Managing Cybersecurity Threats in Latin America

A growing problem in Latin America is the prevalence of cyberattacks across the region. 

Latin America faces an outsized threat from cybercrime, with increasing attacks year over year. Cybercrime has impacted businesses, banks, infrastructure, and government agencies.

Businesses and investors in the region must carefully assess the risks associated with cybercrime in the region. This includes evaluating the vulnerability of local partners and employees. This is extremely important for protecting valuable intellectual property. 

Sophisticated Hacking Rings 

Hacking rings are a pervasive problem throughout the region partly due to Latin America’s still developing commitment to cybersecurity, which is not keeping pace with rapid technological innovations. 

Personal data and intellectual property compromised by cyber-attacks are used to exploit governments, companies, and individuals for profit, blackmail, or political reasons and often circulate the dark web as purchasable data for other bad actors. 

Several high-profile incidents have raised awareness surrounding these issues in recent years. 

Regional Highlights

Costa Rica. In 2022, the government of Costa Rica suffered a weeks-long bombardment of ransomware attacks from a Russian-based hacking group. The attacks led the Costa Rican president to declare a state of emergency after the ransomware crippled the Costa Rican Treasury. 

Brazil. Further south in Brazil, some of the most sophisticated hacking organizations actively attack companies and government institutions. Brazil’s population is particularly vulnerable to cybercrime due to high levels of internet usage, including mobile banking services and e-commerce, without the cybersecurity infrastructure and enforcement to go along with it. 

Most recently, reports of a massive data leak exposed the personal data of over 220 million living and deceased individuals. This data includes names, addresses, phone numbers, tax information, and salaries, among other things, and affects nearly every Brazilian citizen. 

Chile. The Chilean government has fallen victim to significant cyberattacks in recent years, leading to sensitive data and intelligence leaks. The ‘hacktivist’ group Guacamaya was responsible for one such attack, which exposed sensitive information relating to military, defense, and police operations. Local hacktivist groups have also targeted foreign mining firms and other companies for political purposes. 

Mexico. In Mexico, hacker organizations have attacked financial institutions, companies, and government agencies for political or social grievances and profit. Hacker groups in Mexico and throughout Latin America also contribute to the growing levels of organized crime and have been linked to cartels or hired by them for political and monetary gains. 

Venezuela. Venezuela has also become increasingly susceptible to cybercrime due to widespread social and economic grievances and the inability to pursue and prosecute cybercriminals. 

Widespread government censorship of the internet and services has driven demand for black market products. The Venezuelan government has also targeted foreign companies through cyberattacks for geopolitical purposes. 

In fact, Venezuela has been an incubator of tools for cybercriminals in the region. It has also seen an influx of cyber actors from Russia and China who seek to disrupt the United States and its agenda in the Western hemisphere. 

Targets of Cybercrime in Latin America

Virtually every citizen, government, or company in Latin America is at risk of or has fallen victim to cybercrime. However, cybercriminals have been wildly successful in their attacks against the following:

Underwhelming International Response 

Overall, the lack of cohesion between Latin American governments has led to an underwhelming response to the growing levels of cybercrime. In most countries, the legal framework prohibiting cybercrime is weak, as is the ability to enforce existing law. 

The lack of resources for training and creating cybercrime law enforcement units is a regional trend. Low international cohesion and dialogue levels have also facilitated a sluggish response to the problem. 

What this Means for Businesses and Investors 

The cybersecurity environment in Latin America poses significant risks and opportunities for companies and investors. 

As a result, companies looking to do business in or partner with local firms should conduct deep due diligence investigations including cybersecurity assessments to understand the extent of any hidden risks before investing. 

Along with establishing a robust cybersecurity program that accounts for local country risks, training employees about data security, phishing, and other cybercrime indicators is also essential. 

Finally, there are significant opportunities for cybersecurity firms, tech firms, and companies specializing in educational forums regarding internet safety and norms. As Latin American governments come to terms with the cybercrime problem, there may be increased investment into technology to combat and deter the increasing risks. 

Conflict Guac: Mexican Drug Cartels and Diversification in the Avocado Industry And a Lesson in Supply Chain Intelligence

Mexican Drug Cartels and the Avocado Industry

Cartels are Businesses Too 

Conflict diamonds are one thing, but conflict guacamole is another.  Thanks to the phenomenon of avocado toast (an Australian invention), or the transformation of humble toasted bread into $100 delicacies thanks to the addition of avocado and culinary ingenuity, the popularity of the Mexican fruit (yes, avocado is a fruit) has skyrocketed. This demand has allowed for Mexican drug cartels to expand their enterprises away from only stereotypical drug smuggling and human trafficking and into the avocado industry. 

Despite the crime, the bling and the bloodshed, Mexico’s drug cartels are profit-minded businesses at their core.  As such, they take advantage of trade deals, new industries, seek market share, and fight for supply chain control as any other industry.  In 1994, the signing of the North American Free Trade Agreement (NAFTA), transformed the Mexican state of Michoacán into the avocado capital of the world. In Michoacán, the town of Periban even holds an annual avocado festival.  Beneath the quaintness, Mexico’s drug cartels exert extraordinary influence on the avocado industry. 

Avocados, AK-47s, and Narco VATs 

Avocado exports from Mexico to the US amount to a $2.8 billion annual tab.  In addition to limes, Mexico’s infamous cartels levy taxes on the country’s avocado growers, and seek to control commodity prices through price manipulation.  Recent estimates put the tax at $50 per hectare per month. According to avocado field workers, the cartels offer protection and better customer service than the Mexican government.  This is in addition to cartels often taking care of growers’ families. 

While this tax rate at $50 per hectare per month seems small, it ultimately gets passed on to indifferent American consumers roaming the aisles of their local grocery stores.  Highlighting the “freakonomics” of conflict guac, an entire trade organization called “Avocados from Mexico” launched a marketing campaign to promote the cartel-linked commodity in time for Super Bowl LVII.

Despite the chips and dip, the fact of the matter remains that cartel involvement in the avocado industry contributes to unstable security environments in Mexico, as well as extreme violence. Indeed, the conflict-linked avocado trade involves illegal deforestation, child slave labor, and

confrontations between grower-backed vigilante groups and the cartels.  The clashes that occur are not quaint, but rather involve military-designed drones, IEDs, and armored vehicles. 

Cartel Risks to Commodity Industries 

It must be noted that major US companies are at risk of purchasing from cartel-linked growers.  Household store brands such as Whole Foods, Costco, and Sam’s Club often source their avocados from Michoacán, and are potentially unwitting actors within a drug cartel’s supply chain.  

Such purchasing not only exposes American distributors of avocados to political risk and potential liabilities, but also potential cooption or extortion of their own companies from sophisticated political actors. 

Recommendations for US Companies

This study in avocadoes illustrates not only how threat groups like drug cartels can harm supply chains in surprising ways, but also why geopolitical and country risk is relevant to every industry.  

Every country, Mexico included, carries unique country risks that companies must assess and monitor in order to safely do business.  US companies involved in Mexican commodities or with Mexican partners should conduct routine Geopolitical Risk analyses and due diligence investigations to mitigate risk.  Businesses acting as distributors of Mexican suppliers or goods or services should examine alternative sourcing for their supply chains in the event of potential risk. 

Due diligence and country risk intelligence are two faces of the same coin.  Boots-on-the ground investigations detect risks before they make headlines, and before they manifest in shareholder losses, lawsuits, or artificial costs in the form of corruption and security

The Resurgence of Pre-Suez Canal Shipping Routes and Its Economic Implications

Pre-Suez Canal Shipping Routes

The maritime shipping industry has been the backbone of global trade for centuries, with technological and infrastructural advancements steadily reducing costs and shipping times. However, geopolitical tensions and missile attacks from Iran-backed Houthi rebels in Yemen have forced modern shipping giants such as Maersk to take a step back in time, and adopt logistical strategies reminiscent of the pre-Suez Canal era. 

