Anti-corruption enforcement has put anti-corruption due diligence on the agendas of leading corporations when considering acquisitions and investments. Transparency International UK, the UK arm of Transparency International (TI), which is the global, non-governmental, anti-corruption movement, has published a guidance paper aimed at businesses and their advisors entitled Anti-Bribery Due Diligence for Transactions.
The issue of anti-bribery is not restricted to UK businesses. The guidance draws attention to the penalties that await directors of international companies who overlook anti-bribery due diligence. Government agencies are handing out ever-increasing fines (companies settling FCPA-related charges in 2010 paid US$1.8 billion to the Department of Justice and the Securities and Exchange Commission compared with US$641 million in 2009) to businesses that benefit from corruption-related activity. Ignorance is no excuse; the UK’s Serious Fraud Office (SFO) has stated that it won’t show sympathy to “institutional investors whose due diligence has clearly been lax in this respect”.
Anti-corruption diligence is, however, far from standard practice. As Ernst & Young’s 11th Global Fraud Survey 2011 found,
Despite the many recent examples of the perils of ignoring the fraud and corruption dimension of these assessments, a fifth of companies still do not consider it as part of M&A due diligence, and a quarter never consider it in a post-acquisition review
Unsurprisingly the guidance identifies a series of implications that will arise when failing to undertake adequate due diligence—such as reputational damage following an investment or acquisition—and draws attention to the unreliability of corrupt business partners whom, the guidance warns, could be obligated to dubious organisations or individuals, risking further damage. Overall, however, the guidance takes a “real-world” stance, stressing that due diligence should be “considered on a proportionate basis” and “commensurate with the bribery risks.” It’s a sensible approach, possibly intended to stave off the overreaction that greeted the introduction of the Bribery Act.
One of the key elements of effective, proportionate due diligence is starting it early, so the risks can be identified, understood and assessed. Even when discussing the importance of timing, however, the guidance maintains its realistic approach. It acknowledges that the information necessary for thorough due diligence may not be available before the transaction is completed, and advocates that in these circumstances, due diligence is undertaken immediately after closure.
Geographical and sector risk
Despite being the most sensible aspect of the guidance, proportionality is also possibly the most difficult to pin down. The SFO (or any other agency) is unlikely to be sympathetic to a claim that due diligence was proportionate if any wrongdoing is identified by an external body after closure of the deal. The guidance suggests that businesses make full use of TI’s risk-mapping resources such as the Bribe Payers Index and the Global Corruption Barometer to identify the potential geographical and sector risk of a business being involved in bribery. It also suggests asking the following questions:
- Is the target dependent on operations in countries where corruption is prevalent?
- Does the target operate in sectors known to be prone to high risk of bribery?
- Are competitors suspected to be actively using bribery in the target’s markets?
Business model risk
Some business structures are inherently more prone to corruption than others. Decentralised businesses and those that rely heavily on outsourcing have a higher risk factor, as do those that focus on the sectors that are known to be high-risk, such as construction. The guidance also makes the point that businesses with no anti-bribery or anti-corruption programme in place are inevitably likely to be at higher risk.
The guidance makes some suggestions as to how companies can assess the level of threat they may be exposing themselves to:
- Has bribery taken place historically?
- Is it possible or likely that bribery is currently taking place?
- If so, how widespread is it likely to be?
- What is the commitment of the board and top management of the target to countering bribery?
- Does the target have in place an adequate anti-bribery programme to prevent bribery?
- What would the likely impact be if bribery, historical or current, were discovered after the transaction had completed?
If the due diligence uncovers evidence of bribery, it doesn’t have to mean the end of the transaction. The prospective purchaser is usually in a strong position to negotiate a grace period with the authorities while the target is brought in line. Although the authorities may be willing to provide an indication of their views, it must be recognised that there may be consequences for past criminality.
To make a due diligence process as effective as possible, the guidance notes that it helps if the purchaser already has in place a robust anti-bribery programme and consistent, committed buy-in from management. We’ve been here before: any anti-corruption initiative is only as effective as the people implementing it. Management has to drive a programme that is understood and disseminated through the internal team and external partners, which includes prospective targets.
The guidance provides a six stage due diligence process and stresses that it needs to start at the same time as the merger, acquisition or investment process to be most useful.
- Initiating the process
- Initial screening
- Detailed analysis
- Post-acquisition due diligence
- Post-acquisition integration
The guidance suggests that stage 3—detailed analysis—is undertaken by specialised, external advisors to ensure that nothing is missed. Stage 5—post-acquisition due diligence—is recommended even if the parties feel the pre-acquisition due diligence was thorough.
Fraud and corruption due diligence on M&A transactions and on investments should be the norm: there are many examples of pre-acquisition corruption issues resulting in penalties; and the SFO has already successfully targeted dividends representing the proceeds of a corrupt contract. The TI publication provides realistic guidance on this important part of due diligence and should encourage those still not carrying it out that they need to, for their own protection.