The Hindu Business Line : Skeletons in M&A cupboards

The Foreign Corrupt Practices Act (FCPA) is a US federal law mostly known for clamping down on bribery of foreign officials. If one would review FCPA enforcements over the last five 5 years, India finds a name mention in over 70 enforcements; and of the enforcements in 2007, more than half of them arose in the context of M&A (merger and acquisition) activity. "These are figures that India Inc. cannot ignore," says Ms Navita Srikant, Partner, Fraud Investigation & Dispute Services, Ernst & Young.

The FCPA (which came about after the US Securities and Exchange Commission investigations in the 1970s, finding over 400 American companies involved in illegal payments to foreign government officials, politicians, and political parties) stands out for hard-line enforcement, resourceful means in resolving cases, examinations, and fines. In the last decade, the impact of the FCPA on international business activities of US and foreign companies has deepened and broadened.

"Companies round the world are now investing in conducting FCPA due diligence as part of M&A activity to reasonably assure themselves that not only is the deal rightly priced but there are no skeletons in the closet which will come out at a later time and create unnecessary compliance risks," Ms Srikant, a certified fraud examiner, told Business Line in the course of an email interaction.

Businesses don't seem to be learning; at least that's what comes out of the results of the 10th Global Fraud Survey recently conducted by Ernst & Young. Ninety-six 96 per cent of the Indian respondents to the survey have experienced an incident of bribery or corruption within their company in the previous two years! Read on.

Edited excerpts of from the interaction:

Has corruption got bigger with time?

Over the last decade, one has seen that the list of large and well-known corporations facing corruption allegations just keeps growing. In one of the cases analysed in public domain, one act of bribery has ended up making the organisation poorer by millions of dollars in penalties, remediation programmes and also impacted the its reputation in more than one market. The 18th Century essayist Samuel Johnson once wrote, "Even he who ventures not into the world may learn its corruption in his closet." Corporates and governments are increasingly coming to terms with that, as the 10th Global Fraud Survey recently conducted by Ernst & Young reflected that not much has changed since this comment by Samuel Johnson. Twenty-four 24 per cent of global respondents and 96 per cent of the Indian respondents to the survey have experienced an incident of bribery or corruption within their company in the previous two years.

Many Indian companies are acquiring US assets. Conversely, many American companies are also doing business in India. What are the safeguards against bribery, corruption, graft, etc?

Though bribery in the corporate world is not a new phenomenon, these cases now are coming to light on account of the ever-widening impact of the international drive by regulators world over to combat corporate corruption.

Such countermeasures include: The US Statute called the Foreign Corrupt Practices Act, 1977 or commonly known as FCPA, the Organisation for Economic Co-operation and Development (OECD) landmark anti-graft convention in 1999, and the United Nations' anti-corruption convention in 2003 that now has more than 100 countries as signatories. Many countries have their own legislation for anti-bribery and anticorruption. These initiatives also reflect a growing recognition by governments across the globe that bribery is both morally wrong and capable of causing economic harm to givers and takers.

What makes FCPA notable?

Amongst the regulations acting as deterrents to bribery, the FCPA stands out for aggressive enforcement, creative methods in resolution of cases, prosecutions, and penalties. In the last decade, the impact of the FCPA on international business activities of the US and foreign companies has deepened and broadened. The largest ten FCPA prosecutions since 2007 have cost the companies involved nearly $175 million in penalties alone. Moreover, the expansion of jurisdiction over foreign persons through the 1998 amendments has already begun to have a significant impact on enforcement.

Does India figure in the FCPA often?

For the corporate world in India, recognising the importance of regulations like FCPA and the risk of corruption and bribery has never been as important as it is today. Everyone is talking about the `India Shining' story. While many Indian business houses are seeking opportunities and challenges across the globe, India continues to attract more foreign investments through private equity and merger and acquisitions (M&A) by leveraging its competitive advantages.

On the other hand, if one would review FCPA enforcements over the last five years, India finds a mention in over 70 enforcements; and of the enforcements in 2007, more than half of them arose in the context of M&A activity. These are figures that "India Inc." cannot ignore.

Are companies aware of the problems they might get into?

Companies round the world are now investing in conducting FCPA due diligence as part of M&A activity to reasonably assure themselves that not only is the deal rightly priced but there are no skeletons in the closet which will come out at a later time and create unnecessary compliance risks.

However, our recent fraud survey, `Corruption or compliance - weighing the costs' showed that in India, knowledge of anti-corruption due diligence as part of the acquisition process however was limited. Forty-five45 per cent of respondents from India were not aware of whether their company had considered bribery or corruption-related risks before acquiring a business. In comparison, more than 58 per cent of respondents globally claim to routinely conduct anti-corruption due diligence prior to an acquisition at least fairly frequently.

Is there anything apart from in-house safeguards that companies might engage in to avoid coming under the scanner?

Companies are now focusing on creating a culture of compliance, identifying responsibilities for FCPA compliance, creating procedures for coordination of other groups like internal audit with compliance and legal counsel, defining standard policy and procedures to ensure accurate books and records and sufficient internal controls.

Another critical aspect is to ensure established guidelines for whistle-blowing, internal investigations and process for periodic reviews/compliance risk assessments through independent monitors to assess the effectiveness of their compliance programme. Involvement of experienced legal and forensic experts is critical to the effective handling of such sensitive issues.

What if companies don't pay heed to laws such as the FCPA?

Non-compliance to the FCPA has implications not just for the companies involved but also the executives and the board members. Hence, encouraging compliance to its provisions is in the best interest of all the stakeholders involved. In the long run organisations would realise that promoting ethical behaviour is not just about staying on the right side of law. It's good business.

D. MURALI

KUMAR SHANKAR ROY

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