Doing Business in Russia Today: Steps for Security
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Doing Business in Russia Today: Steps for Security
Published by: Bisnis Bulletin
Jeffrey S. Giddings
February 1, 2002

 


 

Doing business in Russia today is not like it was in the earliest, exciting, post–Cold War days. Nor is it the challenge that it was at the height of the Yeltsin era. Nonetheless, precautions necessary in other countries, such as conducting the necessary due diligence and providing for corporate—and personal—security, have to be considered and implemented. 

Russia is no different from most foreign business venues: assumptions that apply to business practices in the United States may not hold true in Russia. A sound business strategy for operating in Russia and careful attention to the realities of the security situation are essential. Certain steps are important for establishing a presence in Russia and protecting a company’s interests, assets, and personnel.

Precautions When Establishing a Presence

It is highly recommended that a U.S. company serious about the market establish a physical presence in Russia through use of its own staff or a joint venture. When considering the options for doing business in Russia, with a fully staffed office or through a joint venture with a Russian company, it is generally preferable to use local resources that have knowledge of the language, bureaucracy, political system, culture and customs.

  • Legal remedies for fraud, recovery of damages, or reimbursement on business losses as we know them in the United States do not exist in Russia. The U.S. judicial system provides unique recourse for both civil remedies and pursuit of criminal violations. Unfortunately, neither US/UK common law nor European civil law is the precise basis for the Russian system. Recovery of business losses incurred in doing business in Russia is extremely challenging; this makes preliminary investigations and evaluations all the more critical. In addition, the use of Russian legal counsel, whether or not affiliated with a major international law firm, may best address the ever-changing Russian legal system.
  • The character of business in Moscow is not the same as that in St. Petersburg; business transactions in one oblast are not going to be identical to those in another oblast regarding issues ranging from infrastructure to site-specific government regulations. The ins and outs, the peculiarities and idiosyncrasies of a specific market, vary by region and even by specific city. Many resources are available to assist in developing a region-specific market strategy, from U.S. Embassy staff to Department of Commerce resources to local business associations and other resources.
  • Due diligence investigations can assist in assessing the risk involved in any venture focused on Russia; such an investigation can determine whether a U.S. company will succeed or fail in Russia. The basic questions are: Are they who they say they are? and Can they do what they say they can do? The suggested due diligence will address the local agent, distributor, or joint venture partner, including the principals of any of these entities, as well as local subcontractors and suppliers. This means a review of background, credentials, and project-specific or industry-specific experience; checks on civil and criminal records; and some real input on personal and professional reputations. This is meaningful only through local, experienced professional contacts, who—in the new Russia—are typically drawn from former law enforcement or KGB personnel.

Precautions for Operating in Russia

All U.S. businesses operating in Russia should be concerned with the security of office staff and personnel, and the integrity and safeguarding of the company’s products or services.

  • Background checks on employees and subcontractors working for your firm in Russia, whether domestic hires or expatriates living and working in Russia, are critical. Criminal statistics in Russia indicate that the vast majority of crime, particularly property crime—which can cripple a business venture—is committed by someone known to the victim. This includes employees and subcontractors. Background checks can uncover persons with criminal records or ties to organized crime, persons claiming false credentials (e.g., university degrees or inaccurate work experience), or applicants with other unsavory or undesirable characteristics.
  • The laws governing intellectual property and proprietary information in Russia are improving, but much improvement is still needed. Basic precautions should be taken to protect these assets. A detailed inventory and analysis should be performed to prevent intangible assets from “walking out the door” and to prevent your company from suddenly losing ownership rights to a product or service. Suggested safeguards include taking measures to protect against external threats on IT operations (such as viruses and hacking) and internal threats on IT files (theft of trade secrets or competitive intelligence), and understanding the current laws and incremental revisions that exist regarding intellectual property.
  • Crisis management plans for operating in Russia must address the classic concerns: (1) What do you want to protect, in terms of people, property, and operations? and, (2) What are your short and long-term goals? In the unique setting that is Russia today, these plans must go even further and address both potential terrorist threats and other possible political crises. These concerns may include Chechen operations directed at Russian interests that coincidentally strike innocent bystanders, as well as post-9/11 operations that target U.S. interests. In addition, President Putin has been aggressive in pursuing corruption and organized crime to the point that there may be backlash that causes local turmoil or political crisis.
  • A thorough security analysis of proposed facilities, staff and operations in Russia is essential. The chosen administrative offices and warehouses must consider the usual “gates and guards.” But today’s Russia must also take into account personal security, such as movement of U.S. staff between hotels or residences and company offices. The appropriate security plans and provision for immediate access to necessary resources need to be created and rehearsed. It is recommended that a reputable local corporate security firm be contacted to provide sound advice in this area.

