Corruption Compliance Due Diligence in M&A Transactions
Good reminder from Baker & McKenzie Australia on the importance of assessing corruption risk in merger transactions:
“…[A]s an exposure to the risk of bribery and corruption penalties has the potential to substantially erode the value of any acquisition, corruption compliance is a critical factor that requires careful consideration. The five essential elements of a corporate compliance program serve as a useful guide in assessing the attention which should be directed to corruption risk:
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Leadership – does the target have a solid foundation of strong ethical values which starts at the top?
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Risk Assessment – does the target have formal processes in place for assessing compliance risks?
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Standards and Controls – does the target have written policies and procedures and are they implemented?
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Training and Communication – does the target have a considered approach to training officers, employees and third parties about anti-corruption measures?
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Monitoring, Auditing and Response – is the target’s compliance regime actually implemented, monitored and regularly revised?”
The advisory includes commentary on a lawsuit by Watts Water Technologies, Inc against its former law firm, Sidley Austin LLP, alleging “professional negligence in relation to the conduct of legal due diligence with respect to the acquisition of a Chinese company.” To whit:
“Sidley Austin was engaged by Watts in 2004 to perform due diligence on Changsha Valve Works (Changsha), a Chinese target company that Watts was interested in purchasing. During the course of the due diligence, Sidley Austin uncovered a document that indicated that Changsha had a written policy of paying kickbacks to government officials in China to secure government contracts.
The existence of the document was not disclosed to Watts in any of Sidley Austin’s due diligence reports or in any other communications between Sidley Austin and Watts. Unaware of the document or its potential implications, Watts paid millions of dollars to purchase Changsha and proceeded to operate the business for several years.
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In 2009, Watts implemented anti-corruption and FCPA training for its Chinese subsidiaries, including Changsha. During the course of that training, in-house counsel for Changsha was alerted to the potential FCPA violations and notified Watts’ management in the US.
Watts retained outside counsel and forensic accountants to conduct an internal investigation, self-reported the breaches identified to the US Department of Justice (DOJ) and Securities Exchange Commission (SEC) and implemented remedial measures to address the corruption issues identified.
Read the entire update»
Assessing corruption risk in M&A transactions by Baker & McKenzie Australia