Navigating Around Africa: A Costly Detour

The Suez Canal, a vital waterway connecting the Mediterranean Sea to the Indian Ocean via the Red Sea, has been a critical route for the efficient movement of goods between East Asia and Europe since 1869.  Modern Eurasian maritime shipping is nearly unthinkable without this open link in Egypt.  

However, recent missile and drone attacks on commercial shipping from Iran-backed Houthi rebels in northern Yemen have sent modern merchant lines back in time.  Now, cargo carriers traversing in the Red Sea have to re-route around Cape of Good Hope to reach the Straits of Gibraltar. This new-old route circumventing Africa has not only extended delivery times, but also caused a dramatic rise in shipping costs due to energy and insurance prices. 

The immediate effect of rerouting away from the Suez Canal is the significant increase in the distance that cargo ships must travel. This detour results in higher fuel consumption, greater operating costs, and the need for more prolonged periods of manpower, all of which contribute to a surge in the overall cost of shipping. Consumers used to short delivery times, and retailers accustomed and “just in time inventory” are facing higher costs all around. 

Climbing Shipping Costs: The Ripple Effect on Global Trade

Adversities faced on the shipping front have had a considerable impact on business. Shipping routes connecting Asia with the United States, seemingly unrelated to the Eurasian shipping conundrum around the Sea, have seen costs rising by 55%.  For routes that connect Asian and Northern European ports, shipping lines, now grapple with container costs that have soared to more than 170% of what they were prior to Houthi attacks. 

The compounded effect of these changes is profound. It affects trade balances, prompts a reevaluation of sourcing strategies, and may even lead to a further push for regionalization or localization of supply chains. The hopes for a return to more secure and cost-effective shipping routes rest on the resolution of geopolitical conflicts; until then, businesses must adapt to a new, turbulent normal in maritime trade logistics.

Geopolitical Tensions and Private Sector Responses

The changing face of global geopolitical tensions is prompting shipping companies to reassess their risk management and strategic planning. The attacks carried out by the Houthi rebels underscore the vulnerability of key maritime routes and highlight the necessity for shipping companies to remain nimble and responsive to emerging threats. The Houthis, wielding the power to disrupt the flow of commerce through the Red Sea, have become a focal point for maritime security concerns. Combined with the Ukraine war and sanctions on Russia, Eurasian trade is threatening to be severed due to geopolitical risk

Investors' Outlook Amidst Maritime Uncertainty

Amidst the backdrop of uncertain maritime logistics, investors are keenly observing the industry's capacity to handle disruptions. In a surprising twist, some financial analysts are perceiving these challenges as opportunities for growth and profitability within the shipping sector. Some institutional portfolio investors are showing agility and expertise in managing such complex scenarios might appear more attractive to investors seeking resilient business models.

For example, Goldman Sachs has revised upwards its financial outlook on Maersk's shares.  The logic behind this short-term positive outlook is based on the assumption that Houthi attacks will be quickly resolved by diplomacy or military deterrence thanks to Operation Prosperity Guardian.  Should attacks and the Africa reroute continue for a year, this new shipping lane will lead to significant inflationary pressure on top of an already stressed global financial system.  These pressures could be catastrophic to retailers and manufacturers in Europe and Asia, and adversely affect portfolio investors farther afield. 

The ongoing situation in Ukraine and the resulting sanctions on Russia have drastically altered traditional trade routes and relationships, effectively severing Eurasian trading ties. This strategic bifurcation has sent ripples through supply chain networks, prompting companies to seek alternative routes and partnerships to maintain the flow of goods. 

The tension between the involved nations—Russia, Iran, China—and the West poses a significant risk to the stability of the global economy.

Strategies for enhancing business agility might include the following:

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Geopolitical Risk for Executives in China

Conducting geopolitical risk assessments before considering entering China is critical to protecting your firm and employees.   

A Growing Risk for Foreign Businesses and Executives in China 

China under Xi Jinping has presided over a regulatory crackdown against foreign businesses that has accelerated recently, leaving foreign business executives and investors at risk. The Chinese Communist Party has expanded control over China’s business sector as the government turns increasingly authoritarian. 

The fallout from the COVID-19 pandemic and heightened tensions with the West and China’s neighbors have resulted in far more stringent and aggressive actions from Beijing that target foreign companies and the private sector. Understanding the risks of this shift and how they may affect the safety and security of business operations and personnel is paramount for foreign firms operating in the country.  

China’s Targeting of Business Executives 

China has increasingly arrested foreign executives and employees and raided the premises of Western companies operating within the country. China has arbitrarily detained foreigners and Chinese citizens alike, while others have simply disappeared. Several high-profile cases, such as the disappearance of Chen Shaojie, the chief executive of the Chinese live-streaming platform DouYu, have highlighted this. Shaojie’s disappearance occurred after receiving scrutiny from China’s internet regulator. He joins a growing list of business executives to disappear in China over the last decade

Detentions have also been linked to geopolitical events and competition between China and its biggest geopolitical competitors. For example, after spending three years in custody, two Canadian businessmen were released back to Canada in 2021.  China’s detaining of Canadian nationals following the arrest of a Huawei executive in Canada based on a US-issued warrant. 

Chinese authorities denied a relationship between the arrest of the Canadian businessmen in China and the arrest of the Huawei executive in Canada; however, the timing of the arrests and releases coincided with that of the Huawei executive. This is not an isolated incident, as China has been accused on numerous occasions of a practice known as hostage diplomacy, where foreign nationals and executives are detained during geopolitical spats with their host countries and used as leverage for their advantage. 

Tightening Legislation 

In April 2023, China updated its counterespionage laws, stipulating that “all documents, data, materials, and items related to national security and interests” are under state secrets protection. The updated law does not specify what classifies as national security.  China’s authoritarian system makes arbitrary seizures and arrests of foreign professionals likely, while new regulations designed to centralize state power render foreign businesses at significant risk. 

In 2021, China also enacted a new data security law and the “personal information protection law,” which has bolstered uncertainty regarding data transfers, particularly of firms operating in China sharing data with entities outside the country. Like the new counterespionage laws of 2023, the legislation cites national security concerns loosely, leaving confusion around how to safely navigate data policy without receiving scrutiny from authorities. 

Who is Most at Risk 

Since early 2023, several foreign due diligence and consulting firms have been targeted by Chinese authorities under the auspices of national security concerns. 

PRC security forces have raided the offices of several US companies, leading to questioning, property confiscation, and the detention of local employees. Think tanks and due diligence firms such as the Mintz Group, Bain and Company, and Capvision have been targeted due to concerns regarding the alleged sharing of sensitive data and intel about Chinese firms, the economy, and institutions it views as compromising to its national security. 

International firms of this nature operating in China are at risk of increased surveillance, investigations, raids, and detentions of employees by Chinese authorities based on loosely defined and applied data security and counterespionage legislation. 

Though any foreign company operating in China faces risks, certain industries should operate with extra caution: 

Economic Impact of Emerging China Risk 

China is losing investor confidence, and foreign direct investment is falling. Targeting of foreign executives and businesses and heightened geopolitical risk and risk associated with pandemic fallout have left the international investment community hesitant to funnel resources to China. In fact, 2023 saw a rare decline in foreign direct investment in China. 

