Cross Border Mergers & Acquisitions: Anti-Corruption Issues

Cross-border mergers and acquisitions can provide tremendous business opportunities for companies looking to expand globally. Reduced labor and operational costs, new technology and vast new markets for existing products are just some of the benefits companies look to take advantage of when considering entering new geographical areas. However, in analyzing cross-border deals M&A professionals must be conversant with the risk factors associated with the vigorous and cooperative anti-corruption efforts being taken by regulators around the world. While these anti-corruption efforts are increasingly legislated through many jurisdictions, the most significant attention remains focused on the efforts undertaken by the United States in this area.

Foreign Corrupt Practices Act

The U.S. Foreign Corrupt Practices Act of 1977, as amended (FCPA), [1] was passed following Congressional hearings into international bribery of foreign public officials by dozens of major U.S.-based issuers.

The FCPA is a statute that prohibits bribery of foreign public officials and requires issuers to maintain accurate books and records and to devise and maintain systems of internal accounting control. American regulators have consistently moved in a more aggressive fashion to expand the reach of this statute to an ever-increasing reach over “foreign officials” and to extend the jurisdictional reach to foreign nationals. In addition, other jurisdictions have also increased their attention to both legislation and enforcement regarding anti-corruption efforts. Lastly, there have been increased cooperative efforts between various jurisdictions in order to have a more cooperative, comprehensive global anti-corruption regulatory effort.

Enforcement of the FCPA is the responsibility for both the Securities and Exchange Commission (SEC), which enforces the civil provisions of the statute and also the Department of Justice (DOJ), which enforces both the criminal and civil components of the statute against companies, U.S. citizens, nationals and residents, and foreign nationals. Over the last decade enforcement of anti-corruption activity has sharply increased, and most legal publications that address regulatory actions cover FCPA matters on an almost daily basis.

A Resource Guide To The US Foreign Corrupt Practices Act

In November 2012, in a joint effort, the DOJ and SEC issued the long-anticipated A Resource Guide to the U.S. Foreign Corrupt Practices Act. [2] Several topics of interest to M&A professionals were addressed. The Guide established that appropriate and thorough due diligence during the acquisition stage was essential and would be one of the factors that would be considered in determining whether any enforcement action was ultimately taken if a violation has discovered. The Guide also referenced Opinion Release 08-02 as an outline of steps that could be taken in order to minimize the risk of enforcement action in those instances when it is not possible to conduct proper due diligence prior to the acquisition on account of time constraints or other factors

The Guide recognized that when an acquisition occurs the acquiring company also acquires potential liabilities associated with various regulations, contracts and statutes and that successor liability is a recognized component of corporate, civil and criminal law. The risk to successor companies increases dramatically when the successor company directly participated in the violations or allows them to continue post acquisition, while the risk can be minimized through proper attention to any identified “red flags.”

The Guide also provided some practical tips to reduce FCPA risk in mergers and acquisitions. One option would be for the acquiring company to obtain an opinion under the Opinion Procedure that DOJ has set up, such as the previously mentioned Release 08-02. This option has many consequences, including inserting regulators into the M&A procedure, which may result in more stringent requirements than would be necessary in most instances. DOJ & SEC acknowledge that most M&A transactions would not require an opinion request and instead suggest that the acquiring company (1) conduct thorough FCPA and anti-corruption due diligence; (2) ensure the acquiring company’s code of conduct, compliance and anti-corruption policies and procedures are implemented as soon as possible; (3) ensure proper anti-corruption training occurs for all employees, vendors, agents and business partners; (4) conduct an anti-corruption audit as soon as practicable; and (5) disclose any corrupt payments discovered.

Due Diligence From A Buyer’s Perspective

An acquiring company has numerous reasons for ensuring that appropriate due diligence is conducted in the M&A transaction. Companies that conduct effective anti-corruption due diligence on the acquisition target are able to more appropriately and more accurately evaluate the target’s “real” value minus any inflated revenues potentially associated with corruption activities. Additionally, the acquiring company can ensure that the costs of the bribery, including investigative costs, fines, penalties, costs for enhanced training and compliance and reputational damage are borne by the selling company in the sale price or through indemnification agreements.

Anti-corruption due diligence can be an involved process and in certain instances it may be prudent to involve anti-corruption experts to help sort out the issues. Some of the key considerations to contemplate in the context of anti-corruption due diligence include: (1) Transparency International’s Corruption Perception Index ranking of the country’s corruption risk; (2) any business or family relationship between employees, vendors or consultants to foreign officials; (3) ensuring that all contract provisions are consistent with standards of that particular industry and do not provide an inappropriate benefit to any foreign official; (4) ensuring there is an economic purpose for any transactions; (5) reviewing the reasonableness of and types of payments, as well as determining the recipients of payments; (6) reviewing the amount of business the entity has with the foreign government; and (7) reviewing any potential concerns, including a lack of transparency; referrals to this company from foreign officials; subcontractors without apparent justification for their need; and any reluctance to sign warranties of compliance with FCPA and other related laws.

In conducting this due diligence it is important to be mindful of who is gathering this information and how it is shared among the broader team in the due diligence process. Given that there may be violations of law underlying this investigation, it is important to proceed with a measured plan and consider things like legal privilege surrounding the information that is gathered. In this vein it may be prudent to involve a litigator or compliance expert who is likely more familiar with these issues then the typical members of the M&A team.

While there are numerous “checklists” associated with due diligence in various industries, the key is to ensure a thorough, risk-based due diligence process is undertaken and a “check the box” approach is not utilized. Successor companies face the threat of civil and criminal liability should they not take seriously the risks associated with anti-corruption matters.

Due Diligence From A Seller’s Perspective

For many of the same reasons a buyer is desirous of learning what risk they may be acquiring, a selling company should also know those same facts. It is important to note, that post acquisition, the decision as to whether this activity that occurred on the target’s watch is revealed to the regulators is no longer a decision of the seller. The incentive for the buyer is significantly different from that of the seller regarding the disclosure and the seller would be best served to know the potential risk and to have taken all appropriate steps while still controlling the situation to minimize both their risk and exposure.

Additionally, the DOJ and SEC are much more likely to look at enforcement action against the selling company if they had been alerted to the potential problem during the acquisition process and elected not to self disclose and not conduct a thorough investigation of the potential concerns, instead hoping to simply sell the problem to the buyer.

Conclusion

The practical realities are that the DOJ and SEC have significant challenges in prosecuting activities that occur overseas, absent corporate cooperation. Accordingly, a risk and reward system has been developed in anti-corruption enforcement efforts, although discussions continue to evolve surrounding a better reward system, such as an amnesty program similar to the Anti-Trust program. While subjective opinions vary on the actual benefits that are sometimes provided when a company voluntarily discloses and is still sanctioned with million dollar fines, DOJ is firmly committed to investigating and prosecuting foreign bribery wherever it occurs and they have made clear that the enforcement actions undertaken when there has been no voluntary disclosure will be significantly different. [3]

Endnotes:

[1] U.S. Foreign Corrupt Practices Act of 1977, 15 U.S.C. §§ 78dd-1 et seq.
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[2] http://www.justice.gov/criminal/fraud/fcpa/guide.pdf
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[3] http://www.justice.gov/criminal/pr/speeches/2010/crm-speech-101116.html
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