The Financial Risks of Failing to Maintain Global Compliance
During an expansion process, global compliance is important. Without it, you could be at financial risk. Here are some tips on remaining compliant.
Financial Risks For Businesses Who Fail to Maintain Global Compliance
Written by Global Expansion
12 | 06 | 20
5 minute read
The success of international expansion is dictated and intertwined by financial preparation and global compliance. No two expansion processes are the same, so all businesses need to research the expansion target to a great extent. Some organizations even choose to work with Global Professional Employer Organizations (PEO) to help them.
Whichever method you choose, it’s worth researching the financial and global compliance risks your business could face.
Six Financial Risks Associated With International Expansion
These risks shouldn’t stop you from pursuing your international expansion goals. Rather, you should view them as guidelines as to why maintaining global compliance is crucial for a successful expansion.
1. Currency Fluctuations Can Affect Your Profitability
Time and again, businesses fail to prepare for changes in exchange rates. Usually, these are small fluctuations, but in some cases, these changes can amount to big drops in value. This may affect how you manage your transactions, create the terms of any contract and even forecast your future profitability.
Smart businesses collect on any transactions immediately to preserve the going exchange rate.
2. Economic Swings
Economic swings can make a huge impact on your success. These are sometimes difficult to predict and can creep up on you without warning. They can have a significant effect on local markets and even bigger ones on global economies.
Some countries with lower operating costs may be less prepared to deal with massive economic hits, meaning any savings in relation to operational, hiring or utility costs can be made null.
3. Overestimating Market Potential
Businesses need to size a market granularly, based on the success and health of local economics. You might be thinking globally, but domestic context is still highly important.
Foreign markets can potentially have less information available for you, due to your unfamiliarity with them. However, working with a Global PEO can help mitigate this. They can also have more fluctuations in sales estimates, meaning you have to conduct thorough research.
4. Political Environment
Depending on the location, regulations imposed by a country can stifle chances of success. Expanding businesses need to accurately determine a path that retains profitability while remaining compliant. The help of a Global PEO consultancy service can aid you in this.
Domestic infrastructure can make or break a business venture, such as energy, transportation, financial services and other necessary utilities. Without these, a business can be left dead in the water. Issues with infrastructure can completely change the model you entered the country with and affect your customer value proposition.
Before entering a country, redesign your model based around any changes in infrastructure.
6. Cultural Differences
When comparing two countries, cultural similarities can often be few and far between. Traditions and etiquette can influence or even dictate business procedures, roles and customer expectations.
A business and its employees will always be viewed through a cultural lens, so it’s worth preparing for that culture. The best way is to hire locally as overseas employees will know the culture intimately.
Examples of Business Fines
There are many examples of global compliance fines relating to international businesses working within a territory non-compliantly. The first we can look at as an example is GDPR, or General Data Protection Regulation. This is an EU regulation that applies to all businesses operating within the EU and the European Economic Area, covering how personal data is handled.
GDPR is an important piece of international legislation protecting data and fines for infringement are costly. At the moment, the maximum fine is either €20 million or 4% of global annual turnover - whichever is greater. Not all infringements result in fines, however, as some cases can result in data suspension or a ban on data processing.
One notable case of GDPR infringement is British Airways, who were ordered to pay €204.6 million in 2019 after hackers stole the data of 500,000 passengers. The company was accused of having insufficient cybersecurity and the sum amounted to 1.5% of their global annual turnover.
In other cases, some regulations apply only to a specific country. For example, in Saudi Arabia, all businesses must work within the regulatory remit supplied and enforced by the Capital Markets Authority (CMA).
The CMA is the sole regulator of the markets within the Kingdom of Saudi Arabia.
In Saudi Arabia, they operate with the Anti-Cover Up Law (also known as the Anti-Concealment Law). The law stipulates a non-Saudi person may not conduct or invest in a business in Saudi Arabia without a foreign capital investment license.
This license is issued by the Saudi Arabia General Investment Authority (SAGIA). Any violation is this law could result in imprisonment or fines of up to SAR 1 million (around $266,000).
We can also look at American examples for further clarification. Tax in the US is highly important and there are many different cases for US businesses operating in foreign countries. For example, tax returns require specific information depending on the type of business venture you’re operating.
In the case of a foreign partnership where a US taxpayer holds the controlling portion, the individual would have to include Form 8865 in their tax return. Alternatively, if you owned more than 10% of a foreign business or had acquired stock within that company, you may be required to submit Form 5471.
These are very specific examples for individual US taxpayers, but do show that the state of international financial regulation is highly complex. Because of this, it’s a good idea to work with an organization like a Global PEO who has a good understanding of the regulatory environment.
Then in Portugal, it’s illegal for employers to sack an employee and there’s no termination period in the country. If an organization wants to dismiss an employee, they must offer a good resignation package and hope the worker accepts it. It’s why you’ll find most businesses in Portugal only offer fixed-term contracts and hire part-time workers.
Although a Global PEO will be aware of these legalities and regulations, you need to do your own research for all aspects of the international expansion process. This research will help ease the amount of global compliance risk the process comes with, ensuring a successful expansion. To help your research, we’ve developed a guide full of expansion considerations.
Expansion Considerations for Rapidly Growing Businesses
Our helpful download covers the most important considerations for businesses looking to expand. From growth options to risk mitigation, domestic vs. international expansion and what to expect when working with a PEO, we’ve compiled the top information to help you on your way to new horizons.