To protect themselves from breaking  the UK Bribery Act and Proceeds of Crime legislation, those involved with corporate transactions (including mergers, acquisitions or investments) need to ensure that transactions do not involve risks of bribery and corruption. The UK’s Serious Fraud Office (SFO), in January 2012, said: “Shareholders and investors in companies are obliged to satisfy themselves with the business practices of the companies they invest in…. It is particularly so for institutional investors who have the knowledge and expertise to do it. The SFO intends to use the civil recovery process to pursue investors who have benefitted from illegal activity. Where issues arise, we will be much less sympathetic to institutional investors whose due diligence has clearly been lax in this respect”.[1]

Guidance

Transparency International UK has published guidance (the “Guidance”) on anti-bribery due diligence for corporate transactions[2]. The Guidance emphasizes a proportionate approach to the anti-bribery due diligence process based around three overarching considerations:

  1. Anti-bribery due diligence should be applied to all investments but on a risk-based approach, with the level of due diligence being proportionate to the investment and the perceived likelihood of risk of bribery.
  2. In many cases the necessary information for due diligence may not be accessible, such as in acquisition of public companies, hostile take-overs, auctions or minority investments. This does not obviate the need for anti-bribery due diligence, but has an effect on the timing – i.e., it may need to be undertaken post-closure.
  3. A good practice approach characterises ethical and responsible businesses, but is also the most effective means for companies to manage bribery risks across multiple jurisdictions and in a changing legal and enforcement environment.

Following the Guidance should mean that companies comply with the legal requirements in the UK, but also any other jurisdiction that the transaction involves.

What level of due diligence is required?

The level of bribery and corruption due diligence required should be determined using a risk based approach as some targets may be judged to present low risks and require lower levels of due diligence whereas others will have higher risks. A proper assessment of what is proportionate can however only be made if the risks are properly understood. The size of investment should not be a determining factor as small investments can carry disproportionate risks and the material risks attached to bribery may not necessarily reflect the size of the bribe.

According to the Guidance, the key things to look for in anti-bribery due diligence are as follows:

  • 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?

The extent and methodology of the anti-bribery due diligence will depend on the transaction, but could include the following:

  • Discussing the risks of bribery and corruption as well as the measures in place to prevent bribery with management of the target.
  • Visiting and interviewing other actors within the relevant sectors and countries, such as customers, suppliers, industry experts, regulatory authorities, business associations, embassy officials, NGOs. 
  • Completing corporate intelligence and background checks on the target’s business and key owners/directors and management.
  • Examining the target’s anti-bribery programme to assess its adequacy and any risks of bribery.
  • Conducting walk-through tests, carried out to confirm that policies and procedures are effectively implemented. 
  • Reviewing data provided by the target company.
  • Completing a detailed financial review.

It is acknowledged that there are a number of challenges to anti-bribery due diligence. These can include a lack of information being available, time pressure, lack of senior management support and insufficient expertise in the deal team. These challenges must however be overcome if the buyer is to protect itself adequately.

What if bribery or corruption is identified?

If bribery or corruption is identified, this may mean that the target and potentially individuals working for the target, are in breach of the Bribery Act and liable to prosecution and criminal penalties. This liability can pass to the buyer in a corporate transaction. There may also be obligations on the buyer and / or its legal advisors to report such bribery under the Proceeds of Crime Act 2002. If the transaction proceeds and the bribery continues, individuals at the buyer may also become liable.

Identifying acts of bribery through due diligence does not have to be a deal breaker. It however allows investors and purchasers to prepare themselves to deal with it. It may even be possible to agree with the enforcement authorities a grace period, following acquisition, during which agreed mitigation steps are carried out. This may save companies a large amount of money.

Despite the information above, bribery due diligence is often not undertaken, neglected, or allocated insufficient time and resources. Adding bribery and corruption to the scope of due diligence already completed in corporate transactions is relatively simple, quick and inexpensive. It can however reveal significant issues that may otherwise not come to light.