The Impact of Geopolitical Risk on Businesses

Geopolitical Risk on Businesses

 

Any business that deals with other businesses, including vendors, in other countries must be aware of the various geopolitical risks they’re opening themselves up to. While there are certainly many benefits to going global, there are also dangers that can, if not understood, result in the end of your company. The many different fines and other penalties you can incur from breaking sanctions, for example, can leave your company struggling to make ends meet. Even if you don’t face any type of immediate financial repercussions from these risks, they can damage your reputation. What customer is going to want to work with you if it comes out that some of your products were made by children in sweatshops?

 

These are just two examples of geopolitical risks and why you must know what your overseas partners and vendors are doing. The impact of these risks cannot be discounted. Before you start working with any other company in another country, you must do your due diligence on both the country and the company itself, and key executives on larger business deals. You even need to look into the company’s supply chain and other partners to make certain you’re not assuming risks there. 

 

It is important work, and is highly recommended if you want to fully understand the risks you’ll take on by partnering with or purchasing that company. This is where Infortal comes in. Our team has years of experience in analyzing geopolitical risks. We will put in the time to uncover these risks and provide you with the information you need to make a decision. In some cases, the risks may be well worth the rewards, but in others, they may not. To understand why you need to do your due diligence, let’s look at some of the ways geopolitical risks can impact your business.

 

Fines and Other Penalties

 

As already mentioned, your company can be fined for transactions that your vendors or other business partners in other countries are involved in. If you’re working with a business that is in a country that has been sanctioned by the United States, you can be fined by the U.S. government. If you don’t know what countries are currently sanctioned, you run the risk of doing business with one of them. Even if you’re not doing anything directly with businesses in that country, you can still be held accountable if one of your vendors is. This is why it’s vital that you do your due diligence not only on your direct partners but also on their suppliers. 

 

Also note that companies and individuals can be sanctioned or flagged in similar lists too. It’s not enough to know what countries have been sanctioned—you also need to look at these other lists. Remember that sanctions are not set in stone either. New sanctions can be introduced, old sanctions lifted, and current sanctions modified as political situations change. Up to date information is key. 

 

Violating sanctions can bring with it stiff penalties and fines. Companies do not need to be based in the U.S. to be sanctioned by the government, either. For example, the Godfrey Phillips India company, which is based in India, was fined in March of 2023 for violating North Korea sanctions. These violations occurred in 2017, but the paper trail showed the violations began two years earlier. Godfrey Phillips agreed to pay $332,500 for their violations. This is a good warning for anyone who has violated sanctions and assumed they got away with it because there were no immediate investigations or repercussions. The U.S. government may move slowly at times, but they are very diligent and take sanctions violations very seriously. 

 

Damage to Your Reputation

 

When you work with vendors or other businesses that engage in shady activities, it’s going to reflect poorly on your business. You may get pulled into a scandal that greatly damages your reputation. You could find that you’re working with vendors that engage in bribery, illegal mining practices, child labor, dangerous working conditions, or any number of adverse business practices. Simply associating with these companies may make customers reconsider buying products or services from you. You could also lose business partners and contracts. 

 

Some businesses take the time to look into the legal records of their vendors and business partners and others take unnecessary risks. A vendor could be bribing government officials and you may never know because they’ve never been taken to court. In other countries, such things are simply considered business as usual. For example, it’s not unusual for strikers to be arrested or fired in countries such as Turkey, Colombia, or the Philippines. Violence against these workers  often happens. Would you want your company’s name associated with such issues?

 

Unless you dig carefully into local media, you may never know one of your vendors was a part of anti-union activities like this. However, should someone find that information and bring it to light, your customers may decide to move their business to a competitor. Even if you cut ties with that vendor and apologize to your customers, the damage is already done. 

 

Uncovering these things takes time and knowledge. You have to know where to look and what to look for. Infortal’s team knows how to find this information and how to help you evaluate the risks to your business. 

 

Damage to and Loss of Assets

 

War and other instability is another geopolitical risk that can have a huge impact on your business. Your supply chain could be disrupted for weeks, months, or even years if the region becomes embroiled in a war, serious social upheaval, or terrorist activities. It’s also possible that your property in that country could be damaged. Businesses that had vendors, partners, or acquired businesses in Ukraine, for example, very likely suffered loss and damage during the Russian invasion of Ukraine that began in 2022. 

 

During terrorist activities, military operations, or outright war, trade routes are often disrupted. If the vendor in that country is your only source of certain products, it can affect your entire production line. You may no longer be able to assemble the products you sell without those parts. If the city where the manufacturing plant is located is bombed or occupied, it’s possible the entire building could be destroyed and your workers imprisoned or even killed. 

 

Wars can be unpredictable, but there are signs of risk that experts can identify. Often, these signs of instability are present for years or even decades before war actually breaks out. By knowing these signs and understanding how they combine with other geopolitical risks, it is possible to determine the likelihood of war or other military action. With this information, you can make an informed decision on whether you want to risk doing business in a region.

 

You May Lose Profits

 

Understanding the financial regulations of a country, especially when it comes to tax law, will have a huge impact on your business. While this may not be a geopolitical risk that’s on the same level as war, it is still something you need to consider. High taxation or regulations that force businesses to use specific materials or expensive manufacturing processes will affect your bottom line. You will need to take this into account when considering whether or not you want to work within a specific country or use vendors that do so. You may instead want to look at countries that are more business-friendly, which would be included in a geopolitical risk assessment.

 

Another thing to keep in mind is that heavy regulation and over-taxation are often indicators of social unrest. They can indicate that the government is putting too much pressure on businesses and on its citizens, pressure that can eventually lead to protests, strikes, and riots. Of course, the impact those will have on your business can be substantial. 

 

Why Work with Infortal to Understand Geopolitical Risks?

 

Before you make any business decision, you need to have the right information. Otherwise, you’re simply making a guess about good business strategy in a particular region or country. When it comes to geopolitical risks, there’s a great deal of information to gather and analyze. Without the right tools or the time to allocate to this task, you can never cover everything. You may not even be able to unearth the most helpful information.

 

These are areas Infortal specializes in. Our team has many years of experience in gathering data on these risks and analyzing them. We do more than just look at a country’s laws and their social situation. We look at their history, their relations with surrounding countries, and current political and financial pressures to determine what risks are involved in working with vendors or establishing a business there. 

 

We can also assist you with due diligence investigations on vendors from other countries. We will break down their supply chain and perform an analysis of each vendor used. This will highlight any sanctions violations or potential supply chain disruption. We will then assist you in weighing the different risks you would face so you can make the right decision for your business.

 

Infortal can do more than help you decide if you should purchase a business in another country or work with a specific vendor. We also do executive due diligence, M&A due diligence, reputation risk management, and geopolitical risk intelligence. Contact us today at 1-800-736-4999 to learn how we can help keep you with risks to your business.

            

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CLE Accredited Courses

Infortal’s Continuing Legal Education (CLE) courses are designed to equip executives, attorneys and risk managers with strategic insights to navigate the complex landscape of geopolitical risk. We cover topics such as international sanctions, regulatory risks, corporate espionage, AML, global warfare, anti-terrorist financing and corruption.

We can help you make informed decisions and mitigate potential risks for your business.
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