This is the 10th in a series of articles intended to assist organizations in assessing their anti-corruption programs through the lens of the 10 hallmarks of an effective compliance program as set forth in “A Resource Guide to the U.S. Foreign Corrupt Practices Act” (“the Guide”), jointly published by the U.S. Department of Justice and the Securities and Exchange Commission in November of 2012. This article centers on hallmark number 10:
Mergers and Acquisitions: Pre-Acquisition Due Diligence and Post-Acquisition Integration
There is a well-known maxim in the realm of criminal investigation, as well as psychology:
“The best predictor of future behavior is past behavior.” That is an important lesson in understanding the value – and limitations – of due diligence.
Due diligence is one of those terms that means different things to different people. It used to be that mergers and acquisitions due diligence was an analysis of the finances and legal implications of the acquisition. It has expanded into something much broader and now often includes background investigations of the acquisition target, its key executives/control persons, and critical business intermediaries, including sales agents and distributors, determining the extent to which they are an important part of the business model.
This last part is particularly important if you have an existing third-party anti-corruption process. Neglecting to hold critical third parties of an acquisition target to the same or a similar standard of care as your existing third parties could serve to undermine the efficacy of that program should the deal go forward and those third parties become integrated into the company without first having been vetted properly.
Another important and sometimes overlooked aspect of acquisition due diligence is the performance of an anti-corruption risk assessment. In a perfect world, all acquisition targets have robust anti-corruption programs. In actuality, many small to midsize companies operating overseas do not have any type of anti-corruption program. That is why the performance of a high-level anti-corruption risk assessment is so important. Gaining an understanding of the company’s ownership group, executive team, customer base, distribution channel, sales and marketing, products and services, activities and overall nexus to foreign officials will better position you as a potential acquirer in evaluating the true purchase price, inclusive of any compliance remediation work that may be necessary to properly integrate the entity post-acquisition. Not only will doing an anti-corruption risk assessment on the front end lower your risk of a future bribery violation, it could provide you with additional leverage in negotiating a more favorable purchase price.
The FCPA Guide recognizes that even the most robust acquisition due diligence is based upon limited information and allows for a grace period (although no time period is defined) to integrate the acquired company into the acquirer’s ethics and compliance program and overall control environment. Indeed, the post-integration actions a company has taken factor heavily into whether it will be held liable for the actions of the acquired company. According to the Guide:
DOJ and SEC evaluate whether the acquiring company promptly incorporated the acquired company into all of its internal controls, including its compliance program.
The clear implication of this statement is that simply performing robust due diligence on the front end of an acquisition is not enough. There needs to be an urgency with which the newly acquired entity is brought into alignment with all of the hallmarks and associated controls of your anti-corruption program. Failing to do so can lead to the same types of fines, penalties and market capitalization impact that could result if improper acts of the acquired company were committed by the company itself.
This article is part 10, the final piece in a 10-part series exploring Anti-Corruption and the 10 Hallmarks of an Effective Compliance Program. Each piece in the series is based on a section from a whitepaper published by Protiviti, titled “Viewing Your Anti-Corruption Efforts Through the Lens of the Hallmarks of an Effective Compliance Program,” which is available in full at:http://www.protiviti.com/en-US/Documents/White-Papers/Internal-Audit/Viewing-Anti-Corruption-Efforts-Lens-Hallmarks-Effective-Compliance-Program-Protiviti.pdf.