The novel coronavirus causing COVID-19 has added a new layer of complexity in determining and mitigating bribery and corruption risks in international M&A transactions. In light of the measures rapidly imposed by countries across the globe in response to COVID-19, such as border closures and lockdowns, acquiring companies and their investors may run into difficulties conducting anti-bribery and anti-corruption (-corruption) due diligence. This article sets out some of the obstacles to anti-bribery and -corruption due diligence the COVID-19 pandemic has created and proposes some practical solutions to these potentially significant challenges.
A Brief Primer on Canada’s Anti-Corruption and Bribery Law
Briefly, Canada’s Corruption of Foreign Public Officials Act (CFPOA) prohibits 1) the giving or offering of an advantage or benefit to a foreign public official to retain or obtain a business advantage, and 2) certain deceptive accounting practices if implemented for the purpose of bribing a foreign public official or concealing a bribe.
Violating the CFPOA prohibition can be an indictable offence subject to a fine in any amount at the court’s discretion and/or imprisonment of up to 14 years. Courts are steadily imposing more severe fines for CFPOA violations. For example, recently, a company fine of $10.35 million was imposed under the CFPOA.
The CFPOA applies to acts committed outside of Canada by Canadian citizens, permanent residents and corporations incorporated in Canada. This means that a parent company in Canada acquiring a subsidiary company abroad may be exposed to liability not only from activities of the target company, but from actions by Canadian citizens or permanent residents working at the company.
Anti-Bribery and -Corruption Due Diligence Considerations In Light of COVID-19
Conducting a thorough due diligence investigation of a potential target located in a foreign jurisdiction is therefore crucial to mitigating the risk of bribery and corruption liability. However, the rapid worldwide spread of the coronavirus causing COVID-19 has created numerous new difficulties in conducting such due diligence.
- Access to Information. Getting access to a complete data set is a challenge at the best of times. Even a target in a friendly acquisition may be reluctant to share documents that when read together may evidence bribery and corruption. Where requests for such information are made via email as opposed to in person, it may be easier for the target to omit to fully disclose. In the light of COVID-19, targets willing to provide access to information may have difficulty doing so or may be significantly delayed in providing such documentation.
- Access to the Target. In-person meetings, interviews and examinations of books of account may be impossible due to lock-downs, quarantines and self-isolation.
- Access to Authorities. Authorities may be working remotely or prioritizing COVID-19 issues. As a result, responses from government officials may be delayed or not forthcoming at all.
- Access to Foreign Countries. As countries lock down borders, it may become more difficult to physically access foreign countries. This may create difficulties in evaluating company operations and how a target gives effect to their internal policies on bribery and corruption. Post-closing, this may cause significant friction in implementing new anti-bribery and -corruption policies and training programs.
- Increased Risk of Bribery and Corruption Activity. Border shut downs may increase the risk of illicit trade and smuggling and result in a general deterioration in anti-bribery and -corruption discipline by officials both at the border and internally (for example, regarding the issuance of licenses). Also, delays in government services could result in prohibited facilitation payments to ensure timely service.
Some Pragmatic Solutions
While these new challenges may appear daunting, pragmatic solutions are available to minimize risk and increase the effectiveness of the due diligence:
- Leverage video-conferencing. Although not equivalent to in-person meetings, it is superior to telephone or email conversation in that it brings with it face-to-face discussions and body language.
- Consider flexible timelines. Challenge the rationale behind certain due diligence and acquisition deadlines. Consider whether deadlines can be pushed back or postponed to allow for sufficient due diligence research to be conducted.
- Representations and Warranties. Where sufficient due diligence cannot be completed and a flexible due diligence completion date is not possible, consider adding additional representations to the purchase agreement. Although not a defence to a charge, such provisions may serve as a basis for post-closing indemnification.
- Consider a flexible acquisition structure. Mergers and share purchases come with the risk of successor liability. An asset purchase of less than all or substantially all of the target’s assets may mitigate this risk. An exit option for breach of compliance representations and warranties may also be worth investigating.
- Be proactive and suggest the target put proactive measures in place. For example:
- Determine at the outset of the due diligence process any requests or inquiries that may need to be made to government offices. It is important to make any requests as early as possible to minimize the risk that their response holds up the transaction.
- Suggest the target digitalize information now. It is possible that information not thought to be relevant now may become relevant at a later date when it is no longer accessible due to lockdowns or other measures.
Concluding Observations: Be Proactive and Thorough Despite the Uncertainty
Conducting bribery and corruption due diligence in a foreign M&A transaction is of great importance. Proactive implementation of processes like those outlined above may mitigate the effects of significant changes in the country of the target in response to COVID-19, such as country lock-downs. A failure to scrupulously review the target’s books, records and policies bring the potential for significant liability and reputational damage. It is therefore essential to come to terms with the COVID-19 pandemic and implement practical solutions to conducting such due diligence. The challenges of COVID-19 will not be an acceptable excuse by the acquiring company to a violation of bribery and corruption law.