Make better divestment and acquisition decisions: mitigate bribery and corruption risk before the deal is closed. A third of global businesses are planning strategic acquisitions in their core business (15% in new business) within the next year. 1 These businesses are seeking opportunities in the current recession by conducting M&A activity to benefit in the longer term, when the economic outlook improves. Divestment and acquisition in uncertain times makes a review of business risk areas during pre-acquisition and pre-investment due diligence all the more important. This will minimise potential loss of value to the acquirer after the transaction. An appropriate analysis of the risks of fraud, bribery and corruption, money laundering, restrictions on trade and export, related-party transactions, and conflicts of interest and regulatory actions is crucial. Without it, the acquirer or investor could be exposed to reduced revenues, increased costs, reputational damage, competitor or shareholder litigation, or even regulatory sanctions including criminal prosecution. Where satisfactory due diligence cannot be conducted before an acquisition, regulators now expect effective post-acquisition due diligence to identify the risks in a relatively short time after the deal. Forensic due diligence explained Conducting forensic due diligence requires global knowledge of fraud and corruption trends together with highly specialised investigative and industry experience. The primary objective of the forensic due diligence analysis is to evaluate the potential future loss in value resulting from inappropriate or unethical business practices of the target. These analyses concentrate on specific areas — for example, travel and entertainment expenses, consultancy and agency fees, political and charitable donations, and cash transactions — that may be insignificant in amount but significant in terms of regulatory risk associated with the deal. Contractual arrangements are also considered, including the granting and renewal of licenses and procurement processes. Findings can assist the acquirer when factored into negotiations and can help reduce risk and disruption from the transaction post-deal. Depending on the target’s industry sector, analysing other aspects of the target’s operations may also be appropriate. Given the current international regulatory environment and increasing investment in emerging markets, one area on which forensic due diligence is typically focused is bribery and corruption. 1 Economist Intelligence Unit survey of 337 C-suite and board level executives conducted in January 2009. Despite numerous recent high-profile enforcement actions, nearly 30% of senior decision makers interviewed in Ernst & Young’s 10th Global Fraud Survey have never – or infrequently – considered bribery or corruption risks in the context of a potential acquisition. Forensic due diligence
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Ernst & Young LLP
Assurance | Tax | Transactions | Advisory
For more information, please visit www.ey.com/uk. Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.
The UK firm Ernst & Young LLP is a limited liability partnership registered in England and Wales with registered number OC300001 and is a member firm of Ernst & Young Global Limited.
Ernst & Young LLP, 1 More London Place, London, SE1 2AF.
In line with Ernst & Young’s commitment to minimise its impact on the environment, this document has been printed on paper with a high recycled content.
Information in this publication is intended to provide only a general outline of the subjects covered. It should neither be regarded as comprehensive nor sufficient for making decisions, nor should it be used in place of professional advice. Ernst & Young LLP accepts no responsibility for any loss arising from any action taken or not taken by anyone using this material.
12699.indd (UK) 09/09. Artwork by UKDP.
About Ernst & YoungErnst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 135,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential.
Make better divestment and acquisition decisions: mitigate bribery and corruption risk before the deal is closed.A third of global businesses are planning strategic acquisitions in their core business (15% in new business) within the next year.1 These businesses are seeking opportunities in the current recession by conducting M&A activity to benefit in the longer term, when the economic outlook improves.
Divestment and acquisition in uncertain times makes a review of business risk areas during pre-acquisition and pre-investment due diligence all the more important. This will minimise potential loss of value to the acquirer after the transaction.
An appropriate analysis of the risks of fraud, bribery and corruption, money laundering, restrictions on trade and export, related-party transactions, and conflicts of interest and regulatory actions is crucial. Without it, the acquirer or investor could be exposed to reduced revenues, increased costs, reputational damage, competitor or shareholder litigation, or even regulatory sanctions including criminal prosecution.
Where satisfactory due diligence cannot be conducted before an acquisition, regulators now expect effective post-acquisition due diligence to identify the risks in a relatively short time after the deal.
Forensic due diligence explainedConducting forensic due diligence requires global knowledge of fraud and corruption trends together with highly specialised investigative and industry experience.
The primary objective of the forensic due diligence analysis is to evaluate the potential future loss in value resulting from inappropriate or unethical business practices of the target.
These analyses concentrate on specific areas — for example, travel and entertainment expenses, consultancy and agency fees, political and charitable donations, and cash transactions — that may be insignificant in amount but significant in terms of regulatory risk associated with the deal. Contractual arrangements are also considered, including the granting and renewal of licenses and procurement processes. Findings can assist the acquirer when factored into negotiations and can help reduce risk and disruption from the transaction post-deal. Depending on the target’s industry sector, analysing other aspects of the target’s operations may also be appropriate.
Given the current international regulatory environment and increasing investment in emerging markets, one area on which forensic due diligence is typically focused is bribery and corruption.
1 Economist Intelligence Unit survey of 337 C-suite and board level executives conducted in January 2009.
Despite numerous recent high-profile enforcement actions, nearly 30% of senior decision makers interviewed in Ernst & Young’s 10th Global Fraud Survey have never – or infrequently – considered bribery or corruption risks in the context of a potential acquisition.
