When one company acquires another, it has long been common practice for the purchaser to carry out commercial due diligence upon the target company. However, anti-bribery and corruption (ABC) due diligence is often overlooked in this process, with one fifth of companies not considering it a standard part of their pre-acquisition due diligence.
So why should purchasers carry out ABC due diligence, how much is enough and how it should be carried out?
Why is it necessary to undertake anti-bribery due diligence?
If a target company has conducted its business corruptly in the past (for example, by acquiring contracts through the payments of bribes), the profits or proceeds flowing from those contracts may be considered to be the proceeds of crime.
Without conducting adequate ABC due diligence during the acquisition process, purchasers may unwittingly inherit serious issues, only to discover them post acquisition when it is too late; such as:
- Post-acquisition, the purchaser of a target with the proceeds of crime sitting within it may, under certain circumstances, be vulnerable to prosecution for money laundering offences and/or confiscation of any such proceeds, for acquiring or being in possession of the proceeds of crime (which is a criminal offence under the Proceeds of Crime Act 2002).
- If the purchaser knows of and allows the target’s corrupt activities to continue post-acquisition, then the company itself, and any senior managers who turn a blind eye to the conduct, may be liable under the Bribery Act 2010 for bribery offences.
- If the target has not implemented adequate anti-bribery policies and procedures within its organisation, then it may be vulnerable to prosecution for an offence of “failing to prevent bribery” under section 7 of the Bribery Act 2010, for any corrupt conduct carried out by the target post July 2011. This offence is punishable by an unlimited fine.
An additional benefit to conducting pre-acquisition ABC due diligence is that identifying whether bribery has taken place in the target, and/or whether its policies and procedures are adequate, may give the purchaser a lever with which to renegotiate the purchase price. Conducting adequate ABC due diligence on the target will put the purchaser in a better position to defend any prosecution of the company under the Bribery Act.
What ABC due diligence is necessary in an acquisition?
The level of ABC due diligence required in any acquisition depends on the target’s perceived bribery risk. There is no one-size-fits-all approach, and a purchaser will have to continually reassess what level of due diligence is required, depending on the information gathered during the process.
When assessing the risk, the size of the target will have some weight, but is not the only consideration. Other factors purchasers should consider include:
- The target’s industry and geographical reach;
- Whether it has regular contact with governments or public officials;
- Whether it has a high-risk business model, for example, it uses intermediaries or agents; and
- Any historic or current allegations of corruption against the target.
How should ABC due diligence be carried out?
The approach to ABC due diligence should be proportionate to the risks that a target faces. Purchasers should consider adopting the following measures:
Compliance officer on the job
It is essential that a suitable compliance advisor is part of the acquisition team involved in the due diligence process - someone able to use his or her expertise to identify areas of risk that may be particularly problematic for the purchaser and then offer guidance in ways to mitigate the risk.
Pre-approach review of the target’s corruption risks
Prior to engaging with the target, the purchaser’s senior management should undertake a high-level review of the target’s potential bribery risks in order to establish the scope and depth of the due diligence that needs to be carried out. This review should be done using publicly available information in order to identify potential red flags and enable the purchaser to tailor its subsequent enquiries.
Interview the target’s management
The guidance to the Bribery Act makes clear that the “tone from the top” (the attitude of senior management) to ABC compliance should be the starting point for any due diligence enquiries. An interview with the target’s management will help the purchaser evaluate the target’s approach to bribery and corruption and assess the bribery risk and any specific areas that require further investigation.
Q&A session with the target’s compliance officer
Certain issues may have arisen out of the previous steps that require further investigation. A good place to start with additional probing is a meeting with the target’s compliance officer, in which the compliance officer can comment on any issues unearthed by the purchaser. In order to maximise the benefit of this meeting, it should not be a legal meeting with detailed questions prepared beforehand, but rather an informal discussion.
Having performed the steps above, the deal team should have a good idea of what further steps may be required to mitigate the risks found. What further steps are required will depend upon the risks discovered during the due diligence process, but they may include analysis of the target’s ABC policies and procedures, due diligence on the target’s third parties, World Check searches on key personnel, visits to the sites where the target does business or further meetings with the target’s key personnel.
How to proceed in light of due diligence findings
Once the ABC due diligence has been completed, the purchaser will have to consider its next steps. The options are varied, but could include proceeding with the transaction as agreed, negotiating a price adjustment or putting in place additional contractual protections, such as specific warranties and indemnities. Equally, if the risks uncovered are too high, it may be appropriate to walk away from the deal.
However, it is important to note that warranties and indemnities are unlikely to assist in avoiding penalties from a law enforcement agency if the purchase goes ahead. Additionally, even if a purchaser does walk away, it must consider whether it has acquired information that requires it, under money laundering legislation, to disclose its findings about the target to the authorities.