Satyam. This Indian outsourcer's name has evolved into the dirtiest six-letter word in investors' lexicons these past few days, ever since Satyam Computer Services
According to the Wall Street Journal, the World Bank recently revealed that it had "blacklisted" the company, forbidding any World Bank entity from doing business with the firm for at least eight years. The blacklisting occurred way back in September 2008, as punishment for Satyam's "failing to maintain documentation to support fees charges for its sub-contractors," and also "providing improper benefits to Bank staff." Now, we all know (more than we ever imagined) about Satyam's "documentation" issues. But the "improper benefits" bit strikes a different chord.
You see, as we recently learned, Satyam isn't the only inhabitant of the World Bank's contractual no-fly zone. Rival consulting shop Wipro
How far does this go?
Now it's worth pointing out that while these three firms share some pretty obvious attributes -- they're all Indian, and they're all outsourcing contractors -- not all such firms should be tarred with the same brush. Case in point: commenting on the scandal, the Journal made a point of noting that peer consulting firm Infosys
But investors can be forgiven for wondering whether Infosys is the exception that proves the rule. There does seem to be a disturbing pattern emerging of Indian firms caught up in scandals involving -- let's not sugarcoat it -- what looks like bribing clients to win contracts. In light of India's membership in the hypergrowth club commonly known as "BRIC" (Brazil, Russia, India, and China), should investors beware similar revelations in their other emerging-market investments?
One word: Yes
Absolutely. As Motley Fool Global Gains subscribers know well, international investors simply cannot ignore the issue of political risk in their investments. Often, when we hear this phrase, we're inclined to think of it referring to Chavez-like nationalization, or taxation into extermination a la Yukos. But the situation with Wipro, Satyam, et al., reminds us that political risk can take many forms. Lax legislation that prompts companies to engage in questionable transactions -- and get caught and punished -- is certainly one of them.
What is the temptation's source? Profit. There's plenty to be made in the developing world, and in the BRIC nations in particular. Whereas the U.S. economy grew less than 2% last year, Russia and India each posted 6% growth, and China expanded by 9%. Even relative slowpoke Brazil tripled U.S. performance .
No one wants to get left out of a good growth story, and seeking profits in developing nations has led many a good firm into trouble. IBM
So what's a Fool to do? If investing in hypergrowth markets abroad raises risks for both local shops and blue-chip "American" firms alike, how do you limit the risk you're taking?
For one thing, realize that Western firms investing abroad are at least somewhat safer than investing in the local firms. Anti-corruption crusades in the West have given rise to such legislation as the U.S. Foreign Corrupt Practices Act and its European analog, the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions. Knowing that they're not permitted to "come bearing gifts" when competing for contracts -- and knowing that regulators are watching -- does tend to keep Western firms on their best behavior. (Usually.) When investing in a foreign firm, it cannot hurt to first check whether the company's home country has signed onto the OECD Convention. (Within BRIC, by the way, Brazil has signed. Russia, China, and -- you guessed it, India -- have not.)
But even this doesn't free investors from responsibility. If you want to participate in the outsize profits available in the developing world, the price of admission is constant vigilance.
Corruption's greatest hits: