Conducting no pre-acquisition due diligence would certainly place a company in a weak position when dealing with regulators should issues arise post-acquisition.

Having coped with the downturn thus far, many companies are beginning to look for new growth opportunities.

With the mature markets of Western Europe and North America recovering slowly, corporations are increasingly looking farther afield for growth.

However, such ventures into unfamiliar markets bring with them both potential risks and rewards. Companies need to consider the drawbacks carefully when proceeding and ensure that fraud and corruption risks are appropriately managed.

Substantial proportion
of management targeting
aggressive growth

More than half of the companies interviewed will be looking for opportunities for growth in the next 12 months, particularly those based in Latin America, Japan and the Far East. The US and Europe, by contrast, remain cautious.

In many cases, growth will come through acquisitions.

Getting more than you bargained for: Inheriting fraud in acquisitions

This should trigger a range of concerns for our respondents as they can expose organizations to a multitude of risks, potentially including corruption or competition issues.

To date, a significant proportion of US Securities and Exchange Commission (SEC) enforcement actions relating to the Foreign Corrupt Practices Act (FCPA) has resulted from acquisitions where companies have assumed legacy corruption issues.

The issue of acquisition risk is likely to get even more important as other regulators seek to expand their reach and emulate the US approach. The greater powers granted to the UK authorities by the recent Bribery Act is a case in point.

Do your homework: Anti-corruption due diligence

One way to reduce the risk of successor liability and subsequent regulatory enforcement actions is to conduct thorough pre-acquisition due diligence specifically related to fraud and corruption.

This is particularly pertinent where the target company is operating in a high-risk or highly regulated market or industry.

It should also be followed by a similarly focused post-acquisition review. Yet this approach does not seem to be standard practice in our respondents’ organizations.

Almost half of the companies that completed acquisitions within the last two years said they only conducted pre-acquisition due diligence fairly frequently, not frequently or, in the case of almost one in five, never. The figures for post-acquisition due diligence are even more worrying, with 42% rarely or never undertaking such procedures.

Frequency of conducting
due diligence into fraud risks

Be proactive by engaging with regulators

Acquirors may be able to insulate themselves from inherent bribery and corruption risks by early communication with regulators.

For example, the US Department of Justice’s 2008 Halliburton opinion release recognized that there may be legitimate legal limitations on the extent of pre-closing due diligence that could be performed.

However, the opinion created an expectation that in such circumstances “significant, focused, risk-based efforts to identify corruption issues”¹ should be conducted post-acquisition.

There appears to be a gap, therefore, between the expectations of regulators and the reality of how companies are conducting due diligence.

In any event, conducting no pre-acquisition due diligence would certainly place a company in a weak position when dealing with regulators should issues arise post-acquisition.

Post-acquisition anti-corruption due diligence — what to look for Sometimes exhaustive pre-acquisition due diligence is not possible. In such cases, post-acquisition anti-corruption due diligence ought to be considered. Among the areas that management should contemplate are: Reviewing existing code of conduct and other relevant policies and procedures for completeness and to ensure that these are effectively integrated between the parent and acquisition Understanding policies and procedures surrounding cash disbursements and facilitation payments, gifts and hospitality, sponsorships, and any differences from corporate policy Assessing the ability of systems to report or monitor expenditures in these high-risk areas Performing interviews with key personnel regarding, among other things: Corporate culture and attitude toward ethics and compliance Vetting procedures for and use of third parties and agents Interactions with government officials and departments Testing internal controls already in place to mitigate fraud, bribery and corruption risks Reviewing fraud and corruption incident logs along with the nature of the responses and ultimate outcomes Identifying third-party agents involved in obtaining key assets, operating licenses or sales contracts and understanding their role Checking whether audit rights relating to suppliers, agents and other third parties have ever been exercised with regard to bribery and corruption controls Assessing to whom compliance training is offered and how often, as well as checking compliance training attendance records

Who, what, where, when: Defining the roles of internal audit, legal, compliance and finance

A push for growth could mean entering new markets for some, executing acquisitions for others. These efforts will bring new risks.

Clearly delineated roles for internal audit, legal, compliance and finance, therefore, are increasingly important.

For example:

• Who assesses a tip from a whistle-blower hotline and decides on what action?
• Who should investigate?
• Who should impose disciplinary procedures?
• Who informs the board (and when)?
• Who should maintain a record of proceedings?

There is a clear disparity between CFOs and other governance stakeholders regarding the level of certainty for how fraud is responded to within their organizations.

Only 43% of CFOs claim that well-defined roles for different groups in investigations exist, compared with an average of more than half of the other functions surveyed.

Well-defined investigative roles
are lacking

The input from the CFOs suggests an awareness that their companies do not respond as consistently as assumed.This is an indication that internal audit, compliance and legal may be operating in silos, and do not necessarily respond seamlessly to instances of fraud.

There will never be an easy time to sort out these responsibilities and procedures.But using the time between the downturn and the next round of acquisitions to align the anti-fraud and anti-corruption policies and create a sustainable compliance program will send a clear message to staff, third parties and regulators.

These efforts will contribute to future ethical growth.

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¹ Source: US Department of Justice Opinion Procedure Release 08–02.