These are my notes from the “Best practices for addressing anti-corruption issues” session at the Private Fund Compliance Forum 2012.
Moderator:
- Douglas N. Greenburg, Partner & Vice Chair of the Global Litigation Department, Latham & Watkins LLP
Panel Members:
- Edina Cavalli, Director, Global Head of Private Equity and Principal Investments Compliance, Barclays
- Paul Golding, General Counsel, Citi Infrastructure Investors
- Kelly Nash, Compliance Counsel, General Atlantic
- Paul Winters, General Counsel & Chief Compliance Officer, Denham Capital
There are continuing challenges. Sure, the DOJ has recently lost a few cases and the Chamber of Commerce keeps pushing for FCPA reform. But FCPA will continue to be an enforcement priority.
Its not just a US law, the UK Bribery Act is probably more stringent, depending on enforcement. You also need to be aware of other local laws.
On the front-end, you should focus on the anti-corruption issues for the target. However, you are unlikely to be able to do a deep dive into a target’s finances. At least, you should look for red flags associated with the target.
- Do business with a government official?
- Partly owned by government official?
- Engaged in an issue with history of corruption?
- Does the business operate in high risk countries?
- What do their procedures and controls look like?
One view is that in acquiring a portfolio company, someone from the private equity firm may end up on the board of directors for the company. That means potential libaility for serving on the board of company that commits violations of the FCPA or Bribery Act. That gets the attention of senior people at the firm. Everyone hates personal liability.
A key is documenting that you focused on the issues and what you did. If you can;t actually unearth bribery, you want to at least show that you conducted a reasonable amount of due diligence.
Personal libility is a concern. Business risk a bigger risk. If someone is engaged in bribery, they are engaged in illegal activity and may be involved in other shortcuts. Reputational risk is problably a bigger risk. The taint of corruption could severly impair the firm’s ability to sources and exit deals.
The tone for the portfolio company is set during the diligence phase. You are letting the target know that anti-corruption is important and will continue to be a focus post-acquisition.
Require management of acquired firms go through anti-corruption training. Do it even if the firm has an exisitng program. Get certification from top executives regarding bribery and corruption. Do you micro-manage the portfolio company?You need to let them know that you are concerned. Certainly, you want to make sure the fund management involved with the portfolio company is aware of the issues. Surprise audits are a great idea, but may be hard if you only have a minority interest.
There was a stern warning about the extra-terratorial reach of the UK Bribery Act. It also reaches beyond political bribery to commercial bribery. You also don’t need to have bad intentions. You should focus on your gifts and entertainment policies. Adapt the policies to facts and circumstances of the giving and the fund’s lifecycle. Could it look like you are trying to buy business. What is lacking under the UK Bribery Act is a history of enforcement. You don’t know what they are looking for and what they are going to do when they find bad acts.
Who should be doing bribery due diligence? Compliance or Acquisition teams? Both. Although it’s likely to end with compliance.
