Industry May 2014

Anti-bribery and corruption considerations in M&A

Despite recent geopolitical shocks, continued low growth in mature markets, and slowing growth in the BRIC (Brazil, Russia, India and China) territories, many people believe the global economy has turned for the better.

Sixty percent of executives think the global economy is improving, according to a report released by EY in April 2014. Confidence in corporate earnings is high, and stock market stability is showing similar conviction.

The spread of “hot” locations globally—the top five investment destinations are the US, the UK, Germany, India and China, followed by Brazil, Ireland, Japan, Singapore and the UAE—shows that positive market signs are not concentrated in any one region.

Unethical behaviour persists
Companies contemplating merger and acquisition (M&A) deals will usually perform due diligence, including that of an operational, financial, tax and legal nature.

These tasks help determine if synergies exist, evaluate the business proposed as an acquisition or merger partner, and contemplate the subsequent merger integration and management of the acquired business.

Anti-corruption due diligence, however, is viewed by some as a “check-the-box” exercise, despite the fact that more than 50% of respondents from emerging markets surveyed in EY’s 13th Global Fraud Survey, released in May 2014, said that corruption was widespread.

Anti-corruption due diligence performed at the 11th hour may be rushed and insufficient, giving rise to risks later. It is thus worrying that under 30% of businesses are always or very frequently conducting anti-corruption due diligence in their M&A process.

The primary reasons to perform anti-corruption due diligence are to assist management in identifying potential anti-corruption risks; avoid inheriting liabilities and overpaying for businesses built on corruption; and assess the target company’s anti-corruption compliance framework.

Through this process, management will also be able to develop a robust anti-corruption compliance programme to address corruption risks specific to the target and smoothly integrate the target company.

Stages to the typical transaction timeline include (1) strategic and pre-transaction planning, (2) due diligence activities, (3) negotiation and execution, and (4) post-close undertakings. Anti-corruption due diligence typically follows a four-phase approach, aligned with the transaction timeline.

The first stage generally involves anti-corruption risk assessments, comprising background searches, high-level procedures including potential interviews to evaluate general and company-specific corruption risk factors, and analysis of the target company’s policies/ procedures to determine the anti-corruption measures in place.

The second stage, anti-corruption due diligence, generally involves interviews with key personnel at the target company, transaction testing, background checks on affiliated companies and senior executives, and electronic data reviews.

Forensic data analytics should be used to support the due diligence, as deal-breakers are unlikely to surface through high-level reviews. If red flags are identified, enhanced procedures such as further detailed transaction testing and a deeper analysis of information can be performed.

During the third and fourth stages, the post-closing compliance programme and policies/procedures may be developed. Additionally, a training programme related to anti-corruption compliance is often developed for a smooth integration.

The US Department of Justice and the US Securities and Exchange Commission have demonstrated their shared commitment to fighting corruption in M&As through their vigorous enforcement of the Foreign Corrupt Practices Act (FCPA) and joint release of A Resource Guide to the U.S. Foreign Corrupt Practices Act.

The guide underscores the US government’s expectation that pre-acquisition FCPA due diligence should be conducted on deals, and highlights how appropriate FCPA due diligence and post-acquisition compliance efforts can contribute to its decision not to prosecute a successor company for a pre-acquisition violation.

Companies embarking on acquisitions should take note, and make anti-corruption due diligence an integral part of their due diligence process.