Risk-Based Approach for Due Diligence in Anti-corruption Issues

Points of Discussion in this Article

1. Importance of due diligence in corporate transactions
2. Framework finalized in U.S. Jurisdiction
3. Aim of Diligence
4. Risk Profile

1. Precis

Transactions related to investment and acquisition pose significant risks concerning anti-corruption affairs. Although there is huge financial opportunities in the corporate business but it comes along with a set of corruption risks, that, if ignored, can bring consequential risks to the company. So, the corporate sector is now moving ahead under the wave of anti-corruption due diligence that will mitigate risks in the corporate transactions. This stream might not guarantee 100% security but it will definitely find the compliance vulnerabilities and structural risks, provided the execution of diligence process is courteous, well programed, and well accomplished.

2. U.S. Jurisdiction

A framework has been drafted and rooted by U.S. Department of Justice and U.S. Securities and Exchange Commission for probable liability. Its requirement arose due to the high risks involved in corporate transactions, specially amidst the international boundaries. The drafting and confirmation of this framework is done under the Foreign Corrupt Practices Act (FCPA). For details, click here.

3. Aim of Diligence

The framework finalized in U.S. Jurisdiction covers successor liability and in line with this, there are several aim of the transactional diligence. These are given below:

Investigation of risks that might result in liability. These risks include weakness in control, inaccuracy in accounting entries, or suspicious payments. Satisfaction of acquirer in terms of it undertaking suitable steps for identifying the potential risk. Before the transaction, there might not be any risk. However, in case a risk is faced later on, the procedures of due diligence will help in ensuring that there is no liability imposed at the completion of transaction.

4. Risk Profile

An approach which is risk-based is highly preferable to due diligence – this is confirmed by seasoned and reputed regulators. The diligence resources lay complete focus on high-risk interactions with government, regulators and customers. Risk profile is impacted by various factors such as the corporate constitution of parties, suitable geographies, industries and history of compliance. Herein, there are a couple of possible scenarios with multinational transactions.

First is the parties are looking to emphasize on anti-corruption reviews along with undertaking due diligence of heightened level on their subsidiaries and affiliates that are globally operational. Second is parties engaged in various industries must be accountant to the possible regulatory scurrility which making the risk profile. Herein, the said parties might already be focused by anti-corruption authorities.

Second is parties engaged in various industries must be accountant to the possible regulatory scurrility which making the risk profile. Herein, the said parties might already be focused by anti-corruption authorities.

While creating the profile, the acquirer must calculate whether imposing of required steps will result in loss, license or some asset.

While creating the profile, the acquirer must calculate whether imposing of required steps will result in loss, license or some asset.

Some other high risk areas are:

A target whose profit are dependent mainly on big government contracts.

A target whose major part of assets depend on government concessions (in past or present).

Such cases can be oil fields, mining rights etc.

Businesses that are extremely regulated. For instance, where timely inspection approvals are required by local authorities.

Organizations that rely on instruction and demonstration of a product

5. Are due diligence procedures helpful?

It is imperative to implement Risk-Based Approach for Due Diligence in Anti-Corruption Issues from the beginning as it helps in reducing the chances of risks. These procedures can be done along with the standard financial postulations of due diligence. Remember that in this case, the access to information will be restricted and so you should scan multiple sources to compile exhaustive data. You can try various sources to gather the information such as assessment of financial ledger, interviews, material of data room and public sources (direct parties or indirect sources).

At this point if you wondering whether due diligence procedures are helpful for your business, then its answer is clear YES! Their implementation will help you reduce the risks and hence safeguard our company’s reliability and credibility in the industry. When we talk about risks, then its types should be trekked in the following areas:

1. Discipline of employees in terms of breaching the policies or norms of anti-corruption.

2. Investigations that are in process or complete (internal as well as government)

3. Policies, training, auditing and topics that can be exposed by whistle blower. All these falls under the control environment of an entity.

4. Side agreements, payments through cash and faulty commissions. All these falls under the tenders / contracts of an entity.

5. Unfavorable findings in the internal or external audits

6. Other Areas of Risk Finding under Due Diligence Procedures

Regulatory relationship of an entity is also one of the main areas, wherein auditing should be done. Herein, important points or resources that should be assessed are approvals like permits and licenses. These can be further elaborated to cover benefits like gifts, expediting payments, fees etc. provided to government inspectors. Another such area is the expenses related to marketing processes such as gifts, travel, entertainment etc. While working on diligence in this area, one should investigate the expense records, conference attendance and trips details. Other areas are:

1) Entity’s relationship with various intermediaries and third parties such as sales agents, distributors, consultants and others. Emphasize must be given on those individuals who directly engage with the government’s clients and regulators. Herein, there are 3 sub areas that require assessment:

(i) Whether an entity is following procedures to review and approve the contracts

(ii) Whether an entity needs written consulting agreements and if these are needed to be

included in various legal clauses viz compliance, audit.

