Managing international risk
Exporting means more opportunities, but also entails greater risks. Although the environment for international trade has changed substantially over the years, the risks that exporters face when selling their products and services in other countries remain essentially the same.
The initial step in managing export risks is an obvious one – but one which sometimes needs to be spelled out: first you have to identify the source of any risks, and then you have to manage and lower those risks to a minimum.
There are many people you can turn to for help. Choosing the right partners and the right professional advisers is a major step in mitigating risk. Your bankers, lawyers, insurers and accountants should also be able to give you knowledgeable advice about the risks you may face in overseas markets.
This section also includes information about potential risks associated with travelling and doing business in overseas markets.
Types of risk in international trade
Doing business internationally can involve different risks from those encountered domestically and will be influenced by the country you intend to export to. Here are some of the major risks firms doing business internationally can face.
Major political instability at your export destination can either disrupt or in some cases prevent completion of export contracts. This type of sovereign risk might include defaults on payments, exchange transfer blockages, nationalisation of foreign assets, confiscation of property, changes in government policies or, in extreme instances, revolution and civil war. Some factors to consider are:
- Trade embargos enforced by governments and the international community affect the flow of goods and services and could affect your delivery of goods and getting paid.
- Civil disorder may affect personal security of company staff and contractors.
- Political upheaval may occur due to economic factors, natural disasters, civil disorder or revolution
- Whether the local country complies with international law requirements, for example, human rights, trade sanctions, recognition of personal property rights etc.
- Some types of exports may be prohibited under local laws or due to trade embargoes or other international resolutions
- There may be no legal recourse for default in the local country or it becomes uneconomic to pursue your legal rights
- The Department of Foreign Affairs and Trade (DFAT) continually monitor the effects of political changes on Australian businesses.
- EFIC also provides Political Risk Insurance to help mitigate these risks.
There can be major differences in Australian law and the law of the country you are exporting to. You need to understand what these differences are and how they could affect your ability to successfully export your products or services. It is important not to assume that legal processes will be the same as in Australia, particularly when entering into contractual arrangements.
Some examples of situations where legal issues can create problems for exporters include:
- The differences between legal systems – for example, common law systems as compared to civil law systems.
- Differences in contract law between countries means tailored advice on contract terms is important to ensure they are binding and enforceable. As discussed further below, the use of internationally recognised contracts may alleviate some of these problems.
- The question of which laws will apply in disputes.
- Patent registration and other Intellectual Property issues.
- Product liability laws and any implied consumer warranties.
- For exporters of services, occupational health and safety and employment laws may apply
- Access to courts and dispute resolution mechanisms. Some countries may not permit local litigation or place restrictions on the types of claims which can be made.
- Taxation and revenue laws
- Negligence and misrepresentation laws
For more information on the legal risks you could face as an exporter read our Legal issues section.
Bribery, graft and corruption risk
Bribery, graft and corruption are illegal in most countries around the world.
Under Australian law (Division 70 of the Criminal Code Act 1995) it is a criminal offence to offer a benefit which is not legitimately due with the intention of influencing a foreign public official. A benefit is not restricted solely to monetary payments and can take other forms. Further, it is not necessary to prove any direct benefit to the foreign official - use of an intermediary is sufficient to make out the offence. The law applies extraterritorially which means conduct engaged in wholly outside of Australia may still be punishable under Australian law.
Many other countries also have extraterritorial laws outlawing bribery, including the USA, UK and other EU nations. Therefore, the risk for anyone engaging in bribery or corruption arises not only under Australian law, but also the law of the host country and potentially laws of other nations. It also places an exporter at risk of litigation by those who are affected by illegal conduct, as demonstrated by recent successful class actions in the USA and Europe.
Read the Legal issues section of our site for more on bribery, graft and corruption.
Quarantine compliance risk
Most countries have strict quarantine requirements. Before exporting, you need to be aware of what is and what is not allowed under the relevant quarantine laws of your export destination.
There may also be import restrictions on certain goods and services and you need to ensure that any proposed exports are permitted under the laws of the local country. Failure to do so can result in forfeiture or destruction of goods, fines and restrictions on the exporter.
To make sure that you know your international customers’ quarantine requirements, go to: Department of Agriculture and Water Resources.
Exchange rate risk
Exchange rate risk can occur because of fluctuations in the value of a currency.
Unfortunately, many exporters have had their profit margins eroded or have even lost money due to exchange rate fluctuations.
There are a number of ways in which you can protect yourself against this risk, including quoting your prices in Australian dollars (but many customers do not like this and you may adversely affect the number of new customers you attract) or hedging against currency fluctuations.
