Avoiding the Taint of Corruption

by Grant Jamieson, Mark Bowra, Eugenia Lo and Katy Wong, KPMG, 05 January 2010

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topics:
Law and Compliance Risk Management

tags:
FCPA Foreign Corrupt Practices Act KPMG OECD Anti-Bribery Convention

The Foreign Corrupt Practices Act (FCPA) is a United States act, but it applies to any organisation with operations in or transacting business through the U.S. It is being strictly enforced and liability for acts in contravention of the law now covers not only corporations and executives in charge of operations, but also investors.

The U.S. is leading the way with respect to enforcement and prosecution of bribery and corruption, but other countries that are signatories to the OECD Anti-Bribery Convention are also focusing on regulatory efforts to meet the standards they committed to under the convention. (The 38 countries that have ratified the convention include Australia, Japan, Korea, New Zealand and the European Union states).The increased focus on enforcement globally along with a trend to hold individuals liable, either criminally or civilly (as was the case where executives settled with the U.S. Securities and Exchange commission under a theory of Control Person Liability with respect to a foreign operations’ books and records), has focused investors’ minds.

In addition to the trend of prosecuting individuals for violations of bribery and corruption laws, penalties and fines being assessed against individuals and organisations are now commonly reaching into the tens of millions of U.S. dollars, and in some cases even more.

Organisations that incur penalties and fines for non-compliance with the FCPA may also find that they suffer from a loss of investor confidence, loss of revenue based on illegal conduct that U.S.-owned companies cannot condone, and, in some instances, indictments or convictions that put the acquirer at risk of being barred from doing business with federal governments.

FCPA Issues in Due Diligence

In the context of M&A, acquirers need to assess the existence and awareness of systems and controls over the following areas:

expense claims, payments and petty cash disbursements
use of agents and outside consultants
entertainment and gifts provided to third parties
contracting with government bodies
fraud response mechanisms
identification and monitoring of relationship development and maintenance with state-owned enterprises and their employees
accurate recording of transactions within the target’s books and records
record keeping protocols in respect of transactions recorded in the books and records.

Based on the information learned through due diligence, a company may decide that the corruption and/or liability risk is tolerable. However, it may decide that the risk is so high that the value of the relationship is significantly reduced. In many instances, the company can then address corruption risks through appropriate contractual rights and contingencies with the counterparty. In other instances, it may need to undertake further due diligence (or an investigation) and to seek assurances from the US Department of Justice regarding possible successor liability.

In some cases, an acquirer may conclude that it is simply too costly (or impossible) to change the target’s embedded culture of corruption.

A Unified Approach

Assessing FCPA- related risks is an important step, but one that should not be conducted in isolation from more conventional financial and tax due diligence procedures. Much like these other steps, the findings can play an important part in determining successor liability, revenue estimates and value attributed to goodwill. Fully assessing FCPA risks can require the involvement of legal counsel and forensic accounting resources, alongside conventional Transactional Advisory support.

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