Domestic Political Risk: Operating in the Uncertainty of a New Era (Part 1)

Steven Minsky | March 21, 2017

What Is Domestic Political Risk?

Political risk refers to conditions and events that affect organizations and result from governmental decisions. It can have major effects on the profitability/expected value of economic action. Political risks impact individual investors, public and private companies of all sizes, and governments.

Starting in 2016, political risk seemed closer to home after the United Kingdom (UK) voted to leave the European Union (EU), often referred to as Brexit, causing instant turbulence across the globe. Now in the United States, under a new administration with an ambiguous agenda, political risk no longer seems like a distant phenomenon to American businesses.

Most businesses are now forced to operate in a constant state of uncertainty and turbulence. Although every new administration brings a change in priorities, President Trump’s change to major regulations, trade relations, tariffs, healthcare, work visas, and taxes has sparked unprecedented confusion in the business world. The same change and uncertainty impacts different businesses in different ways: office locations, supply chain decisions, business partner strategies, data center locations, factory construction, and so on.

Consider regulatory changes that tighten anti-money-laundering efforts to fight global terrorism. Money launderers tend to seek out sectors in which there is a lower risk of detection due to weak or ineffective AML programs. Penalties, although increasingly severe, can be dwarfed by the financial costs associated with damage to an organization’s reputation.

These changes don’t just affect banks and credit unions with Automated Clearing House (ACH) payments, wire transfers, and credit cards. They affect many non-bank activities, including exports, travel tickets, restaurant transactions, and FinTech solutions like Bitcoin. There are now 645 crypto-currencies in the world with a combined market cap of $12.5 billion (USD).

This presents AML professionals with new challenges that require a risk-based approach to handle. Adjustments need to be made to existing transaction monitoring, risk rating, and Know Your Customer (KYC) documentation methodologies.

The myriad manifestations of domestic political risk mean every organization must take unique action to change and adapt. Regardless of your political leanings, everything from your job to your mortgage to your company’s operations depends on your ability to manage risks stemming from new and frequently changing policies.

Three Considerations Regarding Domestic Political Risk and the New Administration

Step One: Separate Political Opinion from Impacts on Your Company

The new administration is pursuing a momentous agenda. When it comes to managing political risk, filter personal feelings from the sustainability of company operations. Managing the fallout of political risk in your work life should be unrelated to your personal life.

Step Two: Recognize Uncertainty is Here to Stay

Uncertainty is and always has been present in the business world; the changes (regulatory and otherwise) brought about by the current administration are just new instances of an age-old problem. It’s simply not possible to assume our environment will become more predictable under any administrative change.

Step Three: Make Your Business More Agile

Managing risk effectively means being able to assess vulnerability and react quickly. Businesses that can’t pivot in the face of an unpredictable, rapidly changing environment will not be able to sustain operations. Compliance should not be your goal; compliance should be a mere byproduct of the achievement of your goals.

The bottom line is that your organization needs to sustain/improve performance, no matter the state of the exterior environment. This means pursuing innovation, not compliance. It means identifying and prioritizing the most important processes – and what might interfere – within the business. Once you have this transparency, you have the tools you need to mitigate and monitor those risks.

2018-09-04T11:25:25+00:00

About the Author:

Steven is a recognized thought leader in ERM, CEO of LogicManager, and co-author of the RIMS Risk Maturity Model. Follow him on Twitter at @SteveMinsky