Bribery schemes are often complex and structured so as to evade detection. There are many examples of companies which have paid bribes, often through middlemen or intermediaries, to government officials to obtain licences, to obtain a business advantage, to move equipment through customs or even in some instances to impede the access of a competitor to a particular jurisdiction or market. If the target’s reliance on such practices is not uncovered before completion, a buyer’s valuation of a target could be significantly over-inflated. Whilst the current scandal unfolding at world football’s governing body, FIFA, did not arise in the context of an acquisition or sale process, it does serve to highlight two key issues that are relevant to M&A practitioners.
Firstly, the hidden actions of a select few can have a severe negative impact on the reputation and value of an organisation. Secondly, regulators are willing to examine conduct that stretches back beyond the normal three to five years that would be picked up during typical buy-side pre-acquisition due diligence questions (the initial round of FIFA indictments unveiled by the US Department of Justice (US DOJ) charged defendants with conduct which took place as long ago as 1996). Accordingly, buyers need to appropriately scope their due diligence methodology to deal with these challenges to ensure the methodology reflects the risk presented by the target, the transaction and the jurisdictions in question. No due diligence exercise can provide a buyer with absolute certainty, but following a proportionate strategy can put a buyer in the strongest position to protect deal value.
When considering a low risk acquisition, enquiries can be focused on assessing whether bribery is a known or likely risk factor. This may involve a high-level review of the target’s anti-corruption programme as well as a series of follow-up questions to help identify any structural compliance weaknesses or prior instances of misconduct.
If, on an initial assessment, the transaction is rated as higher risk, buyers ought to scale up the due diligence workstream and conduct a deeper analysis. The scope of enquiries may focus on how the target’s compliance infrastructure and culture works in practice, its third party due diligence procedures, how robust its financial controls are, its human rights history etc. In the context of an acquisition where the target relies heavily on government licences or permits (such as telecoms, extractive industries, healthcare etc.), there will be two key areas of diligence: (1) a review of the material licences of the target’s business, including the circumstances of the award and maintenance of such licences; and (2) an examination of the nature of ongoing interaction with government officials as well as regulatory bodies. The two issues are often closely intertwined. Ultimately this means compliance due diligence will need to be wider than purely focusing on the target, and extended to cover the parent or selling entity. To the extent the parent has conducted any lobbying on behalf of the target, it will be appropriate to investigate activities at the parent company level.
The risk represented by government interaction is not merely theoretical. There are a number of high-profile examples where governments in emerging markets have proactively taken corrective action that has affected particular industries. In 2013 the Guinean government sought help from the G8 to fight corruption in the mining industry and, following a two year inquiry, subsequently revoked certain key licences. The Ghanaian government recently required certain oil and gas companies to certify compliance with the US Foreign Corrupt Practices Act 1977 (US FCPA) and the UK Bribery Act 2010 (UK BA) prior to entering into new petroleum agreements. In 2012 the Indian Supreme Court delivered a judgement which quashed 122 mobile 2G licences awarded four years earlier after concluding the award of frequency allocation licences was manipulated by the former telecoms minister to his own advantage. The released spectrum was subsequently reallocated by competitive auction.