Value of compliance in the modern times defense industry. Part I

Value of compliance in the modern times defense industry. Part I

Special for “Ukrainian Private-Sector Defense Industries” Directory

Pavlo Verkhniatsky, Managing Partner at COSA

Pavlo is an expert in sophisticated integrity due diligence with an international component. He also leads research on country and political risks, conducts cross-border investigations and asset tracing for the benefit of global corporate players. Having experience of on-the-ground work with a focus on the FSU Pavlo provides COSA’s clients with in-depth understanding of behind-the-scenes particularities of business relations and country specifics.

In current geopolitical conditions and new market realities integrity and compliance is not an obstacle for business growth, but instead a competitive advantage that brings added value.

Compliance is no longer a new concept for our market, but it is still not widely spread. Basically, compliance means doing business in accordance with legal regulations and ethical principles. In countries where the term has long since become a familiar word in business vernacular, there are virtually no international companies left without a compliance system, which involves, among other things, regular due diligence analysis of all contractors all over the world. Such an approach stems from strict regulations, including extraterritorial law, where breaches lead to considerable penalties and reputational losses.

Some of the countries where businesses pay special attention to reputational risks and compliance risks related to contractors are the USA, Great Britain, Sweden, France, Germany, and Denmark. As American and European companies with advanced compliance systems take more interest in Ukraine, our business has to grow in a new environment in conjunction with international economic integration that is no longer possible without integrity and compliance, long since adopted as part of business culture in developed countries.

Businesses based in the aforementioned countries, especially those in the US and Great Britain, are so thorough in assessing the level of transparency and risk (most importantly, risk related to corruption) of their foreign contractors, because if their contractors fail in terms of integrity, these American and British companies will have to answer for such breaches to their national regulators. Global market players tend to fall into such traps in developing countries where corruption risks have been historically high. For instance, virtually all the cases where businesses had to pay millions and even billions of dollars under the US Foreign Corrupt Practices Act were due to offences committed in developing countries including Ukraine.

The defense industry and the market of dual-use products are no exception. Enterprises operating in this sector including production partners, suppliers of materials and components, trade agents, and other players in the industry have to pass due diligence checks. Naturally, in terms of transparency and competitive practices on foreign markets, it would be wrong to equate a defense enterprise with a cheese manufacturer, for instance, but comparisons can be made with electronics manufacturers, pharmaceutical companies, and enterprises operating in the oil and gas sector.

Currently, Western companies are greatly interested in our defense enterprises and the Ukrainian market of dual-use products. Our country is viewed both as a buyer of arms and military equipment and as a prospective production partner. Given the notoriously high compliance risks associated with our special export, American and European companies have to take steps to safeguard themselves against charges they could possibly face under the aforementioned laws in their home countries. In this case, comprehensive analysis of our businesses for reputational risks and the due diligence we have been discussing in this article provides such a safeguard for foreign enterprises. Western companies often refuse to cooperate with Ukrainian businesses when compliance risks reach “level red”.

Apart from the aforementioned reputational or integrity risks, prospective partners of Ukrainian defense enterprises pay attention to a wide range of issues related to the environment where our enterprises operate. This means assessing the entire scope of country risks including those associated with politics, security, specific industry, special export system, technology protection, etc.

Industry compliance assessments have been getting more frequent over the last few years. On the one hand, this shows that Western companies believe there have been positive changes in Ukraine. On the other hand, despite the increased interest in a country at war that has great potential in terms of technology and production, concerns typical of post-Soviet countries remain, which applies not only to the market of weapons and military equipment, but to commerce in general. Companies that view compliance as a basis for business security and a preventive measure against fraud, not just as a series of policies and procedures, postpone landmark decisions about close cooperation when they do not see our businesses implementing comprehensive compliance systems.

It is clear that compliance in its traditional sense needs adapting to the complex and extremely sensitive arms business. Compliance systems have to be developed in such a way that, on the one hand, they would show transparency and thus make Ukrainian businesses more attractive partners for global players and Western companies in particular, and on the other hand, be tangibly useful when it comes to risk assessment and security. Special attention should be paid to risk assessment in foreign markets, where the environment is less familiar and changes happen differently than on the domestic market.