The need for anti corruption due diligence should be considered as part of a purchaser's standard due diligence before any acquisition. Under the US Foreign Corrupt Practices Act, an acquiring company can potentially be directly liable for the past corrupt acts of a target company by virtue of its acquisition. While this is not the case under the UK Bribery Act, there could be liability for the target company, involving penalties and other adverse consequences that could greatly reduce its value and have a reputational impact on the purchaser, as well as giving rise to concerns about future potential liability.
We consider below some of the frequently asked questions about what steps are required to comply with the UK Bribery Act, how to minimise corruption risks when considering potential mergers and acquisitions and what should be done by way of anti corruption due diligence.
Is it now a legal requirement under the Bribery Act to carry out pre acquisition anti corruption due diligence?
Strictly speaking there is no legal requirement to do anti corruption due diligence before an acquisition. But, as applicable, in order for it to demonstrate that it has adequate procedures for the purposes of the corporate offence under the Bribery Act, a company should consider the need, in the context of the particular transaction, to undertake anti corruption due diligence. In addition, there are very good business and legal reasons for doing so.
What could the implications be for the purchaser if historic or continuing bribery is discovered during pre closing due diligence?
Historic corruption may result in a range of adverse legal consequences that will impact upon the value of the target company, including:
- fines for the corruption offences
- investigation and remediation costs
- being barred from government or public authority contracts
- the termination of material contracts
- having key licences and permits corruptly obtained revoked
- being ordered to repay revenues from corruptly obtained contracts, and
- liability for related offences, such as incorrect tax returns or failure to keep accurate books and records.
Moreover, the historic corruption may not be an isolated event and may be part of a pattern of historic or, even, continuing corrupt practices.
What liability could a purchaser have for bribery occurring before the acquisition and continuing after that acquisition?
Where the purchaser is a commercial organisation that is incorporated in the UK, or conducts part of its business anywhere in the UK, and the target is performing services for it following the acquisition, there could be criminal liability for the purchaser.
This liability could arise where the target continues to make corrupt payments and these benefited the purchaser, the purchaser could potentially become liable for the corporate offence of failing to prevent bribery, unless it can show its anti corruption procedures are adequate. These procedures should include due diligence for corruption issues in the context of M&A. Indeed, the Ministry of Justice guidance specifically refers to the requirement for due diligence in this context.
If it appears that the target company may historically have been involved in bribery to win contracts, but has eliminated suspect practices, could there still be liability for the purchaser?
There would not be direct legal liability under the Act for the purchaser, but there could be liability for the target company, involving penalties and other adverse consequences that could greatly reduce its value. There is no time limit on prosecutions for criminal offences, including bribery.
If it appears that someone, such as an agent, may have paid bribes to win business for the target company in the past, could there be liability for the company?
Where the corruption occurred on or after 01 July 2011 and the target company is a relevant commercial organisation, the target company may potentially be liable for the corporate offence of failure to prevent that corruption.
Where the historic corruption occurred before 01 July 2011, the target company may be liable to prosecution under the pre Bribery Act legislation. The circumstances in which the company could be liable under that legislation were legally more complex than the new law, but the pre Bribery Act law was stricter than generally appreciated and could, for example, catch overseas corruption by third party agents.
What comfort can be taken from any anti bribery controls and procedures that the target company has in place?
Adequate anti bribery procedures can be a defence to the corporate offence under the Bribery Act if someone who performs services for the target pays a bribe to win business for it. This defence is not relevant if the company itself has actively taken part in the bribery by offering, giving, requesting or receiving a bribe. Anti bribery controls and procedures are therefore relevant as a means of reducing this risk, but not as a legal defence.
How should anti corruption due diligence best be conducted?
Anti corruption due diligence should be tailored to the business of the target, the countries it operates in, its business relationships and use of agents, its existing anti corruption polices and procedures, its record of past conduct, and the specific nature of the business transaction/acquisition.
This due diligence can cover a corruption risk assessment of the target company, its policies and procedures, use of agents, intermediaries and other service providers, dealings with public officials and its record of bribery incidents, investigations and sanctions. The approach can range from a high level desktop analysis to a more in depth approach using questionnaires of increasing levels of detail, management and customer interviews and other background checks, according to the risks, countries and sectors involved. Anti corruption due diligence needs to be carefully coordinated with reviews of the company's internal financial controls.