Confidence in the Chinese market has been dampened significantly by the growing number of detentions and disappearances of business executives. Travel bans and office raids have also led to concern for foreign firms operating in the country. This has led to concern from firms and investors for their employees, data, and intellectual property security, which have been frequently violated due to evolving legislation.

Supply chain volatility has risen, particularly after China’s stringent COVID-19 policies. Concerns over China’s future in the region, particularly regarding its relationship with Taiwan, pose risks to foreign businesses (particularly those from adversarial nations). Looking forward to a potential conflict with Taiwan, foreign companies must weigh the risks associated with doing business in China, given a conflict with Taiwan, and what this would mean for their operations and supply chains. Growing discontent with China’s treatment of Uyghur Muslims in Xianjiang Province and potential economic sanctions and other punishments from the international community also pose risks to supply chains and foreign nationals and companies. 

What to Know

Despite the recent risks highlighted above, China remains a significant economic market with a concentration of American and other international firms operating in the country. Before establishing a presence in the country, understanding the risks posed directly and indirectly to your company and executives is critical. 

You should arm your leadership team with a deep understanding of the region by conducting a country risk analysis related to your proposed operational plan. Going through this exercise may even open up other opportunities or locations for your business that will allow you to minimize your risk exposure.   

Is Your Firm at Risk? New Restrictions on Outbound Investment

In August of 2023, US President Joe Biden signed an executive order (EO) establishing new outbound investment regulations targeting Chinese development of certain technologies deemed to be risks to US national security. 

The order gives the Department of the Treasury oversight into US investors seeking to fund Chinese firms involved in developing sensitive technologies, including semiconductors, artificial intelligence, and quantum computing. The initiation of this executive order has opened the path to more formal restrictions on outbound investment, including the potential creation of a new outbound investment regime in the United States. This follows a growing trend among Western countries looking to maintain advantages over geopolitical rivals by controlling or diverting investment flows from their jurisdictions, particularly into the tech and energy sectors. 

President Biden’s Executive Order 

President Biden’s executive order, signed on August 9, 2023, establishes regulations for certain types of investment into the development of artificial intelligence tools, quantum information technology, semiconductors, and other microelectronics in ‘countries of concern.’ Currently, the only country explicitly mentioned in the order is the People’s Republic of China (PRC) and the Chinese-administered regions of Hong Kong and Macau. The Biden administration has earmarked the development of these sectors by China and Chinese firms as an ‘extraordinary threat’ to US national security interests due to their ability to advance warfighting, intelligence, and cyber capabilities. 

Furthermore, this order mandates that US individuals provide notification of information regarding certain transactions with foreign entities/individuals covered under these interests. It also prohibits certain transactions involving ‘covered’ foreign persons outright.  While these restrictions currently only target investments into certain Chinese entities, these restrictions will likely grow to include other countries and jurisdictions deemed threatening to national security. 

These new restrictions give the Secretary of the Treasury jurisdiction to prohibit certain outbound investments and require notification for others to preserve US strategic advantages over geopolitical foes. Being amongst the first of its kind, this executive order was open for public comment after its initial announcement in August.  Formal regulations include specific definitions of industries and products deemed threats to US National Security and will likely evolve in the coming months and years. 

The Future of Outbound Investment Regulations 

As the US rolls out these new regulations about outbound investment, other US allies are likely to consider similar policies. For example, the UK and other European countries have also signaled concern over China’s development of sensitive technologies and have begun to consider regulations and outbound investment regimes following Biden’s executive order. 

Many European countries share national security concerns over China’s ability to develop sensitive technologies that may bolster their warfighting capabilities, especially concerning their relationship with Russia. Growing fears over humanitarian issues in China, such as its treatment of Uighur Muslims in Xinjiang Province, have also raised concerns over the destination of outbound investment. 

The US Congress has debated in both the House and Senate the future of outbound investment beyond those established by the executive order. Currently, there is no formalized regime for reviewing outbound investment as there is for inbound foreign investment. However, Congress will likely build on the current legislation, expand the manifestation of geopolitical risk screening in business practices, and establish a more formal review process for specific transactions. 

China is the only ‘risky jurisdiction’ defined by the executive order; however, as legislation around this issue grows, new jurisdictions, products, and industries will likely be targeted by outbound investment restrictions. 

What This Means for Investors 

Current geopolitical tensions threaten to polarize world powers further. War in Ukraine and China’s ambitions for territorial expansion and commercial dominance threaten the national security of the United States and its allies. Understanding this, the US and its allies have proposed and enacted sanctions and other regulations targeting individuals, companies, and industries worldwide, which threaten their capability to maintain military and economic superiority. 

Investors should understand that as geopolitical tensions continue to rise, overseas commercial and economic activities will be subject to heightened scrutiny from government institutions. This is especially pertinent to those heavily involved in the tech industry in artificial intelligence, cybersecurity, and semiconductors. Other sectors, such as (but not limited to) financial services, should also engage in heightened due diligence work to ensure they are ahead of and compliant with current and upcoming legislation about outbound investment. 

More profound economic implications of outbound investment controls may also hamper future investment opportunities, particularly in risky jurisdictions. Industries not directly affected by outbound investment regulations may have added difficulty operating in China and other potentially targeted regions. For example, geopolitical tensions between China and other countries have led to Chinese officials targeting foreign firms and executives in retaliation. This may continue to occur as they lose foreign investment in valued industries. 

Implications for De-Risking and Liability 

The Biden administration’s EO limiting investment in China is not confined to his tenure in office but is the latest development in how the federal government responds economically to geopolitical multipolarity.  Recent statements by Deputy Attorney General Lisa Monaco to the American Bar Association this past March, in conjunction with Biden’s EO, indicate the greater complexity and liability facing US companies seeking to invest abroad and adapt their supply chains.  

Traditional American business culture faces an increasing need to adapt and implement new training and due diligence practices to avoid rapidly emerging liability and regulatory restrictions due to geopolitical risk.  Companies can no longer look the other way. This is frequently emphasized at the Federal level, with significant implications for US companies operating abroad. 

The Risks of Terrorist Financing and Money Laundering

Terrorist Financing and Money Laundering

 

The recent terrorist attacks carried out by Hamas in Israel have raised concerns globally about terrorist financing and money laundering. Given the subsequent conflict, regulators will undoubtedly look more closely at the financing of Hamas and other terrorist organizations in the region, such as Hezbollah.  Hamas is a designated terrorist foreign terrorist organization by the U.S. Department of State.

Accordingly, firms need to examine their potential risk exposure.  You do not want to help facilitate terrorist financing unknowingly.   

Although terrorist financing mostly occurs in the shadows, it can also hide in plain sight. 

Terrorist organizations use a variety of tactics to move capital, including: 

Governments around the world have sought to combat the financing of terrorist activity in a variety of ways with a focus on increased regulation and enforcement. International sanctions regimes have also aimed at curbing the financing of terrorism. 

Despite these efforts, individual companies must understand the risks and their role in thwarting terrorist financing and money laundering. Failing to implement the proper controls and due diligence techniques can lead to inadvertently facilitating terrorist financing, which can bring on a tremendous amount of liability and reputational risk.  

 

The Hamas Financing Network 

Hamas’s global financial network displays the importance of vigilance against terrorist financing and money laundering, even in areas that are far displaced from the region, including the United States. 

Hamas raises funds in a variety of ways, including taxation of imports into Gaza, individual investment portfolios of top leaders, and diverse investment portfolios for the organization itself, which is estimated to be worth between $500 million and $1 billion USD with significant assets in Turkey, Sudan, Saudi Arabia, Algeria, and the United Arab Emirates among others. Hamas is also known to receive monetary and material support from Iran, which some estimate to be worth over $150 million per year.

