the Risks of Globalization
is happening at an awe-inspiring pace. This, of course, creates
spectacular opportunity for the quick and the bold. At the
same time, risks are plentiful and must be aggressively controlled.
Thomas L. Friedman,
in his book The World is Flat, makes a cogent observation:
the prospect of all this flattening -- and all of the pressures,
dislocations and opportunities accompanying it -- causes you unease
about the future, you are neither alone nor wrong. ... The
faster and broader this transition to a new era, the more likely
is the potential for disruption..."
The risks of
globalization, in fact, are greater and more varied than the
risks of domestic commerce. Managing them is the key.
Environment for Risk
CEOs and CFOs
who feel confident about their US risk, often feel a vague tension about
the unknown risks related to worldwide operations. For good
reason: the legal and cultural landscape can be completely "foreign"
in more ways than one. Below are a few of the issues
that need to be considered. Managing them includes awareness
of and reduction of loss, the use and tailoring of insurance coverages,
and control of liability via contract.
Risk: In the US, a stable government with known rules and
regulations is presumed. This is not necessarily the case
in all parts of the world. The possibility of nationalization
of industries needs to be considered. Similarly, there are
the risks of confiscation, expropriation, currency inconvertibility
and contract repudiation. Currency devaluation and rampant
inflation are possible scenarios, wreaking havoc on the adequacy
of insurance limits, as one of many potential problems. There
is also risk to company employees of personal harm or kidnapping,
and risk to the firm of extortion attempts.
Loss: Areas of the world are subject to different
levels of loss from natural disasters such as windstorm, hail, earthquake,
flood, etc. There is neither necessarily the rating information
nor the insurance availability that exists in the US, and insurance
terms and conditions are different. Theft and vandalism exposures
can be higher than what we are accustomed to as well. In cases
of reliance on one or a few foreign suppliers or customers, there
is a “contingent business interruption” exposure that
should be considered and possibly insured. This refers to
business loss a company would suffer as a result of an
incident at their supplier’s or customer’s facility.
Attention must be given to the question of what currency losses
will be paid in, and insurance limits will need to be carefully
monitored in a high inflation environment. Personal property
being shipped to and from the US needs to be insured in transit,
and control over the insurance should be maintained if possible.
If the transit insurance will be handled by the foreign party, the
sale should be on terms whereby risk of non-insurance or poor insurance
falls to the party arranging the coverage, not to the innocent party.
Loss: Automobile liability is controlled in most
countries and insurance must be purchased from approved local
insurers. The laws addressing general liability, including
product liability, are not necessarily the same at home,
some countries using the Napoleonic Code and related systems.
China’s law is a hybrid, adopting some Code law and some Anglo-Saxon
principles, and is evolving and developing as we speak. In
some countries, China being one, the law cannot be totally relied
on as it is subject to various interpretations depending on local
politics. Additionally, in some countries civil law and criminal
law overlap to an extent we are not used to. Business managers
are jailed for unpaid business debts and for violations of employment
laws, for example. None of this, of course, should be
taken lightly. Experts are required to understand the exposures
and to make sure coverage dovetails with the exposures and with
the domestically purchased Umbrella insurance.
Injury: Some US based workers compensation
may be available for US employees “temporarily” outside
of the country, but beyond that separate insurance must be
obtained based on the laws of the specific country. In many
countries, the insurance of employee injury is reserved to state
institutions, and cannot be provided by private insurers.
Diligence should be applied to satisfying these requirements.
No assumptions should be made. For example the laws of China
governing “Employment of Foreigners in China” call for
regulation of foreign employees in China of any duration unless
they are representatives of “permanent offices of foreign
enterprises in China.” Further, you must be aware of
how the law treats “independent contractors” or pseudo
independent contractors. In other words, compliance with other
countries' workers compensation laws is a complicated process.
Additionally, a master policy should be purchased in the US supplementing
the foreign coverage with Foreign Voluntary Compensation, Endemic
Disease and Repatriation Expense.
or Non-Admitted Insurance: Most countries require
that at least some of the insurance purchased in that country be
purchased from insurers licensed (or “admitted”)
in that country. Sometimes the only admitted insurers are
the insurers based in that country, quite often unknown or unrated
entities. Many US firms purchase only insurance types and limits
to meet minimum government requirements from these admitted insurers,
while purchasing the rest of their program from US insurers.
This may or may not be strictly legal from the point of view of
the country where the exposures are located, and can pose the following
tax issues: 1. the premium paid in the US may not be
a deductible expense in the US, or in the foreign country either;
2. non-admitted premiums may be considered additional
capitalization of a subsidiary and subject to local taxation;
3. payment of the loss by the non-admitted insurer could be considered
subject to local income tax; 4. replacement equipment shipped
into the foreign jurisdiction could be subject to import taxes.
Non-tax issues include: 1. penalties may be levied for the purchase
of illegal non-admitted insurance; 2. defense by a non-admitted
insurer of a liability claim may not be allowed – this would
have to be known in advance so policies can to be amended to provide
for reimbursement rather than direct defense. Clearly, structure
of the international program has to match actual country conditions
Language: Flows of liabilities, and in fact the business
deal itself, are controlled by the contract between the parties.
Care should be taken in understanding contract law of the countries
where one will be conducting business. In Code countries,
“act of God” will excuse contract performance; this
is somewhat analogous to our concept of “force Majeure,”
but the former is outside the actual language of the contract and
is therefore out of the control of the parties to negotiate.
Specific contract issues apply to individual countries. In
China, for example, contract law is unreliable and one may want
to make contracts in China subject to Hong Kong law, with Hong Kong
as the venue for dispute resolution. Also, arbitration may
be a more reliable solution for disputes, rather than litigation.