Anti-bribery, corruption and risk diligence recommendations for M&A activity in Asia

August 2022 | EXPERT BRIEFING | MERGERS & ACQUISITIONS

financierworldwide.com

In 2021, global M&A activity surged. The shoots of life as the world started to come out of the pandemic, the low cost of capital, the urge to remain competitive and unique opportunities saw deal volume rise to all-time highs. In Asia alone – according to reports – volume rose to 30 percent higher than it had been in the pre-pandemic period of 2019. The size of deals has increased sharply too. Average deal size in Asia has been trending upwards, with the value of deals in 2021 roughly 40 percent higher than 2019 levels.

Investigators and risk specialists are often confronted with risk factors attached to and contemplated within deals. Investing in evaluating risk can have a material effect on purchase price and on reducing the likelihood of headaches pre- and post-completion. In this article, we present a primer for recognising and mitigating risk, particularly in deals with an Asia angle. The starting point is to recognise the diverse anti-corruption legislation and enforcement landscape within the region.

Asia is one continent, but not a homogenous bloc. This is reflected in the regulatory and compliance space. Each country has a different take on the definition of bribery and corruption. For example, village elders in Indonesia are public officials. The value of what is a considered a bribe varies across borders. In terms of enforcement, Singapore has a robust regulatory regime to deal with prosecution of individuals, with bribes as low as $1 being prosecuted and advertised.

Corporate enforcement in other Asian jurisdictions has not always been swift. In Vietnam and Malaysia, there have been significant developments in the penal code and corporate liability in recent years. Different legislation in different countries can impact the risk profile of deals. In practical terms, this means that the same anti-bribery and corruption (ABC) and compliance policies and procedures implemented in India, for instance, may not be viable for implementation in Indonesia. An Asia-Pacific bribery policy addendum, on its own, will not work. Subtle discrepancies like this can make it difficult for businesses, especially multinational companies, to ensure adherence to local governance and compliance rules and regulations.

In addition, it is not only local laws and regulations that businesses have to be concerned with. The US Foreign Corrupt Practices Act (FCPA) and the UK Bribery Act both have extraterritorial reach. Both apply broadly to organisations and individuals with a nexus to the US and the UK, including the officers, directors, employees, stockholders, representatives and agents of an organisation. To emphasise, the FCPA even seeks to encompass non-US companies processing US-dollar bribe payments through the US banking system. Not only do organisations seeking to operate and expand in Asia need to expertly navigate local laws, they also need to watch out for international ABC legislation as well (which will likely touch their existing businesses in any event).

Purchaser and vendor perspectives: risks and mitigation

In the process of purchasing a new company or asset, due diligence is universally considered essential. While there is familiarity with conducting legal due diligence on target entities, not all parties are familiar with conducting ABC due diligence. Anti-money laundering (AML), countering the financing of terrorism (CFT), know your customer (KYC), trade, sanctions, data privacy and workplace culture are other items that can be captured within risk. But for the purposes of this piece, we will focus on ABC due diligence and what it might feature.

Purchaser’s perspective. It is in the interests of purchasers and vendors to mitigate the risks surrounding the target as much as possible. For a purchaser, performing ABC diligence into a potential target entity is about preventing buyers’ remorse (either in the form of successor liability or the acquisition of a business laden with bribery and corruption problems).

A purchaser should seek to obtain a comprehensive understanding of the internal workings of the potential target. This means understanding both the strengths and weaknesses of the vendor’s asset, such as compliance personnel and structure, policies and practices, and recent reports or reporting lines, interactions with third parties and officials, gifts, hospitality and sponsorship, donations and corporate social responsibility, and integrating these findings into the legal due diligence.

This exercise in compliance due diligence often forms a part of the purchaser’s cost-benefit analysis. If gaps are found in a target entity’s compliance or ABC processes, a purchaser can then make an informed decision about the next steps. This could mean continuing with the deal and allocating additional resources to address any gaps within the target’s compliance procedures, insert protections in contractual language, or even deciding to walk away from the deal.

ABC due diligence exercises allow purchasers to assess the viability of a target company prior to entering into any commercial agreements for which they could be exposed to commercial, reputational and financial risks that continue post acquisition. Ultimately, the question for purchasers is how to assess prospective vendors to avoid those with very poor compliance structures, or to properly price assets for purchase. The answer is to build an ABC risk assessment into the process from an early stage. Regulators want companies to address their compliance issues, so purchasing an asset with warts can be fixed through post-acquisition remediation.

