With Cuba poised to open up to U.S. investment, it may be tempting for companies to jump in without testing the water.

But first-mover advantage will not guarantee success —in fact, according to a group of risk management experts who spoke at the recent Cuba Opportunity Summit, it could lead to disaster if firms do not have strong compliance programs in place.

“Like any emerging market or any new market that a company wants to go into, there’s always opportunity and there are threats for businesses,” said Glenn Ware, partner and practice group leader for anti-corruption, corporate intelligence and strategic threat management at PwC. “For example, there are labor issues, there are political issues, there are corruption risks and supply chain risks.”

Ware made his comments during an interview on the Knowledge at Wharton show on Wharton Business Radio on SiriusXM channel 111. He also moderated a panel on the topic at the Cuba summit that featured Natalia Shehadeh, chief compliance officer for Weatherford, Raj Chatterjee, chief risk officer for Tishman Speyer, and William Jacobson, a partner at the law firm, Orrick, and a former assistant chief in the fraud section at the U.S. Department of Justice. The conference was sponsored by Knowledge at Wharton, The Lauder Institute at Wharton and Momentum Event Group.

“You’re worse off if you go in there, mess things up and trip over wires than if you give up a little bit of the upside …before going in.” –Raj Chatterjee

“It is people [in the risk and compliance space] who bring up the notion of first-mover disadvantage,” Chatterjee said. “You have to be deliberate and considered in making that approach. You’re worse off if you go in there, mess things up and trip over wires than if you give up a little bit of the upside …before going in.”

The First Step

As companies look toward a possible end to the U.S. trade embargo with Cuba, leadership needs to craft a detailed plan to enter the market. Should a firm fly solo in setting up operations? Or does it need to seek a partner already on the ground?

“Maybe there’s a business, a small business operation that’s operating from a country that’s been in for a while,” Ware noted. The entering company benefits because its venture partner has already overcome many of the obstacles to setting up shop, he added, while the other firm gains because the entering company can help it scale.

But before choosing the right counter party, firms need to look deeply at the risk profile of potential partners, the panelists said. In addition, leadership must also have a plan in place to constantly reassess the partnership and its activities.

“Most U.S. companies don’t have an existing relationship with people on the ground in Cuba,” Chatterjee said. “So you really have to get comfortable with getting into bed with someone and not just jump at the first person out there.”

Jacobson noted that U.S. companies looking to do business with Cuba will need to thoroughly vet and employ outside contractors to aid with issues such as customs and procuring work visas —two arenas that are “rife with corruption” in many places around the world. “It’s not just the U.S. regulators you need to worry about; the multi-level development banks and their regulations have huge implications for companies,” Jacobson pointed out. “They can put them out of business entirely.”

If the embargo is dropped, the U.S. government and national and international development groups will likely encourage U.S. businesses to explore opportunities in the Cuban market — but Jacobson and Chatterjee warned that firms should not assume that this is a stamp of approval to play fast and loose with compliance. “There is no sort of immunity just because a bank or the U.S. government is pushing it,” Jacobson said.

In addition to assessing the risks of potential partners or contractors, companies should also look inward, Shehadeh said. “Companies have very short-term memories and governments often have very long-term memories,” she pointed out. “Enterprises need to assess what could be the skeletons from the past. If you did business with Cuba in the past, maybe you fled the country, maybe you left people unemployed in the country, maybe you left debts.”

“There is no sort of immunity just because a bank or the U.S. government is pushing it.” –William Jacobson

A thoughtful approach to risk and compliance issues is also how a company can prove to the Cuban government that it is the kind of firm officials want operating there, Shehadeh noted. “Getting it right on entry is how you seize the competitive advantage,” she said. “There aren’t that many emerging markets left nowadays.”

Risk vs. Reward

How much risk a company is willing to take on also affects how quickly it is able to scale in a new market like Cuba. Some companies operate in high-risk markets in a very regulatory-compliant matter and do very well,Ware pointed out. “Some of the key features of that — is there high demand? Is the product unique, such that company can insure that its counter measures, its controls, will withstand the risk demands that may be placed on them? Very valuable services that are in high demand that civil society needs can do very well in high-risk markets.”

While the Cuban market has been cut off to the U.S. for decades, a number of other countries are already doing business there. “One thing that I would ask anybody looking into going to a new market is — your competitors there, are they having success? Is there market share to be captured?”Ware said. “If the market is really saturated, that means you’re going to have to take market from a competitor. How are you going to do that?”

Jacobson pointed out that Cuban companies may not be prepared for the number of regulatory concerns and constraints that U.S. firms will bring to the table. “Think about all the countries that were able to get into the Cuban market: Russia, China and Venezuela. Those are not the countries with the best business practices,”he said. “I hate to stereotype, but we know it happens. And that’s a problem for U.S. companies that have to play by a different set of rules.”

“Getting it right on entry is how you seize the competitive advantage.” –Natalia Shehadeh

Ware noted that while the Cuban market presents some unique challenges, there are plenty of aspects of the due diligence process that are the same no matter what country a business is trying to enter. “The part that is the same is that you’re assessing all those components,”he said. “When you’re entering a new market, obviously you know your product. You want to know what the appetite for your product is, the demand, who the buyers are. And then you want to look at the risk lens and the threat lens.”

Also important, Ware added, is that companies have an exit strategy if things go bad. “Maybe the opportunity didn’t emerge like [a business] thought it would: Now what?”

Ware said that risk spending today is being driven not only by companies entering new markets, but also by federal regulatory laws, such as the Foreign Corrupt Practices Act. With violators now facing fines in the hundreds of millions of dollars, many leaders are highly motivated to direct their funds toward ensuring that the firm is never on the receiving end of one.

“Companies that are routinely operating in foreign markets kind of get the balance. The concern that we would have is for the new entrants,”Ware noted. “Companies that are very successful domestically realize they have to look at new markets. But they might not have the balance correct. Small- and medium-size businesses that perhaps have a great product that would work in a specific market might not have the money available to do it.”

Panelists noted that the need for risk assessment in Cuba and for markets all over the world is a constant, not something that can be addressed and abandoned the minute after a firm opens operations in a new locale. Initially, however, setting the right tone may come down to just one person.

“You’d be surprised about how it only takes one person with the right message to look your government counterpoint in the eye and say, ‘This is how we do business,’”Shehadeh noted. “It doesn’t take legions if you can get that strength of message from the person who is going to be the first boot on the ground doing the outreach.”