Economic sanctions and anti-corruption issues have caused nearly two-thirds of companies in the U.S., Canada and Mexico to renegotiate or pull out of planned business relationships, mergers or acquisitions over the last three years, according to Deloitte’s annual “Look Before You Leap” survey of corporate executives, investment bankers, private equity executives and hedge fund managers.
Similarly, 62 percent of survey respondents pointed to issues related to potential violations of economic and trade sanctions, such as known or suspected dealings with Office of Foreign Assets Control (OFAC) sanctioned entities, as the cause for their companies to renegotiate or pull out of a deal over the past three years. The number of financial services industry respondents reporting economic and trade sanctions issues impacting a deal was higher at 64 percent.
Further data from the survey revealed that 21 percent of respondents identified a lack of transparency or unusual payment structures in contracts as reason for renegotiating or terminating deals, while 18 percent renegotiated or pulled out due to concerns regarding the target’s use of agents, consultants, distributors or third parties to obtain or facilitate business.
“Increased governmental crackdowns on corporate corruption and foreign bribery issues are dramatically changing the playing field for potential transactions. As such, companies are either reevaluating the costs and benefits of these deals, or are outright scuttling those that present unacceptably high risks,” says Ed Rial, leader of Deloitte’s Foreign Corrupt Practices Act Consulting practice.
The survey also revealed that during the last three years, 61 percent of survey respondents noted that their companies have pulled out of business transactions as a result of information identified about the target company or its principals during compliance and integrity-related due diligence. Almost two-thirds (60 percent) of respondents have adjusted deal pricing to reflect compliance and integrity-related issues. Additionally, risk concerns involving integrity and compliance have increased 85 percent either significantly (41 percent) or somewhat (44 percent) over the last three years.
“Respondents placed a great deal of importance on the strength of the integrity and reputation of potential business partners or acquisition targets, as well as the ramifications for their own organizations. In today’s environment where word travels quickly, maintaining one’s reputation, and engaging in business deals with upstanding organizations, is of utmost importance,” states Wendy Schmidt, leader of Deloitte’s business intelligence services practice.
Of the 64 percent of financial industry respondents who identified Foreign Corrupt Practices Act (FCPA) and anti-corruption issues that caused their company to renegotiate or pull out of a deal, 25 percent identified lack of transparency or unusual payment structures in contracts compared to the 21 percent of overall respondents.
Of the 64 percent of financial industry respondents who identified economic and trade sanction issues that caused their company to renegotiate or pull out of a deal, 35 percent reported weaknesses in due diligence, screening and compliance programs, including quality of data and effectiveness of screening controls compared to 32 percent of overall respondents.
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