by Christopher Stewart-Smith
Ask a company, “Who runs your FCPA program?” and a common response may be, “What FCPA program?” It’s one thing to not self-police, but when acquiring a business, it’s doubly important to know what to look for when examining a potential merger with a target.
When it comes to steering clear of Foreign Corrupt Practices Act (FCPA) violations, mergers and acquisitions can present a problem. That’s because no matter how good a job a company does at watching its own back, it can’t change the history of a merger or acquisition target. Like a new homeowner who’s just been handed the keys, the acquiring company is now responsible for any issues that occurred before the deal closed.
One of the best ways to identify potential FCPA red flags is through the use of audit software, which can provide constant auditing and monitoring, and can also sift through a mountain of historical data.
It only takes one bad piece of data to catch the attention of the Department of Justice or the Securities and Exchange Commission, and cause a disaster. Finding problems early in the M&A process can be essential.
Audit software can allow companies to analyze information in many ways, and it is especially helpful in identifying FCPA-related issues, such as:
- Unusual patterns in an acquisition target’s business dealings, such as irregular payments in foreign locations. Sometimes there are keywords that appear in communications with vendors – “Thanks for your cooperation” or “Let’s get this through” are the types of comments in paperwork that could be a sign of bribery having taken place.
- Expense reports that don’t provide explanations for large claims – especially in foreign nations – and multiple uses of one-time vendors. The latter implies that a business relationship has strayed from the original intent.
- Where the company does business. The Corruption Perception Index, an annual ranking issued by the organization Transparency International, highlights countries where corrupt practices are most likely to occur.
- Signs of interaction with anyone designated as a politically exposed person, a term describing someone who performs important functions for a government.
A comprehensive audit software program can test a company’s entire data set against these types of government lists and flag potential FCPA violations.
Why are such solutions needed? The price of violating FCPA provisions can be steep: Corporations and other business entities are subject to a fine of up to $2 million, while officers, directors, stockholders, employees, and agents are subject to a fine of up to $100,000 and imprisonment for up to five years.
The fines can exceed those levels. Under the Alternative Fines Act, fines can be up to twice the benefit that the defendant sought to obtain by making the corrupt payment. Also, any fines imposed on individuals may not be paid by their employer.
Unfortunately, acquiring companies have been forced to pay large fines after assuming the liabilities of a company that violated the FCPA. It happened to Tyco International, which was fined $50 million in 2006 after the government learned that the company’s due diligence on a pair of acquisitions revealed possible violations that Tyco failed to disclose to authorities. The wrongdoing continued after Tyco completed the transactions.
General Electric Co. fared better with the acquisition of InVision Technologies in 2006. Prior to closing the deal, GE discovered that InVision was aware that its foreign sales agents or distributors either made or offered to make improper payments to foreign government officials in order to win or retain business. GE reported the violations, and the SEC negotiated a $1.1 million settlement with InVision.
What are the lessons here? A software program can easily monitor, detect and alert users to major FCPA-related problems. Companies may be afraid of issues that the software finds, but if something shady is uncovered, it’s best to self-report the news to the government. No company can or will ever be 100 percent bulletproof, but diligence is essential. No specific industry is more at risk than others for potential FCPA violations, and the same rules apply to public and private companies.
The government continues to crack down on violators, which means it’s as important as ever to keep a trained eye on your company’s data. A simple software system can provide the constant monitoring that is needed, and if something is flagged, it can immediately be run through remediation. It’s much more cost effective and much less risky than the alternative, and it doesn’t gamble with your company’s reputation.
This article was written by Christopher Stewart-Smith and originally published on corporatecomplianceinsights