Investing in emerging markets has become all the rage. But high levels of corruption in those countries pose a growing threat to portfolio results.
According to accounting giant Deloitte LLP, nearly two-thirds of a group of more than 500 executives it surveyed from Canada, the U.S. and Mexico reported that bribery, corruption, and lack of transparency derailed offshore takeovers or led international deals to be renegotiated during the past three years.
"As North American companies continue to explore growth opportunities abroad, most notably in emerging markets, we are observing that compliance and integrity risks appear to be rising sharply," Deloitte said of its results, which were published in a report called "Look Before You Leap, Managing Risk in Global Investments."
The executives in the survey included presidents, directors, and treasurers at banks, hedge funds, private equity firms and industrial companies.
Among the respondents, one in five reported finding a lack of transparency or "unusual payment structures" in contracts, while 18 per cent said they had experienced the questionable use of agents, consultants and other third parties to obtain business. The use of agents is often linked to bribery.
China was the worst offender, with 80 per cent of respondents saying they were significantly or somewhat worried about business practices in the Asian economic superpower.
Mexico and Central and South America ranked second, with 76 per cent of the executives expressing concerns over corruption. While Western Europe scored better, with only 43 per cent expressing any degree of concern, it didn't escape unscathed.
One unnamed respondent, a compliance chief for a U.S. multinational, said that in Italy "it is still not uncommon for a company to keep two sets of books, one for internal purposes and one for outsiders."
But the executive said the situation was even worse in Eastern European countries such as Bulgaria, where local companies would say they were making their sales numbers but would really be inflating results through the use of promotions.
Another executive reported that Russia and Ukraine are also problem areas, with bribery so common "you cannot complete a plant or import a new product without paying someone off."
Peter Dent, a Deloitte partner in the firm's Canadian forensic and dispute services department, said bribery is a part of doing business in some countries. Requests for illegal payments are typically made by foreign government officials, and are either paid directly to them or indirectly through consultants who channel the money to associates in government, he said in an interview.
Mr. Dent believes some Canadian companies are paying bribes but face low odds of ever being charged in Canada. There has been only one conviction under the Corruption of Foreign Public Officials Act for illegal payments over the past 11 years.
"I would not say that Canadian companies are not bribing," he added. "This is not seen in the Canadian landscape as a high risk area."
There were 75 Canadian companies included in the survey.