Vendor’s perspective. Vendors that conduct ABC due diligence ahead of a deal often gain an advantage. A more recent trend is for vendors to enhance their compliance system prior to a sale. This signals to prospective purchasers that they take governance and compliance seriously, and also provides assurance to potential purchasers that they are not acquiring an entity with ‘skeletons in the closet’. This can have a material effect on the number of interested parties and ultimately the purchase price, but only if the improvements made are thorough.

ABC due diligence exercises give vendors the opportunity to right any wrongs and improve internal checks and balances before an acquisition. To illustrate, if a vendor operating within the construction industry conducts a thorough risk due diligence exercise and realises that it does not have an adequate conflicts minerals policy in place, it can immediately create or update such a policy. But the arrival of a policy at the eleventh hour will not solve underlying issues. Changes such as including a conflicts minerals declaration in third party questionnaires, and carving out a section on conflict minerals best practices in an organisation’s ABC and compliance policies will need to be carved out. Vendors may also use this opportunity to position themselves closer to international best practices. This instills confidence in prospective purchasers and shows the vendor is up to date with trends in its sector and has taken steps to close any existing gaps.

Tips

Some tips when reflecting on a compliance framework, or positioning for a sale or divestment in Asia are outlined below.

Your global policy might not apply in South East Asia. A global compliance policy will never be entirely adequate for local idiosyncrasies. Policies and procedures should be adjusted based on relevant functions that deal with government or public officials, the local language, the size of the target’s businesses in particular markets.

There is no ‘one size fits all’ approach. There is also no single prescribed method to understanding and evaluating corruption risks. Each organisation has its own history, business needs and risks, and compliance programmes should be customised to meet these needs and challenges. This process will also be affected by the time available to conduct the transaction.

Training. We recommend a detailed consideration of how training is carried out, which personnel should conduct it, and who is on hand to provide assistance. This can make a huge difference to the effectiveness of compliance systems and the overall framework. Compliance education should be more than an annual computer-based exercise. Various strategies can be utilised, such as disseminating key updates on the regulatory landscape, regular interactive training, publishing reminders and updates in company newsletters, or posting on the organisation’s intranet and website to raise awareness of best ABC and compliance practices, key areas of concern, and how to report potential bribery and corruption activity.

Compliance champions. Finding suitable compliance champions in middle and lower management can play a part in overcoming cultural barriers. Reliable and honest, with a good sense of leadership, compliance champions are beacons who can set the tone. It is better that you first hear about malfeasance from within, rather than from the media, external sources or regulators.

Compliance database. When conducting a risk assessment, data that speaks to the target’s compliance structure will be vital. This includes whistleblower reports, audit checks, existing compliance policies and any revisions, among others. The absence of reports in the database is not always the sign of a clean bill of health. The existence of reports and issues in audit checks point to a functioning compliance system.

Cultural due diligence. Companies are expected to attend to the culture of their organisation. It can be difficult to determine, but may cover compliance reporting, employee relationships, human resources reporting, as well as external considerations such as supply chains. Consumers and shareholders expect supply chains to be free of modern slavery, and the target’s internal culture to be a foundation for continued growth. In many instances, cultural failings have had a direct effect on a company’s financial performance and reputation.

When evaluating a target business as part of a risk assessment, culture should not be overlooked.

Conclusion

Eradicating all risk is impossible. However, when contemplating a merger or acquisition, mitigating risk is becoming a more sophisticated endeavour. With a considered approach, deploying human intelligence and technology solutions, businesses can evaluate risk in a way that benefits their current and future plans.

Nick Williams is a partner, Khushaal Ved is a senior associate and Nicole Lim is an associate at Hogan Lovells. Mr Williams can be contacted on +65 6302 2453 or by email: nick.williams@hoganlovells.com. Mr Ved can be contacted on +65 6302 7137 or by email: khushaal.ved@hoganlovells.com. Ms Lim can be contacted on +65 6302 2429 or by email: nicole.lim@hoganlovells.com.

Nick Williams, Khushaal Ved and Nicole Lim

Hogan Lovells