In our experience, a purchaser can often face practical challenges in conducting anti corruption due diligence on a target, particularly in certain jurisdictions where the target may have been operating to a different compliance standard than a US or UK company, its management and employees may be sensitive to providing information, and/or there is a lack of publicly available information.
What should a purchaser do if historic corruption is discovered in pre closing due diligence?
First, any discovery of an incident of bribery should lead to an additional level of due diligence to establish whether the incident was isolated or part of a wider pattern that may make the target unattractive as a whole.
It would generally be unwise to proceed with the acquisition before resolving the impact of the discovery upon the target. It seems to us that as a practical matter and as a matter of public interest, the Serious Fraud Office (SFO) is less likely to prosecute the target company after the closing where corruption is identified pre closing and reported to the SFO. However, the timing of such reporting raises difficulties, given the inevitable confidentiality undertakings at the due diligence phase. It is possible that if the target company has retained the benefit of bribery, lawyers and other professionals working on the deal would be obliged to submit Suspicious Activity Reports to the NCA under the Proceeds of Crime Act, but this obligation does not extend tp notifying the SFO of suspected bribery.
Can concerns over possible corruption be dealt with by way of representations, warranties and indemnities?
In general, a purchaser should ensure that the sale and purchase agreement contains standard representations and warranties like compliance with all applicable laws, but advantageously also obtain anti corruption representations and warranties, such as that the target company has maintained and effectively implemented policies and procedures to prevent corruption. Indemnities of a wrongdoer will be unenforceable to the extent that they seek to recoup amounts paid out in criminal fines by the wrongdoer as a matter of public policy. But, in other circumstances the diminution in value of the target company may be contractually recoverable by a purchaser from a seller.
Given the huge burden upon management that an investigation into suspected corruption will involve, as well as the unquantifiable reputational damage, warranties and indemnities should not be seen as an effective replacement for proper due diligence.
What else can a purchaser do to mitigate concerns about corruption or lack of anti corruption systems and controls?
The purchaser can put in place an effective plan to introduce appropriate anti corruption policies and procedures to start immediately post completion. Consideration should be given to the viability of this pre completion as it may have an impact on the decision whether to proceed with the acquisition and, if so, the terms of that acquisition.
If the purchaser does not perform adequate anti corruption due diligence before the acquisition, is it worth carrying out a due diligence exercise after completion?
Yes. Undetected issues of corruption within a group company pose a substantial risk of both legal liability, contractual uncertainty and reputational damage to that group company and its senior officers (including new directors appointed by the purchaser). It is usually better to be able to discover an issue and deal with it on your own terms than to risk having to address it after it has emerged and is being investigated by the authorities.
If a suspected incident of corruption is identified, either current or historic, is there a legal requirement to report it to the authorities?
Bribery offences do not in themselves trigger a UK reporting obligation. But, money or goods representing the benefit derived from a bribe will be the proceeds of crime under the Proceeds of Crime Act 2002 (POCA). This may be in the form of money or goods delivered as a bribe or, it will be the advantage gained from the bribe, for example the revenue from a contract won by paying a bribe. If you become aware that you, your company or its employees may be in possession of the proceeds of bribery, you must proceed with care and should consider making a disclosure to the authorities. The crime of money laundering may be committed by anyone dealing with the proceeds of crime and the only safe course of action is to request permission to deal with it from the Serious Organised Crime Agency (SOCA).
Anyone in the regulated sector must report any knowledge or suspicion that property has been acquired by someone through bribery. The regulated sector in this context includes those individuals working in financial and credit institutions, and professionals such as accountants, auditors, tax advisers, insolvency practitioners and private practice lawyers. POCA makes it an offence for a person operating within the regulated sector when he either knows or suspects, or has reasonable grounds to know or suspect, that the proceeds of crime are being dealt with and fails to report his knowledge or suspicion to a nominated officer or to SOCA.
Which laws will be relevant when considering corruption risk in a transaction?
It is likely that the laws of multiple jurisdictions will be relevant to any potential incident of corruption identified in the course of an acquisition. Where any indication of a potential corruption issue is identified, it will be necessary to examine the circumstances and which laws may be applicable. Relevant laws may include those of:
- the country where the target is incorporated
- the country of nationality of the individuals involved in the possible corruption
- the place where the counterparty to any potentially corrupt payment is incorporated or domiciled
- those countries in which any potentially corrupt activity took place, and
- any countries through which money that may represent corrupt payments has flowed.