Forensic due diligenceErnst & Young contacts:Jim McCurry +44 (0)20 7951 5386 [email protected]
Recent regulatory developments addressing bribery and corruptionWith the ever-increasing global fight against corruption, any company looking to acquire or sell a business with overseas interests must be aware of the implications in relation to bribery and corruption legislation.
The UK bribery bill, which is expected to be passed over the next year, takes into account the Law Commission’s recommendations to introduce new bribery offences. Since the Serious Fraud Office (SFO), the Financial Services Authority and the police are all turning their attention and powers of enforcement to stamping bribery and corruption out of British business, whether conducted in the UK or overseas, the bill is expected to turn the spotlight on businesses directly or indirectly involved in corruption.
In addition, a recent opinion released by the United States Department of Justice (DOJ) highlights the importance placed on preacquisition due diligence by the US regulators. The opinion also provides insight into the actual approach the DOJ has used and will likely use when companies demonstrate their intention to address these issues thoroughly.
This is significant for UK businesses because both the SFO and the DOJ have announced that national and international regulators will be working more closely together in future, so a focus for one will most likely become a focus for the other.
An acquisition target with any of the following characteristics may particularly benefit from a forensic due diligence assessment.
Subsidiaries and operations in emerging markets or countries considered to have ►high levels of corruption (see extraction from Transparency International’s Corruption Perceptions Index to the left).
Public sector contracts. ►
Consultancy services poorly documented. ►
Sales commission contingent on contracts being awarded. ►
Excessive travel, gift or entertainment expenditures. ►
Industries with a history of regulatory issues. ►
What are the benefits?Obtaining an assessment of the risk that the target is engaged in bribery and corruption may result in the following benefits:
Purchase price reduction/improved terms. ►
Reduction in risk of criminal and civil proceedings. ►
Limitation of future reputational damage. ►
Inclusion of appropriate indemnities, warranties ►and certifications.
Our forensic due diligence team uses its extensive experience to evaluate an acquisition’s or investment’s potential future loss in value, which may arise from inappropriate or illegal business practices of the target. Our team’s work includes:
Identifying revenue streams or supplies that may be ►predicated on bribery.
Identifying transactions that may give rise to potential ►exposure to criminal prosecution, regulatory fines and civil litigation.
Analysing and assessing the effectiveness of anticorruption ►compliance programmes, including areas such as culture, policies, training, implementation and compliance.
Our experienceWe assisted a US investment bank prior to a transaction with an Asian multinational company. Our analysis helped the client assess risk areas including bribery and corruption, breach of trade restrictions, noncore investments and financial statement irregularities. The absence of our forensic due diligence would have been a deal-breaker, since the client was unwilling to proceed until the impact of such issues on the business going forward was understood.
We were engaged by a financial institution acquiring ►a multinational brokerage firm. Specifically, our analysis focused on:
Identifying and tracing intercompany trades, loans, ►receivables and transfer pricing affecting the businesses targeted for purchase, particularly as they may have originated from fraudulent transactions.
Tracing shareholder acquisitions to the beneficiary, source of ►purchasing funds and accounting treatment.
Understanding of business operations and current status with ►senior management.
Obtaining, analysing and assessing findings of the audit ►committee investigation.
The results of our findings were a significant contributing factor to the company walking away from what was revealed to be too high of a risk.
Transparency International Corruption Perceptions Index — 2008
Country* RankUK 16Turkey 58China 72Brazil 80Saudi Arabia 80India 85Nigeria 121Kazakhstan 145Russia 147*Selected countries only (180 ranked in total)
Recent regulatory developments addressing bribery and corruptionWith the ever-increasing global fight against corruption, any company looking to acquire or sell a business with overseas interests must be aware of the implications in relation to bribery and corruption legislation.
The UK bribery bill, which is expected to be passed over the next year, takes into account the Law Commission’s recommendations to introduce new bribery offences. Since the Serious Fraud Office (SFO), the Financial Services Authority and the police are all turning their attention and powers of enforcement to stamping bribery and corruption out of British business, whether conducted in the UK or overseas, the bill is expected to turn the spotlight on businesses directly or indirectly involved in corruption.
In addition, a recent opinion released by the United States Department of Justice (DOJ) highlights the importance placed on preacquisition due diligence by the US regulators. The opinion also provides insight into the actual approach the DOJ has used and will likely use when companies demonstrate their intention to address these issues thoroughly.
This is significant for UK businesses because both the SFO and the DOJ have announced that national and international regulators will be working more closely together in future, so a focus for one will most likely become a focus for the other.
An acquisition target with any of the following characteristics may particularly benefit from a forensic due diligence assessment.
Subsidiaries and operations in emerging markets or countries considered to have ►high levels of corruption (see extraction from Transparency International’s Corruption Perceptions Index to the left).