Hamas additionally has an extensive global fundraising and political advocacy network that includes the United States. Hamas’s network in the United States dates back to 1988 with the formation of the Palestine Committee. Since then, the Palestine Committee has been divided into several organizations responsible for political advocacy, propaganda, and fundraising campaigns. 

The FBI has levied numerous investigations against pro-Hamas campaigns in the United States, which have led to the prosecution and deportation of Hamas operatives. Nevertheless, Hamas’s network in the United States remains intact, posing risks to financial institutions and firms providing financial services. 

As the issue of the Hamas-Israel war becomes more polarizing in the United States and throughout the Western world, firms must maintain strict due diligence and compliance processes to avoid any negative implications stemming from enabling terrorist financing of Hamas and other like-minded groups.  Due diligence investigations on third party suppliers will help to minimize inadvertently engaging with terrorist financing activities.

The US Department of Treasury Financial Crimes Enforcement Network (FinCEN) has recently issued an alert regarding Hamas, which can be found here. 

After the recent October 7 Hamas attack in Israel, the US has announced multiple investigations into supporters of the group in the US.  Additionally, because Hamas enjoys support across multiple countries otherwise removed from the direct Hamas-Israel conflict, the risks posed to financial institutions globally are severe. 

 

Who is at Risk? 

Terrorist financing and money laundering are global problems but pose higher risks to firms operating in or near areas with continued political and social unrest, combat areas and their neighboring regions, countries with increased rates of terrorist and extremist activity, and countries with weak financial and regulatory institutions.  This includes countries where the terrorist group may not be attacking, but where it enjoys levels of support among the population.

In addition, the following industries have higher risk exposures to money laundering and terrorist financing: 

 

Banks and Financial Institutions Face Heightened Risks 

Several international banks and financial institutions have been implicated in empowering significant money laundering and terrorist financing in recent years, highlighting the growing importance of customer due diligence and stringent AML/CFT controls and compliance. 

In 2015, Kuveyt Bank from Turkey was sued by the family of a teenager slain by HAMAS for allegedly providing financial services to entities tied to HAMAS. Though these claims were never settled in court because the plaintiff accepted a settlement offer, this case shows the reputational and financial implications associated with terrorist financing. 

Likewise, in 2012, US authorities alleged HSBC’s involvement in money laundering for drug cartels in Colombia and Mexico and terrorist organizations linked to Iran led to the bank paying over $1.9 billion USD in fines. The Bank’s performance fell drastically in the following years due to customer, investor, and legal backlash, leading to plummeting stock prices and lasting reputational damage. 

Kuveyt Bank and HSBC are just two examples of financial institutions implicated in money laundering and terrorist financing schemes, which have faced international backlash from investors, customers, and lawmakers. They show the growing importance of stringent customer due diligence and the need for robust AML/CFT controls and compliance. Establishing these is important to ensure corporate ethics are instilled in one’s company and to avoid catastrophic consequences from enabling criminal activity.

 

Combating Risk

It is much better to be solving risks before they start™. 

Successfully combating money laundering and terrorist financing begins with creating robust due diligence and compliance frameworks. 

US businesses can do this by establishing regular assessments regarding vulnerabilities related to customers and suppliers, conducting customer due diligence investigations, and assessing risks associated with the geographic location of business operations. 

Businesses can also invest in monitoring systems that flag risky or abnormal customer transactions and have clear protocols for handling suspicious activities. Corporations should be up to date with current AML/CFT programs and be aware of sanctioned individuals, companies, and states. Cooperation and relationships with law enforcement agencies regarding AML/CFT programs and concerns can also help keep your company ahead of potential risks. 

 

Europe at War – Defense Policy and Spending

Europe at War - Defense Policy and Spending

 

Europe is once again experiencing intense, active military conflict on its doorstep. Accordingly, many European countries, motivated by Russia’s ongoing violent campaign to seize Ukraine, are now forced to re-examine their defense plans, capabilities, and, importantly, defense budgets. 

For some EU countries, this is the first time they have had to seriously consider military and defense spending in several years. However, it is not only military budgets that require reassessment but also perceived identities and roles that must be reckoned with as NATO and the EU attempt to unite behind a shared strategy. 

 

Who’s Who in European Defense Spending

With the United Kingdom’s withdrawal from the EU, Germany has become the top military spender. Last year, Germany was reported to have spent $55.8 billion on its military, with France just behind spending $53.6 billion. This is almost double what Italy and Spain, which have the third and fourth largest expenditures respectively, paid in 2022. 

However, with support for funding the conflict in Ukraine globally waning, European countries may need to dig deeper in 2024 to support Kiyv’s war effort. 

 

Competing Plans for EU Security

 

Germany Steps Up to the Plate

Germany’s expenditures are expected to increase again in 2024 with the adoption of a $51.8 billion defense budget and $19.2 billion in extra-budgetary funds intended to further the training of armed forces. Defense spending is the only aspect of the German budget that will not be facing cuts in 2024, partly due to Germany’s commitment to dedicating 2% of its total funding to military spending in compliance with NATO standards. 

Immediately after Russia invaded Ukraine in early 2022, Olaf Scholz , Chancellor of Germany, delivered a speech to the German parliament calling the conflict a sign of a “Zeitenwende,” or changing times, and encouraging Germany to shed its longstanding reservations regarding its military presence in Europe, which date back to World War II. In the same speech, Scholz clarified that Germany would take an irrefutable stance against Russian aggression, commit to its NATO obligations, and further support its allies to the east, with which Germany has particular sympathy, having once been the easternmost country of the NATO alliance. 

Since Scholz gave this speech, Germany has fulfilled these goals, and in addition to announcing 2.7 billion euros in aid to Ukraine during a meeting in Washington, DC with US Secretary of Defense Lloyd J. Austin III, German defense minister Boris Pistorius confirmed in June 2023 that Germany would permanently station 4,000 troops in Lithuania, which borders the Russian enclave of Kaliningrad; following up on a German pledge made in June 2022 to send combat troops to the country. 

Germany has also ramped up its presence in Estonia and Latvia by agreeing in May of 2023 to supply the two countries with IRIS-T SLM defense systems manufactured by the German company Diehl. The medium-range defense systems feature truck-mounted missile launchers currently used in Ukraine. They can neutralize aircraft, helicopters, uncrewed vehicles, and more. 

Germany has also openly expressed interest in boosting its presence in the Indo-Pacific as a potential strategic move against an alliance between China and Russia. Evidently, Germany is shaking off its last reservations about having a robust military and economic presence on the world stage and is embracing its new role in defense leadership. 

However, defense spending is proving to be more contentious across the EU than expected. Although most members of the EU, NATO, and their allies seem to agree that increased spending and more active military is desirable, the two largest economies in the EU, Germany and France, disagree on how to do those things. 

 

French Dissent

The EU's second-largest economy, military spender, and largest arms exporter, France, has voiced discontent with certain new German defense strategies. 

Germany announced in October of 2022 that it was spearheading the European Sky Shield Initiative along with 14 other NATO members and allies, including Finland and the UK. The plan allows for the joint purchase and use of “off the shelf” air defense systems- like the US Patriot, the Israeli Arrow 3, and the German IRS-T systems. However, France, Italy, and Poland notably did not sign the initiative. France postponed a summit with Germany to signal its ire. France has also criticized the German plan for being too invested in defense and not proactive enough offensively. 

France has protested the initiative heavily, and France may interpret Germany’s new strategies, which notably do not feature French defense systems, as a snub to France’s position as a powerful exporter of arms.

