Diligencing corruption risk in M&A

Global economic growth, convenient travel and technological evolution has propelled cross-border M&A to new heights as companies look to expand and enter into new markets. And as more deals take place, governments around the world are stepping up to tighten commercial conduct regulations. In Europe alone, an estimated €990 billion is lost in the economy every year due to bribery activities. Global anti-corruption enforcement is at its peak, and it is unlikely to recede any time soon.

The number of investigations under the U.S. Foreign Corrupt Practices Act (FCPA), together with the number of prosecutions and enforcement actions taken by the U.S. Department of Justice (DOJ) and the U.S. Securities & Exchange Commission (SEC), has increased dramatically in recent years. Huge fines are being imposed. Investors have also witnessed the extra-jurisdictional reach of the UK Bribery Act. And, on the other side of the world, China is carrying out a country-wide anti-corruption campaign against so-called “tigers and flies,” or corrupt state officials. The Chinese government is also closely working with foreign countries to recover assets gained from illicit activities.

Anti-corruption is now a standard of general business conduct. It is critical to comply with the strict rules of engagement, especially in high-risk markets like China.

Costs and risks

There are several critical reasons for conducting anti-corruption due diligence when pursuing an M&A deal:

• Any existing contracts of the target company obtained through bribes may be legally unenforceable if discovered, thus impacting future business.
• Discovery of corrupt practices can impact the business model, including changes to customers, suppliers and use of certain third parties.
• Any business obtained illegally may be lost when bribe payments are stopped.
• Internal investigations in connection with regulatory inquiries can require huge expenses and a large amount of time.
• The cost of implementing an anti-corruption program to align standards with regulatory requests and internal compliance objectives can be very high.
• Other risks include potential criminal charges against management who were involved in illegal conduct.
• Negative findings could also hurt the acquirer's reputation and future investment prospects.

The high costs associated with undertaking anti-corruption due diligence may impact the accurate reflection of a deal's “true value”.