When being good is not good enough: compliance, geopolitics and predicting regulatory enforcement in Asian markets

The ever-growing global importance of Asian economies, and the inevitable competition both among themselves, and collectively with the rest of the world, is a significant issue. This issue is fueling a growing tendency for Asian countries to prioritize their domestic economy over those of competitors, particularly in the face of trade arrangements they deem ‘unfair’, creating an opportunity for “local” regulators to deploy domestic regulatory frameworks in the relevant national interest. As a result, understanding your regulatory and compliance exposure for all of your operations in Asian markets – both as it is today, and as it may be tomorrow - is more crucial than ever. This domestic focus is only amplified by the impact of global events such as the COVID-19 pandemic and Russia’s invasion of Ukraine.

All of this increases the risks for multinationals investing in Asia. Faced already with the difficulties of applying “head office” compliance systems and expectations across the varied countries of developing regions, legal and compliance teams now must also have the prescience to predict trends in the new enthusiasm of national regulators to pursue foreign entities.

Again, this is not a new phenomenon, in Asia and elsewhere, but we are seeing businesses caught flat-footed by new and atypical market realities and regulatory scrutiny.

For example:

• Companies are having to make difficult business decisions about diversifying their supply chain away from North Asia and into Southeast and South Asian economies (e.g., India, Vietnam and Indonesia) - markets which are susceptible to complicated regulatory and investment rules, not to mention very real corruption risks.
• In India, there is a well-documented uptick of regulatory scrutiny against - in particular - Chinese operators.
• This phenomenon also appears to be permeating into other Asian jurisdictions - protecting “national interests” in today’s globalized world has become a focal point for governments, often as a reaction to regulatory action taken elsewhere.
• Certain emerging markets like Sri Lanka and Pakistan are having to grapple with political and economic crises, while balancing negotiations with various multilateral and government debtors, and dealing with conflicting political agenda.

We are conducting compliance “stress tests” and acquisition due diligence for clients that specifically anticipates political worst-case scenarios and assesses whether crisis management systems are “fit-for purpose” in the challenging operational environments of Asia.

Just having good systems is, unfortunately, no longer enough to ensure freedom from regulatory scrutiny and business disruption. But prevention is, as always, better than cure.