France’s main critique of the German plan is that it relies too heavily on foreign powers, like the US, to provide defense systems in Europe instead of depending upon European countries to provide the necessary defense systems. France has rallied support from Belgium, Hungary, Estonia, and Cyprus, with additional support from Italy, to purchase the French Mistral defense systems to demonstrate the viability of an exclusively European air defense solution. France has also supplied Ukraine with Franco-Italian manufactured MAMBA systems as an alternative to German defense systems. 

In response to France’s misgivings over its defense plan, Germany has insisted that the program allows France’s defense systems, like the MAMBA and SAMP systems, to be incorporated with the US, German, and Israeli systems as soon as enough are available. Boris Pistorius has emphasized that Germany’s plan is not intended to provoke competition with France but to prioritize creating a unified, pragmatic, and quick defense plan. 

 

Implications of Fractious Defense Spending

France and Germany are historical adversaries, and in the post-WWII world, Paris and Berlin have oftentimes clashed on defining a Europe-wide policy towards economic and foreign policy.  

As the first major foreign policy challenge that poses a potentially existential threat to Europe, Franco-German disagreements against the backdrop of Russian agression pose a similar intra-European challenge to the contintent’s cohesion.  The implications of the tension between France and Germany regarding security in the EU may not be immediately apparent to outside observers, but they are certainly cause for concern. 

During a crisis, the animosity between the two most powerful countries in the EU spells trouble for an organization that hinges upon consensus and cooperation when responding to issues. Indeed, a disjointed defense system could lead to a disorganized response across the EU should violence spread. 

As the conflict in Ukraine has demonstrated, defense systems and technology from different manufacturers and countries do not always work together effectively. Having two separate plans and strategies in Europe could ultimately have a similar outcome if the EU should need to protect itself down the line. Furthermore, smaller countries in the EU that rely on military assistance from larger countries could feel politically vulnerable when requesting aid. Two distinct defense plans may begin to feel like a referendum on power within the EU and the role of NATO in Europe.

 

What This Means for US Businesses 

US businesses looking to land European defense contracts will likely find opportunities in technology and manufacturing as most European countries go ahead with Germany’s Sky Shield Initiative, which prefers American defense systems.  In fact, Germany’s leadership has now opened the market for more US defense systems in Europe. 

However, US businesses should be aware of France’s unwillingness to participate in the initiative. In fact, France’s insistence upon European-manufactured systems could be problematic for further opportunities for security contractors. France’s reluctance to embrace US systems may eventually encourage other countries to do the same, limiting opportunities for US business in the future. 

 

China is Cropping Up on US Soil

China is Cropping Up on US Soil

American lawmakers on both sides of the aisle have increasingly expressed concerns about  foreign investment in the US agriculture industry, including purchasing farmland. Although the  increasing criticism may seem like an overreaction because foreign investors own just 3.1  percent of all US farmland (as of 2021), significant strategic factors must be considered if the US  continues to allow the continued increase in foreign ownership. The ownership of critical assets  and areas of farmland allows for leverage over food supplies and international markets.

Between 2009 and 2019, foreign ownership of American farmland nearly doubled. During this  time, Chinese investment in American farmland grew nearly tenfold as the Chinese Communist  Party (CCP) was more and more proactive in encouraging investment in the US agricultural  market. With increased ownership comes increased market influence.  

Why Is China Hungry for US Land? (see report)  

Over the past several years, China has faced increasing food instability due to various factors,  including a lack of arable land. Despite having a comparable land mass to the United States,  China possesses nearly 100 billion fewer arable acres. Considering China is the most populous  country in the world, this deficit is already crippling.  

The amount of farmable land in China continues to be at risk of shrinkage as it is converted to  account for rapid urban growth. Pollution has worsened as China has urbanized and threatens the

available land. The Chinese Ministry of Ecology and Environment reported in 2018 that  approximately 15 percent of groundwater was unusable. This is exacerbated by the Ministry of  Land and Resources data, which suggests nearly 20 percent of China’s agricultural land had  contaminated soil.  

Economically, China has prioritized urban growth through its 14th Five-Year Plan. Accordingly,  flight from the agricultural sector has resulted from its focus on industrialization and  urbanization.  

Additionally, the farming demographic in China is aging out, as young people are incentivized to  pursue more white-collar positions in cities. Compounding the flight from the agricultural sector  is the relative success of China’s economic strategy. China’s middle class has grown  substantially, and with it, the taste for more expensive foods. The meat industry faces higher  demands, and the Chinese have failed to keep up with the increased interest.  

Adding to this stress are natural disasters, pests, diseases, and pollution that continue to wreak  havoc on China’s food industry. Recent breakouts of African Swine Fever have devastated the  pork industry. Also, the fall armyworm, which feeds on over 80 different types of crops, has  decimated provinces across the country since 2019. When these pests and diseases are paired  with record flooding due to global environmental changes, China’s agricultural sector simply  cannot keep up with the demands of its booming population.  

Domestic pressures have pushed the Chinese government to look abroad, and Beijing has turned  to investing in foreign lands worldwide to help stabilize and subsidize its local market.  

A Blight on American Industry?  

High-profile purchases like the WH Group’s acquisition of Smithfield Food in 2013, the Fufeng  Group’s purchase of land near a North Dakota air force base in 2022, and Chinese billionaire  Sun Guangxin’s attempt to build a wind farm on hundreds of thousands of acres in Texas near  yet another Air Force base in 2021 have lawmakers raising their hackles over perceived threats to food supply and national security.  

How much of a risk are these acquisitions, and how are they monitored?  

It is worth noting that both projects near the Air Force bases in North Dakota and Texas were  halted over security concerns. The Committee on Foreign Investment in the United States  approved the Smithfield acquisition and has not publicly been found to cause any security  concerns. Furthermore, in the case of Smithfield, which primarily facilitates the production and  processing of pork, most of the land owned by the company is not necessarily arable farmland,  according to the CATO Institute.  

Smithfield has come under fire from politicians for its extreme consolidation along the supply  chain and vertical integration, which could have economic ramifications for US businesses  looking to be competitive at every level. However, regarding the threat to food supply, the  Center for Strategic and International Studies suggests that these purchases and the Chinese

ownership of farmland in the United States do not pose a significant risk to food stability in the  US. The low degree of threat comes from the fact that China owns only a tiny portion of  available farmland in the US.  

Sowing its Seeds  

According to a report by the US-China Economic and Security Review Commission, the  acquisition of US farmland has potential national security ramifications, regardless of the  location of the land being purchased. By involving itself heavily in the US agricultural sector,  China has put itself in an excellent position to benefit from American technology and other  intellectual property.  

This report indicates that China has historically shown interest in obtaining US intellectual  property in the agricultural sector through illicit channels like IP theft and physical seeds.  However, integrating Chinese-owned farms into the American agricultural sector would likely  simplify Chinese acquisition of advanced American technology.  

For example, agricultural technological developments, such as genetically modified (GM) seeds,  are in high demand because of changing environmental factors and food insecurity around the  globe. GM seeds mitigate risks surrounding droughts, disease, and pests and offer an increased  yield per acre of arable land. This resistance and productivity reduces the land needed to  produce sufficient crops. In short, GM seeds appeal to a Chinese state ridden with agricultural  insecurity and lagging behind US innovation.  

Stabilizing China’s food production capacities is not the only consequence of American  technology falling into Chinese hands. Chinese possession of GM seeds and specific agricultural  IP could pose serious military risks. The US-China Economic and Security Review Commission  suggests that GM seeds and IP are subject to reverse engineering, which could allow nefarious  actors to unlock blights and bioweapons based on the genetic material available. This is  particularly concerning because GM crops are by nature minimally varied, meaning that any type  of bioweapon or disease could more easily wipe out entire crop populations. Chinese acquisition  of this technology could allow the country to stabilize and increase its crop production. It could  fuel a dangerous conflict spiral between significant powers and heighten the risk of  bioterrorism.  

