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Government investigations and regulatory compliance are increasingly concerning issues for businesses operating in the CEE market. This is according to the latest ‘Central & Eastern Europe: Risk & Resilience’ report, published by international law firm CMS and Legal Week, which canvassed the views of more than 40 in-house counsel on the region’s business potential and how to mitigate risks.

More than half of respondents (53%) highlighted data protection and cybersecurity as being the primary challenges facing the region, while regulatory compliance ranked as the third most concerning issue for businesses in CEE, behind product liability. In fact, more than half of respondents said the risk posed by certain countries was so great that they would consider halting expansion into those jurisdictions.

Malgorzata Surdek, CMS managing partner in Poland and CEE dispute resolution head, comments:

“A number of businesses operating in CEE, particularly financial institutions, are feeling the burden of increasing compliance requirements and the pain of numerous regulatory investigations. On top of complying with the tsunami of regulations flowing from Brussels, financial institutions operating in CEE also have to deal with the hyperactivity of various local regulatory and enforcement agencies.”

Bid rigging remains key concern

Public Procurement also featured as a key concern among in-house counsel, who regard infringements such as bid rigging as significantly problematic in doing business in the region. In response, Governments and Competition Authorities across CEE have been taking active steps to eradicate this destructive practice, primarily focusing their attention on sectors such as construction, IT and healthcare, though smaller industries and players are also facing investigations. CMS partner and head of commercial, regulatory and disputes in the Czech Republic, Tomas Matejosky comments: “Since the prevention of public procurement cartels can lead to significant savings in government spending, competition authorities are likely to continue to increase their vigilance in this area in the future.”

Hungary seen as riskiest country in CEE

Looking at risk from a country perspective, Hungary came out on top of the table with 19% of those surveyed ranking Hungary as the most problematic country in CEE. The Czech Republic ranked second at 14%, despite Transparency International’s Corruption Perceptions Index ranking the Czech Republic highest in the region, while Bulgaria and Romania ranked jointly in third place with 11%, followed by Albania (8%) and Poland (8%). Reasons cited by respondents included “politics”, “poverty”, “lack of sophistication” and “intellectual property risks.”

The Hungarian government’s implementation of Europe’s highest banking levy on the foreign-owned sector, and its policy to increase Hungarian ownership of the banking sector to above 50%, has seen many foreign investors categorise the country as one of the least business-friendly CEE countries.  Erika Papp, CMS’ head of banking in Hungary says: “Hungary’s changing financial regulatory laws do not give great certainty for foreign investors. Those banks who are already here, are carefully complying with the regulations and feel that they must have a strategic presence here. But those banks who do not have operations are not likely to decide to invest in Hungary this year.”

Opportunity and resilience

Although the findings from the report highlight various challenges, respondents agree that risks will not dramatically deter interest in the region. CEE continues to outperform many establish economies and is a preferred hub of business for many industries.

Managing Director of CEE and CMS partner Dora Petranyi, comments: “Undoubtedly, some CEE countries are closer to the sunlit uplands of corporate well-being and opportunity than others. There naturally needs to be consideration of which countries are most appropriate for particular sectors. But the business potential of CEE outweighs the risks; investment and interest are increasing year-on-year as global companies continue to see the advantages and opportunities the region offers.”

She adds: “For legal teams to build resilience into their risk management and compliance infrastructure is the same in CEE as it is anywhere – preparation is everything. To prepare is to protect – and there is a lot of protect these days as we see so many businesses thriving and new opportunities arising every day. The region has a lot to play for in the coming years.”