(iii) Whether an entity needs to authorize payments after the completion of documentation.

2) Entity’s teaming arrangements such as its involvement in joint ventures etc., wherein government regulations must be followed.

7. Due Diligence Procedures and their Timing – Both are Important

The discussed anti-corruption procedures are effective only when they are done at the correct time. An entity must discuss the timing part with the other party to implement it before the signing of deal or after it. In most of the cases, parties prefer anti-corruption due diligence procedures to be implemented after the contract signing. One key jeopardy with this timing is that in case a risk is detected after deal- signing, then it might result in price negotiation and/or disclosures at some level, thereby delaying or preventing closing.

For more information on Due Diligence and Due Diligence Service one can contact Bill Trueman a highly experienced specialist in risk review and due diligence. He is permanent member of AIRFA, and director of RiskSkill and UKFraud.

How Due Diligence Can Reduce Third Party Corruption

Due Diligence Investigation Advantages

It is a common practice for businesses to implement internal policies and established a positive and goal-oriented team in order to safeguard their practices from corruption. However, one loophole that still exists and is often overlooked is the outside factors, such as those people, who have a different ideology than that of businesses. This can also be understood as the unethical practices of the 3rd parties that can negatively impact the company’s existence and credibility in the industry. In line with this, UK introduced the Bribery Act 2010 in July 2011 with the aim of combating frauds and corruption related to 3rd parties. One odd concern with this act is that it holds the principal organization fully accountable for the corruption. This has been condemned by Neil Swift, who works for Peters & Peters Solicitors. He cites that even if the main organization is not involved, still they could be held liable for it.

International Corruption Data

Transparency International published The Corruption Perceptions Index (CPI) 2015. Herein, all the countries are rated on the scale of 0 to 100, maximum rating meaning that the country is very clean in terms of corruption.

Highlights:

  • On the rating scale, 53% of G20 Countries acquired less than 50 points.
  • EU and Western Europe scored an average lower than 50 points
  • Denmark scored 91 points
  • UK scored 81 points
  • India scored 38 points
  • China scored 37 points
  • North Korea and Somalia scored 8 points

The publication must be considered by businesses, who desire to expand overseas. Less CPI score does not means that business in those countries should be altogether avoided, it just tells that one should take extra measures while expanding their businesses.

Businesses Should Improve Diligence on Third Parties

By now, it should be clear to you that there is no such foolproof method that guarantee that the third parties would comply with your business-related procedures for corruption and anti-bribery. However, it is important to implement due diligence irrespective to the reputation of third party. Here, we will mention some good practices for the same:

1. Risk Assessment to Find Amount of Due Diligence

Here, note down the possible points (make a checklist) that can make the third party risky. For instance, their ranking by CPI (personally owned or open to communication with government entities), their commercial terms etc.

This checklist can help you in the identification of potential risk areas. So, whenever you decided to make a deal with that third party, make sure to consider it.

2. Questionnaire on anti-corruption guidelines

As a business organization, you should prepare a questionnaire for third parties asking whether they have drafted a policy in concern with bribes or not. In addition, you may include questions that relate to the types of reporting systems they follow.

In case, you are not satisfied with their answers (satisfaction can be related to inconsistency, absence of details or indirect replies), you can just pull out of the deal.

3. Provide Suitable Training to the third party

If you have made the decision to undergo a business contract with a third party, then first thing you should do is to give them training on policies related to anti-bribery and corruption. This will make you both on the same level on this aspect. In addition, the importance of training is increased manifolds as every country has a different set of attitudes and laws concerning the corruption. Therefore, it is important to be at par all those guidelines while doing business overseas.

4. Vetting and Auditing

You should take enough time in accumulating information and verifying the reliability & credibility of the third party, as a part of your due diligence process. Some decisive constraints to consider in vetting and auditing process are:

  • Reputation
  • Public records resources
  • Payment of contract
  • Financial background
  • Competency of the third party
  • Beneficial Ownership

Once you are in contract with the overseas business, then you should NOT rest on ones laurels else you might end up in a difficult situation. There are always risks related to third party, even after the contract is finalized. You can develop a framework, wherein you should keep an eye on the performance of the third party via inspections/reviews, site visits, and consistent contact.

Bill Trueman and Kevin Smith are eminent due diligence experts who provide their consultancy services to card issuers, banks, corporates and business organizations globally; and help in comprehensive appraisal of a business/organization before undertaking by a prospective buyer to evaluate its commercial potential. They are chief executives of RiskSkill, & UKFraud and full time member of AIRFA which is a worldwide known independent organization of risk and fraud advisors.