The Seeds of De-Risking  

Although foreign acquisitions of US land are monitored by the USDA and subject to further  approval by the Committee on Foreign Investment in the United States, businesses in the  agricultural sector should take extra steps to consider their business partners and potential  buyers.  

The concept of “knowing your customer” (KYC) due diligence so frequently applied to banks  can also apply to agriculture. Because USDA data relies entirely on self-reporting, American  business owners in the agricultural sector must look for warning indicators and risks surrounding  investors, buyers, and partners. This obligation includes knowing whom you do business with at

the personal and corporate levels. Due diligence on prospective business partners in this sector is  becoming more important.

Screening individuals for foreign political ties, ties to State Owned Enterprises (SOEs), major  criminal organizations, intelligence agencies, or front organizations reduce reputational risk from  partnering with entities that may draw scrutiny and scandal.  

This kind of in-depth screening requires more than a background check. It includes checking and  interviewing sources abroad, data mining social media posts, and employing skilled investigators  with sophisticated OSINT (Open Source Intelligence) techniques to identify imposters and bad  actors.  

As an agricultural vendor in the US, being approached by a business interested in land near  sensitive US military sites offers a clear warning indicator of potential risk.  

The location of your assets, such as proximity to military sites, can inadvertently expose your  company to legal and regulatory liability and potential violation of national security laws if you  sell to a bad actor.

Knowing the companies you sell to is another level of risk mitigation that goes beyond basic  investigation. This kind of sophisticated screening involves intelligence gathering to know the  background of your partner company, its beneficial ownership, and motivations.

For companies selling agricultural assets to Chinese buyers, intelligence and due diligence  investigation is just good business.

Specialty Chemical Manufacturer Albemarle’s Fined $2.8 million to Settle Global FCPA Violations

Albemarle’s Fined $2.8 million

Albemarle corporation, agreed to a $2.8 million payment in penalties and disgorgement to the Securities and Exchange Commission (SEC) and Department of Justice (DOJ) to settle Foreign Corrupt Practices Act (FCPA) violations related to bribery in Vietnam, India, and Indonesia. According to the DOJ, Albemarle conspired to pay bribes to government officials in these countries between 2009 and 2017 through its third-party sales agents and subsidiary employees, to obtain and retain chemical catalyst business with state-owned oil refineries, resulting in around $98.5 million in illicitly gained profits.

Albemarle agreed to the SEC’s findings and to a cease-and-desist order against future FCPA violations, along with agreeing to pay more than $81.8 million in disgorgement and over $21.7 million in prejudgment interest, totaling more than $103.6 million.

In a parallel action, Albemarle entered into a three-year non-prosecution agreement (NPA) with the DOJ, agreeing to pay a criminal penalty of approximately $98.2 million and around $98.5 million in administrative forfeitures. The DOJ credited $81.8 million of the forfeiture against disgorgement for “its substantial cooperation and extensive and timely remediation pursuant to” Division Corporate Enforcement and Voluntary Self-Disclosure Policy.

Initiating the first FCPA application of the Compensation Incentives and Clawbacks Pilot Program announced earlier this year, the DOJ agreed to a penalty reduction for $763,453 in bonuses withheld from qualifying employees by Albemarle. The DOJ further stated that Albemarle disciplined “employees involved in the misconduct, including terminating eleven employees and withholding bonuses from sixteen employees.”

According to an internal SEC administrative order, Albemarle was charged with violating the FCPA’s anti-bribery, recordkeeping, and internal accounting controls provisions.

Investigations first started in back 2018 when Albemarle self-disclosed FCPA scrutiny. 

While Albemarle had centrally coordinated compliance, internal audit functions, contracting, legal, and finance, it sold catalysts through sales offices and third-parties in Indonesia, Vietnam, and India, as well as the United Arab Emirates (UAE) and China. 

Albemarle was purportedly well aware of the risk of bribery. The SEC findings report and inhouse audits conducted by Albemarle starting in 2013 identified numerous red flags and compliance gaps in their reliance on third-party agents and distributors in their Refining Solutions area. “For example, sales agents and distributors were paid: despite incomplete due diligence; despite a lack of an executed contract; despite having a contract that lacked required anticorruption provisions; and at rates higher than those provided for by contract – all in contravention of Albemarle’s policies and procedures.” Albemarle also failed to obtain reports of their agent's sales activities, backdated various agreements and reimbursed vague, unsupported and extra-contractual expenses.

According to the SEC, “Albemarle sold refinery catalysts globally through agents and distributors approved by Albemarle sales, business, legal, compliance, and finance personnel and management.” 

Albemarle undertook some effort to closing compliance gaps by hiring compliance personnel, reducing the number of sales agents and distributors without contracts, and implementing software to assist in third-party onboarding and contracting. According to the SEC, “it failed to devise and maintain a sufficient system of internal accounting controls with respect to commission rates and deviations from contracted rates.”

It's well known by the regulators that 90% of FCPA violations are prompted by third-parties and third-party business providers. These are often concerned with a company’s downstream supply chains and the companies themselves within foreign locales. What can be acceptable, or even legal, in one country, may not be legal elsewhere, and there is no reduction of a company’s legal responsibility if they have management or financial activity in the US.

The Albemarle enforcement once again highlights the need for strong compliance programs and Tier III human and business due diligence investigations to mitigate risk, especially when it comes to third-parties and foreign subsidiaries and agents. Thirty-five percent of third-party vendors have corruption related issues. 

Albemarle, as the SEC remarked, "failed to devise and maintain a sufficient system of internal accounting controls with respect to commission rates and deviations from contracted rates...despite certain Albemarle personnel having knowledge of red flags indicating the agents would use a portion of the commission to make bribe payments….” In some quarters, certain parties appear to have been willing to take the risk. 

The lesson here is the critical need for companies to partner with an independent, unbiased global security and risk management company capable of providing a business with a comprehensive analysis of all available public record data, supplemented with detailed in country field investigative intelligence to identify known, and more importantly, unknown conditions, and provide clear recommendations and actionable steps. There is something to say about the adage “not leaving the fox to guard the henhouse.” 

To discuss how to protect your business from FCPA violations, or to assess third party risk, reach out to Infortal here.

 

Poland: A Power Player on Europe’s Eastern Front

Poland Europes eastern front


As the conflict in Ukraine continues, Poland has played an increasingly important role in  mitigating tensions along NATO and the EU’s easternmost flank. Although Poland, Latvia,  Lithuania, and Estonia have jointly made-up Europe’s eastern front as NATO allies and members  of the EU for nearly 20 years, the strategic importance of their location has come to light as  concerns over Belarus’s alliance with Russia and the status of Kaliningrad, the Russian exclave  on the Baltic Sea which borders both Poland and Lithuania, are mounting.  

Where Ukraine had previously provided a buffer between Russia and the rest of Europe, the  conflict there has catapulted Poland to a new position of relevance and power in safeguarding  Europe against Russian and Belarusian aggression.  

Historical Importance 

Historically, Poland is no stranger to the importance of borders. Changing borders and rotating  sovereignty have informed much of Poland’s modern existence. In fact, Poland ceased to exist  entirely between 1795 and 1918 after being divided between the Kingdom of Prussia, Austria,  

and the Russian Empire. Between 1918 and the end of the Second World War, Poland’s territory  was constantly in flux due to fighting with the Soviet Union, separatist groups, and the looming  threat of Germany to the West, which ultimately annexed much of Poland by the end of the war. 

Most recently, however, Poland played a role on the other side of things as one of the  westernmost members of the Communist bloc during the Cold War. 

