting individuals the right to access and delete their personal information, and enabling them to opt out of having their data sold. Many of these regulations are influenced by the California Consumer Privacy Act (CCPA), which is evolving into the California Privacy Rights Act (CPRA). CPRA will establish a separate state data privacy agency and broaden data rights requests to include employee data.
Across the Atlantic, we have two key General Data Protection Regulations: the European Economic Area’s GDPR (EEA GDPR) and the United Kingdom’s GDPR (UK GDPR), customized through the Data Protection Act. These regulations oversee the gathering, utilization, transfer, storage, and overall processing of personal data within their specific jurisdictions.
Understanding the data privacy laws that pertain to your specific region, industry, and business type is essential. Additionally, grasping the implications of “passed down” regulations is vital. Your enterprise must adhere to these rules, not because they directly affect you, but because they are mandated by the vendors with whom your technology and processes interact.
The global average cost of a data breach in 2023 was USD 4.45 million, a 15% increase over 3 years.
Reverse due diligence empowers you to comprehend your global data privacy compliance obligations and implement corrective measures.
Tax laws and regulations exhibit significant variations between countries, introducing complexity into the compliance process. These differences extend to many areas, such as VAT, sales tax, GST, and customs duties, among others. Moreover, even within a single country, tax rates may fluctuate based on factors like regional distinctions or the type of product or service being offered.
Governments across the globe frequently update their tax regulations, posing a challenge for businesses to remain up-to-date with the latest changes and maintain compliance. Companies not only contend with varying tax rates but also navigate a multitude of reporting requirements. This entails understanding the requisite documents, their submission timelines, and the relevant authorities responsible for receiving them.
Reverse due diligence serves as a valuable tool for businesses to identify international taxation compliance requirements, thereby mitigating the risk of substantial penalties and legal repercussions.
6. Transfer Pricing
Companies operating across multiple countries encounter a unique set of challenges absent in single-country operations. Among these challenges, the intricacies of transfer pricing stand out as particularly complex.
By its very nature, transfer pricing is inherently complicated, not only due to its technical complexities but also because it invariably necessitates adherence to compliance and reporting standards across multiple jurisdictions. These standards can vary significantly from one jurisdiction to another.
Almost every country mandates some form of local transfer pricing reporting, which companies must undertake to demonstrate compliance. In most instances, this involves the creation of reports in accordance with either OECD or local guidelines.
Hence, it is imperative for companies to gain a comprehensive understanding of compliance requirements pertaining to transfer pricing through a process of reverse due diligence.
7. Contractual Liability
Companies with global footprints engage in a multitude of contracts across the globe, spanning customers, vendors, and partners. In such scenarios, strict adherence to contract clauses becomes paramount, as any lapses could expose them to potential liabilities jeopardizing contractual relationships.
Key provisions like insurance procurement, renewal, periodic self-audits, and anti-bribery policies are sometimes overlooked, paving the way for contract breaches that not only entail financial penalties but also trigger dispute-resolution procedures.
Reverse due diligence not only serves as a tool for evaluating compliance with contract terms but also empowers companies to fortify their existing agreements, safeguard their interests, and mitigate potential liabilities.
8. Anti-corruption and anti-bribery
Amidst the escalating global crackdown on bribery and corruption, companies must prioritize compliance with these laws in their operating markets as many countries craft their own rules and regulations.
Prominent legislations in this context include the 1977 US Foreign Corrupt Practices Act (FCPA) and the 2010 UK Bribery Act (UKBA). They define bribery, penalties, record-keeping, and jurisdiction. While the FCPA primarily focuses on public bribery offenses, the UK Bribery Act extends its purview to encompass both commercial bribery and bribery of public officials, explicitly prohibiting facilitation payments.
The plethora of strict regulations, coupled with India’s existing Prevention of Corruption Act, pose challenges for companies in terms of compliance monitoring and developing comprehensive anti-bribery and corruption policies. Expanding into new markets demands extensive scrutiny of not only their own practices but also those of their business partners and associates.
Reverse due diligence offers a valuable tool for companies to assess their current policies and ensure alignment with global regulations and best practices.
9. Immigration law compliance
Many companies encounter immigration challenges not due to intentional disregard of immigration regulations, but rather due to the struggle to stay updated on evolving laws and their enforcement. In the face of heightened scrutiny from federal agencies like the US Citizenship and Immigration Service (USCIS) and the Department of Justice (DOJ), companies now contend with a range of issues, from I-9 audits to potential criminal prosecutions.
To navigate this landscape, businesses must proactively prepare by conducting policy and process reviews, implementing regular audits, and providing comprehensive employee training. Reverse due diligence can prove invaluable in these efforts.
In summary, reverse due diligence is a crucial proactive tool for companies operating globally. It offers an in-depth exploration of a company’s internal workings, highlighting potential risks and gaps across various aspects of its operations.
In today’s complex regulatory landscape, compliance and understanding these aspects are vital for success and reputation protection on the global stage. Reverse due diligence provides the knowledge and tools necessary for companies to ensure compliance, manage risks, and thrive in the challenging world of international business.