Essential elements of due diligence

The increasing focus on enforcement of the U.S. Foreign Corrupt Practices Act (FCPA), Canadian Corruption of Foreign Public Officials Act and U.K. Bribery Act, as well as similar global anti-corruption laws, has made conducting pre-acquisition anti-corruption due diligence an essential element of any cross-border transaction, merger or acquisition.

It’s true that local officials in some jurisdictions expect to be compensated for doing their job. A business may see their payments to local government representatives as a cost of doing business — to expedite the granting of a license or permit. Other risks may also include criminal activity, money laundering, export violations, bribery, tax evasion, false financial records, extortion and other activities. On the right is a non-exhaustive list of risk factor considerations.

Under U.S. principles of successor liability a buyer may be liable even if it had no knowledge of or participation in the violation. As such, the U.S. Department of Justice and Securities and Exchange Commission endorse a risk-based approach to conducting pre-acquisition anti-corruption due diligence.

Legally, corporate boards and executives have a fiduciary duty to the shareholders and the company itself to assess and manage risk.

What does risk management involve?

Risk management requires an evaluation of the target’s risk profile, followed by the creation and implementation of a work plan that incorporates ongoing review policies. These plans need to be tailored to the risks or red flags identified, essentially enhancing compliance and ethics policies and programs and internal controls both pre and post closing.

By finding red flags early in the process or later pre-closing allows the acquiring company to renegotiate purchase terms to account for potential anti-corruption issues. If the red flags are prevalent and serious enough they may even suggest cancelling the transaction.

Your investment bankers don’t have the know-how to conduct anti-corruption due diligence; Advanced Compliance Solutions does. We can assist your company to properly identify and manage the risks of an international transaction, enabling you to pursue profitable business endeavors.

Risk Factors to Consider

  • Business Development Does the seller provide gifts or other incentives to encourage purchase, like travel, gifts or entertainment?
  • Compliance Programs Has the seller implemented anti-corruption policies and procedures and if so are they adequate?
  • Geography Does the seller, either by itself or through third parties, operate or conduct business in countries that score poorly on the Transparency International’s Corruption Perception Index?
  • Government Business To what extend does the seller’s revenues rely on government licenses, permits and other authorizations?
  • History Does the seller have a history of suspicions or corruption allegations?
  • Industry Historically has the industry been the focus of heavy anti-corruption enforcement?
  • Third Party Intermediaries How reliant has the seller been on third parties in dealing with government officials for business development efforts?