These historical factors have left Poland torn between the East and West; both are aware of the  influence of national borders and familiar with the complicated question of what it means to be  European. Poland’s unique experience could influence how it responds to conflict on its borders  moving forward and make it an invaluable guide in rethinking Europe’s eastern flank. 

Fresh Approach  

Informed as it is of the precarious nature of borders, Poland initially navigated the conflict on  Europe’s eastern flank by investing in military modernization and coordinating protection  measures between Lithuania, Latvia, and Estonia. This has called into question the traditional  power balance in the EU. Germany and France, traditionally viewed as the strongest leaders of  the EU, have been somewhat displaced as they struggle to keep pace with Poland’s new defense measures and military investment.  

Poland spearheaded a movement to provide Ukraine with Leopard 2 tanks despite initial  hesitancy from Germany. It has also invested in defense systems from the United States, Israel,  and South Korea to prepare itself for potential conflict with Russia.  

Poland’s swift military responses and political jockeying against typical EU powerhouses have, in many ways, increased the importance of Central Europe in the EU and invited a shift in the  center of gravity within the continent. It has stepped up to modernize its military speedily.  

It has brokered important defense deals with the United States and other nations, setting aside the  Europe-first sentiments that have caused recent strife between France and Germany and tension  among EU members. Poland has also helped install a more robust NATO presence across the  eastern border of Europe by establishing a permanent US presence within its borders that can  also provide rotational support in the region.  

However, Poland has recently indicated that the country has stopped sending arms to Ukraine  and has indicated a shift to arming its own military. This is clearly a sign that resources are  dwindling, and concerns of a larger European war are increasing.  

Emerging Threat from Belarus  

Poland’s commitment to defending the EU’s and NATO’s eastern flank could not come at a  more opportune time. Over the past several months, Belarus has increased its military operations,  which are now directed by the displaced Wagner mercenaries along its borders with Lithuania  and Poland.  

In response to increased activity along the border with Belarus and an incursion of Belarusian  aircraft into Polish airspace last week, Poland’s defense ministry has sent an additional 1,000  troops to the border to help deter further unwanted military activity in the area. Most of the provocative military exercises, which Belarusian officials have insisted are drills to teach troops  about Russia’s special military operation--the Russian term for its invasion of Ukraine, have  taken place in the Grodno region of Belarus, an area close to the Suwalki Gap

The Suwalki Gap is the area that divides Belarus from the Russian exclave of Kaliningrad  (formerly German and Polish territory). This area is separate from the Russian mainland and  allows Russia to maintain a strong presence on the Baltic Sea.  

Putin’s response to the Polish decision to shift troops to the area included a baseless claim that  Poland was attempting to annex territories in Belarus and Ukraine as well as a threatening  statement implying Poland’s existence was tied directly to Russian generosity and that it would  remind Poland of its debt to Russia. These claims are reminiscent of some Russian  disinformation campaigns that preceded the invasion of Ukraine and can be viewed as a tool of Russia’s hybrid warfare.  

Path Ahead 

Poland’s existence in the arena between established and emerging political leaders within the EU presents a unique dilemma for establishing a unified approach to the Ukraine war.  

Importantly, Poland has garnered sway as an influential broker of defense deals in the region,  able to apply pressure on the larger EU and NATO members to mobilize arms and troops and  facilitate support to the Baltic region. Businesses looking to take advantage of the defense  market in the area will find several opportunities for deals with Poland and NATO in the region  as it races to defend against mounting pressure from Russia.  

For companies looking to invest in a potentially up-and-coming European power, Poland may be  the perfect choice, especially as the center of gravity in the EU seems to be slightly shifting away  from Western Europe and into Central Europe, where Poland is undoubtedly a strong point of the  region. 

Of further significance, Poland has recently seen rapidly shifting political winds, including a  change in political leadership. It will be important for any company doing business in the region  to understand the recent political trends, as this can dramatically impact defense spending and  the larger regulatory landscape. In addition, a thorough understanding of the sanctions regimes in  place is necessary, given the geographic proximity to Russia and Belarus.

To learn more about risk management and how Infortal can help you identify, assess, and mitigate risks, reach out today. 

Geopolitical Risk in the Middle East – Spotlight Iran: Social Media Crackdown and Civil Unrest

Iran Geopolitical Risk

 

Iran in the context of the Middle East’s geopolitical situation has long provided both political risks and business opportunities. The oil and gas sector, service and agriculture sectors, and a “noticeable state presence in manufacturing and finance services” dominate Iran’s economy. Aiming to move Iran away from a heavily oil-dependent economy, Iranian authorities have implemented a new comprehensive strategy surrounding market-based reforms. The goal is to pivot to high-tech solutions, manufacturing, and boost a knowledge-based economy, along with strengthening privately held Iranian companies’ “innovation and competitiveness.” While this may provide new business opportunities, there is also increased risk in Iran with its highly volatile political situation. Internet outages, social media suppression, and social unrest are ongoing issues, and it’s support of Hamas and Hezbollah terrorism across the Middle East and particularly against Israel creates additional risk and uncertainty for international business. 

IRAN

September 16th marks the 1-year anniversary of the death of Masha Amini. Amini was a young Iranian Kurdish woman who died while in Iranian police custody after being arrested and taken to an “education” center in Tehran for purportedly violating the country’s strict hijab, headscarf laws. Her death prompted a backlash of demonstration, many of which were led by women. Protestors burned hijabs in the street and clashed with police, who used firearms loaded with mettle pellets, batons, tear gas, and water cannon to clear the crowds. Authorities restricted the internet to try to prevent the spread of protests and curbed access to Instagram and WhatsApp, the two most popular social media apps in Iran. Protestors included students, teachers, middle-class professionals, farmers, and others who added their voices, also decrying the state of the economy and shouting for change in the government. Reports from social media showed protests had spread to the energy sector, with images of workers at oil refineries and a petrochemical plant. Human right groups reported 500 people were killed, including 71 minors, hundreds wounded, and thousands were arrested and three people executed in connection with the protests. A September 2023 update claims the situation was even worse.

In the days leading to the upcoming death anniversary, Human Rights Activist News Agency (HRNA) reports Amini's uncle Safa Aeli, a resident of the Kurdish city of Saqqez, was arrested at his home on September 5, 2023 by 10 intelligence agents. Reasons for his arrest have not been given. 

Reuters reports claims that the Iranian authorities are clamping down hard to prevent further unrest by intimidation and instilling fear, “arresting, summoning for questioning, threating or firing people connected to the protests.” Officials of the Iranian government are blaming the arrest on “foreign foes, notably the U.S. and Israel.” According to the Associated Press, snap check points, internet disruption, and university purges are also taking place. Just on September 13th, the Iran Ministry of Intelligence detained three Iranians living abroad under accusations of “leading protests.” These arrests, HRHNA reports, “follow a recent prisoner swap deal between Iran and Western countries…and precede the imminent release of Iran’s frozen assets.” It is believed by many, the report further states, “that the Iranian government detains foreign and dual nationals to exert leverage in negotiations with Western countries of for political purposes.”  Further protests are said to be planned for September 16th.

Companies have numerous geopolitical risks to consider. Iran has a rich cultural heritage and many business opportunities, but human rights issues, social unrest, and Iran’s active financial and military support of terrorism, among other issues are in play. The current social turbulence has led to the U.S. and Australia enacting further sanctions. 

A new stricter hijab bill that is being put forth in Iran has raised alarm; it includes the use of AI, internet, surveillance, and sets up a Basij organization tasked with virtual and physical education of women in “good behavior.” 