Public sector contracts. ►
Consultancy services poorly documented. ►
Sales commission contingent on contracts being awarded. ►
Excessive travel, gift or entertainment expenditures. ►
Industries with a history of regulatory issues. ►
What are the benefits?Obtaining an assessment of the risk that the target is engaged in bribery and corruption may result in the following benefits:
Purchase price reduction/improved terms. ►
Reduction in risk of criminal and civil proceedings. ►
Limitation of future reputational damage. ►
Inclusion of appropriate indemnities, warranties ►and certifications.
Our forensic due diligence team uses its extensive experience to evaluate an acquisition’s or investment’s potential future loss in value, which may arise from inappropriate or illegal business practices of the target. Our team’s work includes:
Identifying revenue streams or supplies that may be ►predicated on bribery.
Identifying transactions that may give rise to potential ►exposure to criminal prosecution, regulatory fines and civil litigation.
Analysing and assessing the effectiveness of anticorruption ►compliance programmes, including areas such as culture, policies, training, implementation and compliance.
Our experienceWe assisted a US investment bank prior to a transaction with an Asian multinational company. Our analysis helped the client assess risk areas including bribery and corruption, breach of trade restrictions, noncore investments and financial statement irregularities. The absence of our forensic due diligence would have been a deal-breaker, since the client was unwilling to proceed until the impact of such issues on the business going forward was understood.
We were engaged by a financial institution acquiring ►a multinational brokerage firm. Specifically, our analysis focused on:
Identifying and tracing intercompany trades, loans, ►receivables and transfer pricing affecting the businesses targeted for purchase, particularly as they may have originated from fraudulent transactions.
Tracing shareholder acquisitions to the beneficiary, source of ►purchasing funds and accounting treatment.
Understanding of business operations and current status with ►senior management.
Obtaining, analysing and assessing findings of the audit ►committee investigation.
The results of our findings were a significant contributing factor to the company walking away from what was revealed to be too high of a risk.
Transparency International Corruption Perceptions Index — 2008
Country* RankUK 16Turkey 58China 72Brazil 80Saudi Arabia 80India 85Nigeria 121Kazakhstan 145Russia 147*Selected countries only (180 ranked in total)
Ernst & Young LLP
Assurance | Tax | Transactions | Advisory
For more information, please visit www.ey.com/uk. Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.
The UK firm Ernst & Young LLP is a limited liability partnership registered in England and Wales with registered number OC300001 and is a member firm of Ernst & Young Global Limited.
Ernst & Young LLP, 1 More London Place, London, SE1 2AF.
In line with Ernst & Young’s commitment to minimise its impact on the environment, this document has been printed on paper with a high recycled content.
Information in this publication is intended to provide only a general outline of the subjects covered. It should neither be regarded as comprehensive nor sufficient for making decisions, nor should it be used in place of professional advice. Ernst & Young LLP accepts no responsibility for any loss arising from any action taken or not taken by anyone using this material.
12699.indd (UK) 09/09. Artwork by UKDP.
About Ernst & YoungErnst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 135,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential.
Make better divestment and acquisition decisions: mitigate bribery and corruption risk before the deal is closed.A third of global businesses are planning strategic acquisitions in their core business (15% in new business) within the next year.1 These businesses are seeking opportunities in the current recession by conducting M&A activity to benefit in the longer term, when the economic outlook improves.
Divestment and acquisition in uncertain times makes a review of business risk areas during pre-acquisition and pre-investment due diligence all the more important. This will minimise potential loss of value to the acquirer after the transaction.
An appropriate analysis of the risks of fraud, bribery and corruption, money laundering, restrictions on trade and export, related-party transactions, and conflicts of interest and regulatory actions is crucial. Without it, the acquirer or investor could be exposed to reduced revenues, increased costs, reputational damage, competitor or shareholder litigation, or even regulatory sanctions including criminal prosecution.
Where satisfactory due diligence cannot be conducted before an acquisition, regulators now expect effective post-acquisition due diligence to identify the risks in a relatively short time after the deal.
Forensic due diligence explainedConducting forensic due diligence requires global knowledge of fraud and corruption trends together with highly specialised investigative and industry experience.
The primary objective of the forensic due diligence analysis is to evaluate the potential future loss in value resulting from inappropriate or unethical business practices of the target.
These analyses concentrate on specific areas — for example, travel and entertainment expenses, consultancy and agency fees, political and charitable donations, and cash transactions — that may be insignificant in amount but significant in terms of regulatory risk associated with the deal. Contractual arrangements are also considered, including the granting and renewal of licenses and procurement processes. Findings can assist the acquirer when factored into negotiations and can help reduce risk and disruption from the transaction post-deal. Depending on the target’s industry sector, analysing other aspects of the target’s operations may also be appropriate.
Given the current international regulatory environment and increasing investment in emerging markets, one area on which forensic due diligence is typically focused is bribery and corruption.
1 Economist Intelligence Unit survey of 337 C-suite and board level executives conducted in January 2009.
Despite numerous recent high-profile enforcement actions, nearly 30% of senior decision makers interviewed in Ernst & Young’s 10th Global Fraud Survey have never – or infrequently – considered bribery or corruption risks in the context of a potential acquisition.
Forensic due diligenceErnst & Young contacts:Jim McCurry +44 (0)20 7951 5386 [email protected]
