The Sri Lanka Crisis - A Compliance Wake - Up Call for Regional Operators?
The situation in Sri Lanka is no longer news to most, although the political situation may appear to be on the mend.
While the news cycle does not have Sri Lanka under a magnifying glass any longer, the missing message in the headlines is that what has happened in Sri Lanka is very possible – some say inevitable - in other emerging economies in Asia.
This vulnerability creates exposure for corporate investors - most obviously in terms of capital and return, but also in terms of regulatory compliance and business ethics. In simple terms, businesses in stress behave badly if allowed to do so. The pandemic and the corruption “surge” experienced by many corporates was sobering proof of the point.
Is your compliance infrastructure robust enough to cope with that stress? Prudent investors invest in compliance “stress tests” - judging the effectiveness of systems on bad days, not good.
Investment in designing and enhancing compliance systems is no longer a “good to have,” but a “must have.” It has become more crucial than ever to identify and remediate pressure points in your compliance system.
The worst aspects of the economic and political crisis in Sri Lanka are no longer news. In the span of a few months, the country spiraled from economic distress to a full-blown crisis of legitimacy. Proximity to the ruling elite, until now a ticket to invest, is now potentially a liability.
The situation on the ground remains volatile. Investors in both Sri Lanka and the immediate region look carefully for the knock-on effects of the crisis. The immediate focus is economic, but prudent investors worry that difficult questions may now get asked as to how businesses run and how investments and partnerships were approved and established.
There is also a message missing from the headlines - what has happened in Sri Lanka is very possible, some say inevitable, in other emerging economies. This is especially so given unstable global economic conditions, high rates of inflation and regional political tensions. This is all amplified in some investment destinations, such as Pakistan and Laos, by ongoing and significant governance issues.
This vulnerability creates exposure for corporate investors - most obviously in terms of capital and return, but also in terms of regulatory compliance and business ethics. Businesses in stress can behave badly, if allowed to do so. The pandemic and the corruption “surge” experienced by many corporates was sobering evidence of this.
The spotlight has also been thrown on the efficacy of certain political relationships. Proximity to key political figures remains the easiest way to fast-track investment; both the effectiveness, and legitimacy, of that proximity is now being questioned.
Investors - both the prudent and the vulnerable – are therefore re-evaluating whether their compliance systems are sound. The focus is emerging economies, which are often also high-risk from a financial crime perspective.
Are your compliance policies and systems robust enough to cope with stress and challenge? A true compliance “stress test” will judge the effectiveness of systems and policies in a crisis environment.
Beyond the need for such compliance “stress tests,” the Sri Lanka saga has several key lessons for investors with operations in or plans to invest in emerging markets:
- Emerging markets are fraught with political risks that do not necessarily materialize immediately. As such, pre-transaction due diligence to understand your investment’s exposure to such risks (e.g., involvement of individuals with political affiliations) is key.
- Appreciating the geopolitical climate in the country of investment is essential and should be factored into investment decisions - this should not be discounted given global developments in recent years. In other markets across Asia, we have seen geopolitical interests impact regulatory scrutiny in certain jurisdictions by the government of the day.
- Preparation for crisis management needs to be done proactively, especially if a foreign investor is operating in a volatile political or economic environment.
In more ways than one, the situation in Sri Lanka is a compliance wake up call for regional operators. It is a reminder that compliance risks no longer exist in isolation - they ebb and flow based on external factors, and in these emerging markets, often remain on the high-end of the spectrum.
Our team in Singapore is familiar in advising businesses on conducting compliance “stress tests” in high-risk markets, as well as on crisis management and risk analysis across markets across Asia. We are no strangers in identifying and remediating any pressure points in your compliance system.