In May 2023, the United Nations Human Rights Council’s Social Forum, in a worldwide controversial move, appointed as chair the representative of Iran, disregarding the country’s long standing human rights issues. 

August 24th 2023 also saw Iran’s admission into BRICS, whose anti-US policy and goal is to weaken or replace the US dollar as the world’s default currency

Iran’s recent financial support of the Hamas terrorist attacks against Israel have further increased global concerns, increased regional instability, and have led to re-freezing of the $6 billion prisoner swap deal (for the release of 5 American hostages held by Iran), according to the White House.

For a more in-depth analysis or further information contact Infortal.

Understanding Geopolitical Threats

Geopolitical Threats

 

Geopolitical threats affect businesses, organizations, governments, and even individuals around the world. As a business owner, these threats can affect your profits, your reputation, and even your ability to do business in certain countries. If you fail to identify and understand the geopolitical threats that affect your business, you’re likely to end up losing money or even being forced to close your doors.

Let’s take a look at the basic definition of geopolitical threats, some specific types of threats, and examples of each. If you want to know more or would like to work with a professional to understand the geopolitical risks you’re facing, Infortal can assist you. Our team has years of experience in this area. After identifying the threats you’re facing, we’ll help you develop plans to mitigate these risks or avoid them.

 

Geopolitical Threats Defined

Something is defined as a geopolitical risk or threat if it poses a political, military, social, or economic threat to another organization, country, or individual. From a business standpoint, the risk is mainly economic, although reputation damage is also a serious risk in some cases. Some of these threats are ongoing, while others may be situational. Sometimes a geopolitical risk isn’t present in an area until a change in government or the beginning of a conflict in the region. That’s why geopolitical due diligence investigations are so important—Infortal can often bring to light indications of a major shift in power or economic collapse in an area by carefully studying its history and current social conditions.

Here are some types of geopolitical risks:

These geopolitical threats can have serious repercussions for businesses that fail to understand them and what risks they present. Let’s take a closer look at each of these issues and how they can damage your business.

 

Wars and Other Regional Conflicts

It’s easy to see how war can pose a risk to your business. All we need to do is look at how Russia’s invasion of Ukraine has disrupted much of Europe and even Africa. Companies doing business in Kyiv and other major Ukrainian cities may have lost employees due to either being killed or fleeing the country. Their physical factories and other workspaces may have been destroyed or may no longer be safe to occupy. There may be no customers in Ukraine to purchase your products, or your products could be held up at the port. 

Even those businesses that only work with vendors in Ukraine are affected by these issues. With the major ports on the Black Sea. This embargo prevented grain and other materials from being shipped to other countries, including those in Africa that relied on the grain for food. Millions of people suddenly found themselves facing food scarcity, while the companies in Ukraine were unable to do anything with the products and materials they had in storehouses and on ships. 

These are just a few of the consequences of the war in Ukraine. Sanctions from the U.S. and Europe have affected thousands of businesses that once purchased or sold items to Russia. McDonald’s, for example, has closed all of its restaurants in Russia, ending their 32 years of operating in the country. If you were doing any business with Russia when the sanctions were put into place, you had to immediately assess all of your dealings to make certain you were following the imposed regulations. If you weren’t, you either had to cease those activities or risk being fined for your violations. 

These are just a few of the ways that regional conflicts can threaten your business. Food shortages, global trade disruptions, supply chain disruptions, and other risks all come from wars and can result in businesses struggling or failing. Knowing the indicators of conflict can help you avoid entering into an unstable region.

 

Economic Warfare

Not every country wages an overt militaristic war. Some wage economic warfare. This type of war is often more subtle, but it can be just as damaging to countries, businesses, and individuals. It makes use of various methods to weaken the country’s economy and currency. Trade embargoes, tariff discrimination, boycotts, and sanctions can all be forms of economic warfare. To go back to the conflict in Ukraine, the U.S. and other countries have used methods of economic warfare in an attempt to push Russia to halt their invasion. Often, economic warfare is used in this manner to avoid making a conflict larger or leading to another world war.

Economic warfare affects businesses by blocking trade options. If you’re operating in a country that is embargoed or sanctioned, you may not be able to purchase necessary materials or sell your products. You can lose a significant portion of your company’s profits if you had worked with that country for years prior to the start of the economic battle.

On the other hand, sometimes economic warfare fails to achieve its goal. For example, the U.S. trade embargo against Cuba was designed to push Fidel Castro out of power. However, many businesses in Cuba simply turned to trading with Mexico. Trade between the two countries has built up over the years, and by 2014, the trade between the two generated over $370 million for Mexico. Many Mexican business owners have invested in Cuba as well. While U.S. businesses may have suffered from the embargo, those in Mexico saw a new economic opportunity and seized it. This can be an unintended side-effect of economic warfare.  

 

Cyberattacks

 

Cyberattacks are a new type of geopolitical threat, but that doesn’t mean they aren’t serious. These forms of attack can quickly cripple a business or a government if the right data is stolen or malware implanted. If your business is hacked and ransomware placed on your network, you may not be able to access anything or make use of any of your IT until it’s removed. Stolen customer data can lead to fines and other penalties if you don’t secure your system correctly, plus it can damage your reputation. 

Cyberattacks continue to increase. In 2022, the FBI received more than 800,000 complaints related to cybercrimes. In total, this threat cost over $10 billion in damages, an increase of more than $3 billion over 2021. This doesn’t include hacks that were never reported. 

Hacking is often done in conjunction with other forms of warfare. For example, Ukraine’s intelligence agency has reported that state-sanctioned hackers from Russia have attempted to compromise their systems. Cyberattacks can also be done in conjunction with economic warfare, especially against businesses or countries that have invested in cryptocurrency. Even when they aren’t backed by the government, hackers may take it upon themselves to attack those they believe are threats to their country or their way of life.

 

Resource Scarcity, Including Food, Water, and Energy Scarcity

 

The final type of geopolitical threat we’re going to look at is resource scarcity. This type of threat may be due to the direct result of a government or other organization, or it may be due to climate change or other environmental factors. For example, a major drought can lead to food scarcity. So can disease. In 2022, nearly 50 million chickens died from the avian flu, leading to a serious egg shortage in the U.S. Eggs tripled or more in price, leaving many on strict budgets unable to afford a food staple that was once only a few dollars.

As mentioned earlier, many countries in Africa have suffered grain shortages due to Russia’s embargo of Ukraine ports. Another result of this conflict is that the U.S. and the E.U. have stopped purchasing oil from Russia. While this was done voluntarily via import bans, it has left many in these countries scrambling to find new providers and oil trading partners. As a beneficial side-effect, however, businesses in the green energy industry have found new opportunities as companies look for new sources of power.

Food, water, oil, coal, and many other types of resources can be scarce. Moving into a region that is experiencing some form of scarcity can be a risk. You may find it difficult to keep your business running, especially if employees are unable to meet their basic needs. 

 

How Infortal Can Help You Assess and Mitigate Geopolitical Risks

 

If you don’t know what geopolitical risks you’re facing, you won’t be able to properly make decisions. You could end up moving into a region that is politically unstable. Civil unrest could break out, leading to rioting and looting. Civil war, economic instability, and resource scarcity can leave your business struggling to stay afloat. In some cases, you may even have to cut your loss, losing the thousands or millions of dollars you’ve invested. 

Infortal is here to help you avoid these outcomes. We can do a geopolitical risk assessment and deep dive due diligence to help you determine if the country or region you’re moving has been demonstrating factors that indicate a risk. We will provide you with as much information as possible about these potential risks and help you understand the threats you would face if you purchase a business or partner with a vendor in that country. With this information, you can make an informed decision. To learn more, reach out to Infortal today.