Operating a foreign business in Russia is safer now than it was in the recent past, but U.S. companies must still take extra precautions to prevent basic losses due to corruption, fraud, and security-related incidents. You can enter Russia, but success will be a challenge unless you ”play smart” and are well prepared.
 
Jeffrey S. Giddings is a Managing Director of Smith Brandon International (www.smithbrandon.com), based in Washington, D.C.

This report is provided courtesy of the Business Information Service for the Newly Independent States (BISNIS)

Highlights of the Article:

(...) Although the economy is doing well, companies that want to conduct business in the global market should not throw caution to the wind, said Gene Smith, founding partner of Smith Brandon International, specializing in international investigative services. A significant sale can go sour after the product is delivered due to a lack of background knowledge and business intelligence, she told delegates. (...)

"Some business gurus advise Western-based businesses to set foreign sales targets of 40 percent of all business revenues. But any global ventures must take into consideration the potential risks as well as rewards," she said. (...)

The Internet enables companies to do business around the world by connecting them, but global connections also "create serious security concerns," said Harry Brandon, founding partner of Smith Brandon International. The "Love Bug" virus was created in the Philippines but quickly swamped computer networks around the world, he reminded delegates. "Is the credit information you have on file secure from hackers?" he asked the delegates. (...)

Even with the risks associated with the Internet, Brandon says companies have "no choice" but to embrace electronic commerce. "The goal is to do it right, in a safe, secure, protected environment." (...)

For the full article see below.




If credit managers felt they were somehow immune to the business effects of the digital revolution, electronic commerce innovation and global economic transformation, they discovered differently at "Exploring the New Frontier", NACM-Canada's second annual Credit Conference and Expo held in Toronto, Ontario on October 11 and 12.

The Internet brings disparate cultures together for social and commercial interactions. Global communication at Web speed changes both the nature of societies and the culture of business, conference speakers told the NACM delegates. In a world where almost every new business venture begins with an "E", geographic boundaries are disappearing, and companies are open 24 hours a day.

Instant digital connectivity creates a host of business opportunities and challenges, delegates were told. Credit managers need to protect corporate financial interests while supporting the development of new opportunities. Armed with new digital tools, they can process information faster and make decisions quicker. At the same time, they are dealing with more information from more sources than ever before. That's life on the new frontier.

OUTLOOK POSITIVE

When it comes to overall financial matters, "the global outlook for the next 18 months or so continues to be upbeat, not withstanding the sharp increases in oil and natural gas prices," Dr. Lloyd Atkinson, chief investment officer for Perigee Investment Counsel Inc., an investment and money management solutions firm, told conference delegates.

Growth is driven by the technology revolution, and the pre-emptive action taken by central banks, most notably the US Federal Reserve, to keep inflation in check. The result: US productivity has increased significantly at inflation-safe speeds. Inflationary pressures have been contained and there have been real gains in wages, salaries and corporate earnings.

While there will be economic slow downs, "they will be much more muted than in the past, and there is no recession in the five year forecast... Barring economic accidents, such as occurred in Asia in 1997, we continue to be very optimistic about the longer term," Atkinson said.

While business-to-consumer e-commerce ventures such as Amazon.com have received a great deal of media play, Atkinson called them "small potatoes" compared to business-to-business e-commerce. The old economy--automotive, financial services and other traditional sectors--are using the tools of the new economy to change the way they do business. For instance, General Motors will use the Internet to reduce distribution costs by 30 percent over three years. This is a direct benefit to General Motors and suppliers who adapt to the news ways of doing business in the digital age will also benefit.

CAUTION ADVISED

Although the economy is doing well, companies that want to conduct business in the global market should not throw caution to the wind, said Gene Smith, founding partner of Smith Brandon International, specializing in international investigative services. A significant sale can go sour after the product is delivered due to a lack of background knowledge and business intelligence, she told delegates.

Even though there are risks, "there is no option to sit out e-commerce." Forecasters indicate that e-commerce will generate $ 1.3 trillion dollars in global sales in 2003. "Some business gurus advise Western-based businesses to set foreign sales targets of 40 percent of all business revenues. But any global ventures must take into consideration the potential risks as well as rewards," she said.