Note: Contact your bank for advice on how you can protect yourself against foreign exchange risks.
The risk of not being paid for your goods or services is a very serious one for exporters, regardless of the country you are trading with.
In order to mitigate this risk, the payment option you choose should match the level of the risk.
To protect yourself against payment default it is prudent, at least initially, to use payment methods which provide you with some security such as pre-payment or an Irrevocable Letter of Credit – even for customers in wealthy markets such as the United States. (Your bank will be able to provide advice on various payment options.) There are a number of relatively simple things you can do to lower the risk of not being paid. For example, be careful about offering credit terms to customers, and look into getting credit insurance.
Some ways to minimise risk of non–payment:
Consider risk carefully before offering credit terms
When considering credit terms with your customers, ask yourself:
- Does my cash flow permit me to offer credit terms?
- What do I know about my customer’s credit history?
- Should I deal directly with the customer or should I make use of an intermediary bank or agent?
- How easy or difficult will it be to resolve potential disputes or problems with this customer?
- How difficult will it be to take action for recovery, such as legal remedies or official representations etc
Note: Make sure that you get regular credit reports on your customers. These reports can be provided by credit agencies, insurers and banks.
Take out credit insurance
Credit insurance offers protection against a wide range of both commercial and country risk to exporters selling their products on credit.
Most credit insurance covers the risks of trading on short credit terms – up to six months.
Credit insurance content is typically supplemented by extensive support services including access to commercial and political information from overseas credit rating agencies and embassies.
Managing your export risks
Managing export risks is a process of thinking systematically about all possible undesirable outcomes before they happen and then setting up procedures that will either avoid or minimise these risks, or help you to cope with their impact.
There are six basic elements in the risk management process:
- Establish the context of the risks
- Identify the risks
- Assess probability and possible consequences of the risks
- Develop strategies to mitigate these risks
- Monitor and review the outcomes
- Communicate and consult with all parties involved.
Keep your risk management analysis clear and simple, and ensure it is understood by everyone in the company who is involved in exporting.
Developing a Risk Management Matrix
A Risk Management Matrix will not only clarify your thinking on the risks you may face, but also give you a guideline to work from in managing or mitigating risks. This document should be an appendix to your Export Plan, here’s some examples of what could be included in your risk matrix:
||Steps to manage or mitigate this risk
|Exchange rate risk (AUD/USD rate changes)
|Payments in USD will not cover invoiced amount resulting in losses or eroded profit margin
||Company policy to hedge all export orders taken in USD currency at time of order receipt
|Legal risk: product liability laws in USA
||Legal action could be taken against us with subsequent financial claims by customers
||Ensure up to date legal advice on liability laws in USA and take out insurance
||Debtors difficult to chase overseas, financial losses
||Credit checks on any customers we provide credit terms to, check debtors list before shipping any orders. First order to be prepayment or L/C
Start your Risk Management Matrix by creating a simple list of potential risks. A Risk Management Matrix is not only a good way to identify the probability of risks occurring and the consequences if they do, it will also help you to order the priority of issues that cannot be ignored.
Grading risks helps you to focus on critical areas and to mitigate them before they become a crisis. For example, if all of your export business is with a single client in Malaysia, and that company becomes insolvent, the outcome could be catastrophic. But if the likelihood of insolvency is low, your risk ranking for that event is more moderate, although it may still require monitoring.
Note: It is a good idea to review your Risk Management Matrix regularly to ensure you cover any emerging market changes.
Personnel and Asset Security Overseas
Taking adequate, sensible security precautions is a part of life for everyone today.
For Australian exporters who travel internationally, having timely and accurate information on security issues is an integral part of making informed business decisions.
In certain countries, you need to be aware of cultural or religious restrictions. Not adhering to these rules could place you at significant personal risk, for example, importing and/or consumption of alcohol in some destinations.
Travel Advisories and Information about overseas conditions
Overseas Intelligence Information for Australian Businesses
In 2005, the Australian Government established the ASIO Business Liaison Unit (BLU) to specifically provide an interface between Australian business and the Australian intelligence community.
This Unit provides timely ASIO information on matters which could affect the security of Australian exporters’ staff and assets in offshore locations.
- Exporters who wish to obtain BLU information through the Unit’s secure website, should apply for login access at www.blu.asio.gov.au.
- Register your overseas business activity – this register has been set up to help protect Australian assets and personnel operating overseas and allows Australian companies to record the locations of their overseas staff, facilities and emergency contact details through a secure website.
The Register is located within the BLU website: www.blu.asio.gov.au.