To successfully tap global markets, companies require strategic plans that integrate e-commerce into their overall business strategies before they build secure, transactional-based Web sites. And they cannot afford to overlook due diligence. "A classic case of 'it's too good to be true' is often accompanied by an online request--or even demand--to evaluate a proposal quickly and sign the necessary papers at once," she said. "If the prospect is so compelling, it can wait until it is given adequate review."

If a new client places an order from your web site, how do you determine who they are, if they have the authority to place such an order and if their company has the ability to pay? A company can "proceed on faith," or it can sort out all potential transactional dilemmas before hanging its shingle in cyberspace. The Internet is making it easier for companies to conduct business in foreign countries, and it is making it easier for companies to conduct credit checks on foreign companies, said Julie Gage, business project manager, Dun & Bradstreet Canada, a NACM-Canada Credit Conference sponsor. Companies like Dun & Bradstreet can help credit managers adopt to the new global reach of the Internet by providing them with background and credit information online or by e-mail, she said. Scott Blakeley, partner with Blakeley & Blakeley LLP, concurred. The most dramatic effect on the Internet "is the shortening of the credit cycle," he said. Vendors are using the Internet to conduct background and credit checks on com panies, cutting dramatically into the time required to approve credit.

SECURITY A CONCERN

The Internet enables companies to do business around the world by connecting them, but global connections also "create serious security concerns," said Harry Brandon, founding partner of Smith Brandon International. The "Love Bug" virus was created in the Philippines but quickly swamped computer networks around the world, he reminded delegates. "Is the credit information you have on file secure from hackers?" he asked the delegates.

Companies are even posting order acknowledgement forms and invoices on secure web sites that customers can access. While clients enjoy the freedom of accessing information any time, they want to be assured their credit and purchasing history is secure, or they will look for other vendors.

"Computers are efficient, and they empower employees, but there are downsides," Brandon said. Fraud cost North American businesses $ 350 billion in 1990 and $ 400 billion in 1999. Computer fraud grew exponentially over this same time. Damages pegged at $ 300 million in 1990 hit $ 50 billion in 1999. Over 25 percent of Fortune 500 companies are computer crime victims, and employees have perpetrated many of the crimes.

Risk avoidance is obligatory. Firewalls and virus protection are required to keep hackers out. ID, passwords and other internal measures, including forensic audits, are required to prevent or track down illegal activity by employees.

Even with the risks associated with the Internet, Brandon says companies have "no choice" but to embrace electronic commerce. "The goal is to do it right, in a safe, secure, protected environment."

STREAMLINING THE CREDIT DEPARTMENT

Using technology to do it right also includes employing information technology systems to make the credit department more efficient, says Brian Cheney, vice president technology, IHS Solutions Limited, an information management solutions technology company. Companies can increase collection efficiency without increasing operational collection costs using technology, he said.

Companies moved from paper-based document management to microfiche and then to CD-ROM. Now they are moving to Web-based data that puts information in the hands of clients. For example, if a vendor establishes a secure e-business web site, clients can search for the status of orders or for lost invoices based on purchase order number, product code or other criteria. Centralized credit databases and computer networks allow credit managers to fax or e-mail "lost" invoices from their desktop to overdue accounts while on the phone. This gives the credit manager the opportunity to say: "It's there now, so let's talk about the bill."

Information management automation is not a process than can be implemented overnight. Companies must review existing business practices and define ideal practices and then build systems that meet defined needs. Staff input is important if they are to buy into, rather than resist, automation, Clients also have to be kept in the loop and reassured that credit and payment information is secure.

Automating the credit department and integrating back office databases with web sites can be expensive propositions. The results, however, can include streamlined business practices, improved productivity and a higher rate of closure on outstanding accounts, Cheney said. "But why stop there?" asked Mark Visic, vice-president sales, Kubra Data Transfer Ltd., a document fulfillment, management and e-commerce company. Although companies have automated many aspects of traditional "print and mail" bill presentment, they still spend time and money printing invoices, stuffing and stamping envelopes and mailing bills. The post office then takes time delivering bills, which customers lose or claim they did not receive. Some companies have outsourced the entire print and mail process, which means a third party has to spend time doing what internal staff once did. And the post office is still involved in the equation. An automated electronic bill presentment and payment (EBPP) can reduce the time it takes to get invoice s in the hands of customers and payment in the bank, Visic said.

EBPP is an emerging technology that will eventually replace mail, fax and electronic data interchange (EDI). "EBPP offers corporations the ability to send invoices or statements to consumers via the Internet and process an electronic payment. Companies employing EBPP can post bills on their web site, with a financial institution or a third party clearinghouse. The client receives a secure notification and can view and pay bills online using credit cards, debit cards or other forms of electronic payment, trimming time off the invoice-to-payment cycle. The electronic bill is traceable from the moment the client receives notification, Visic said.

While 7 in 10 companies indicate that billing cost reductions are key to EBPP, the process can also be used to bring clients to a vendor's web site, allowing the vendor to market its brand and continue to sell to the client. "Now bill payment can be used to increase brand awareness, loyalty and sales," Visic said. "This represents a new opportunity for businesses to strategically use billing to sharpen their competitive edge in the new electronic economy."

EBPP is not yet simple or inexpensive to implement. "There is considerable sticker shock," said Visic. The return on investment is not there for every company considering it. Even so, the future holds some form of EBPP for most companies.

If you are still skeptical, look back over the last five years and review how the digital revolution has influenced the way your company does business, and the way you work. "When it comes to advances in technology, we haven't seen anything yet," said Dr. Atkinson. "In five to ten years, we'll look back at the technology we are using today the way we look back at dinosaurs." In other words, companies and credit departments will continue to evolve with the digital world and global economy, or face extinction.

Paul Lima is a freelance journalist and workshop leader based in Toronto, Ontario.

As companies begin to conduct e-commerce in the global market place and move to online billing and payment systems, they must tackle the issue of international law head- on, speakers at NACM-Canada's second annual Credit Conference and Expo told delegates in Toronto.

"In the virtual world, as in the paper world, commerce is based on contracts," said Marie-Pierre Simard, copyright lawyer with the law firm Brouillette Charpentier Fortin. Before a dispute over a virtual contract arises, credit managers need to know what makes virtual contracts acceptable to the courts. "Sometimes it seems as if the law cannot keep up with the information age. Yet, people involved in e-commerce must be able to identify the laws upon which e-commerce relies so that [virtual contracts] may be seen as a valid, enforceable, credible way to do business."

The federal governments in Canada and the US are developing national standards to govern e-commerce transactions, but many provinces and states have different laws, as do different jurisdiction around the world.

In some countries, only contracts with handwritten signatures are allowed in court. In other countries, an electronic signature (fax, scanned document, use of a PIN or password) is acceptable. Other jurisdictions--particularly in North America and Western Europe--will accept digital or encrypted signatures to prove a client ordered a product, and the vendor shipped in good faith.

In the US, electronic signatures cannot be "denied legal effect, validity or enforcement solely because it is in electronic form", said Scott Blakeley of Blakeley & Blakeley LLR. However, an electronic signature does not mean a company will win its case. All other laws for commerce come into play.

Blakeley also warned credit managers to be careful about what they write in email, especially if discussing a client's credit information with a third party. E-mail is easy to send, receive and forward, and sometimes people forget slander and conspiracy laws that cover the printed word, he said.

There are risks and opportunities associated with doing business in the global economy. When dealing with new clients in foreign countries, companies can protect themselves by insuring receivables, explained Angela Boston, business development manager, Export Development Corporation, which is a Canadian crown corporation that helps credit managers mitigate risk in 160 countries.

Her thoughts were echoed by Mark Hall, associate broker and credit insurance specialist with Dan Lawrie Insurance Brokers Ltd. Hall, which offers credit insurance for both domestic and global markets. "This is not a replacement for due diligence or a well-managed credit department," he said. "But it adds another layer of security."

If companies are having difficulty collecting uninsured payables, they can use training or technology to improve their ability to collect, or outsource collectables.

"Effective training can show people how to be assertive, not aggressive and collect more while retaining customers they want to keep," said Tim Paulsen of T. R. Paulsen & Associates, a company specializing in "creative receivables management."

Automating the collection process can boost the rate of return, says David Phillips, Guthrie Phillips Group (GPG) president and CEO. GPG's CAT2000 recovery system puts complete customer history in the hands of each staff member and schedules follow-up correspondence and calls. It can be connected to the company accounting system and updated the moment an invoice has been paid, so collectors are working from current information.

If collectables get out of hand and hiring more staff is not an option, then companies might look to outsourcing some or all the responsibility, says Robert Ingold, president of The Commercial Collection Corp. He admits some companies resent having bills turned over to collection agencies. However, his company can "work as an extension of the credit department" so the overdue client doesn't know the account has been turned over to a collection agency.

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