(Due diligence) checklist

Transcription

1 (Due diligence) checklist Ep Hannema, Partner Recep Altun Norton Rose Fulbright LLP 19 September 2013 Are there particular transactions which are high risk? M&A Agents Logistics / import / export Anything involving commission Evolution to consultancy? Technical services etc. Depending on country: Anything involving a local official Anything where payment is offshore and the servics must be performed onshore Litigation Routine to bribe judges in some jurisdictions 2 1

2 Properly managing high-risk transactions Have adequate and thorough policies in place to deal with the following: Sales agents and consultants Hospitality/events and client entertainment Client travel and trips Gifts/benefits Charitable and political contributions Petty cash Contracts re freight forwarding Visas, licences, permits 3 Due Diligence In order to know exactly who a company is dealing with, and trust them, a thorough review of all intermediaries, acquisitions and business partners should take place The purpose of the review is to collect information to get to know enough about these persons so that the company can make an informed decision on whether to accept the risk of doing business with them, which is particularly important when the third party is operating in a high-risk or regulated environment Not only should this be completed before the relationship is entered into and on completion of any transaction, but due diligence should be carried out on an ongoing basis as the relationship proceeds 4 2

3 Who should due diligence be carried out on? The requirement for and extent of such diligence should be risk based: Those third parties carrying out less risky services require less due diligence (e.g. any firm in an otherwise high-risk category whose shares are publicly traded or regulated; everyone who is not in the high-risk category) High-risk third parties include: Proposed joint venture partners External sales and marketing agents or commercial intermediaries Distributors External lawyers, accountants and tax advisors Freight, logistics and customs agents Visa and licence intermediaries (and anyone retained to procure licences and permits from the government) Major subcontractors Anyone where a red-flag has been picked up in the low-risk category 5 Level of diligence to be carried out Low risk diligence: Obtaining a request from the business unit or employee who wishes to engage the business partner, specifying details such as terms of engagement, expected activities and scope of work, remuneration and structure, where and how payments are to be made, how candidate introduced, etc. Understanding who the key people are - who owns the business partner, manages it and who is doing the work for your company Take notes of everything Review the diligence every two years High risk diligence: Questionnaire to the business partner to ascertain: ownership, directors/employees, existing partnerships and relationships, any judicial or regulatory findings, business/financial references, anti-bribery policies, if they do business in sanctioned countries Ask for third party references Conduct a site visit (if relevant) Be alert to key commercial questions (e.g. is the agent really necessary, does it have the required expertise, is the payment reasonable, are foreign officials involved) 6 3

4 Typical Red Flags Large, unusual or unexplained cash payments, including payments to vendors in cash Round sum payments Payments being made through a third party country Small suppliers and consultants being paid large amounts of money for uncertain services Advances to vendors or credit balances with suppliers Long standing entries in suspense and temporary accounts Lavish entertaining gifts to clients (including paid travel) Missing documents or records regarding meetings or decisions to retain suppliers One-time transactions or payments to vendors not approved in the company's master vendor file Doing business directly with government officials, their associates, politicians or the police Transactions with unusual or generic descriptions ("extraordinary costs") 7 Typical Red Flags (continued) Third party's refusal to participate in due diligence, identify a beneficial owner, or certify anti-corruption compliance Convictions or allegations of illegal or unethical conduct by suppliers Recommendations of the use of particular suppliers by a governmental official An agent's requirement of an unusually high commission or a deficient invoice lacking details of the tasks performed A middleman or local being involved in a public contract and their addition has no obvious value to the performance of the contract Supplier invoices include claims for disbursements without supporting receipts 8 4

5 Contract review and tips When reviewing contracts for third party business partners, the following terms should be expressly included/excluded: Prohibit bribery and all forms of corruption and have compliance of such provisions confirmed in writing Duty to immediately report any changes in ownership or corporate leadership Exact duties and deliverables should be spelt out No rights of assignment or subcontracting Payments should be made via electronic funds transfer, should not be made upfront, should be in the local currency and should only be paid to the named company The agent should generate the invoice not the company and should be fully supported and comply with the terms of the contract Unilateral right to cancel the contract if there is a compliance violation or breach of contract 9 Contract review and tips (2) Unilateral disclosure to authorities or to take any other action necessary or appropriate Allowance for disgorgement of any monies previously paid under the agreement Ability to withhold payments due until any alleged breach of compliance has been investigated and resolved Dispute resolution by arbitration in the company's home country or in a third country - not the agent's! The contract should be renewable annually The company should have sufficient audit rights (i.e. the right to review the books and records of the agent) 10 5

6 Bribery concerns during an acquisition/corporate takeover If there is a bribery violation lurking in the target company, as a buyer you will potentially suffer severe consequences: The valuation of the target will inevitably fall, sometimes significantly, due to: Potential liabilities for fines, penalties, profit disgorgement and associated investigation and remediation costs The buyer can itself be held liable for the conduct of the target In order to prevent this: Bribery due diligence Include bribery related provisions in the purchase agreement, including a termination right if any representations or covenants are materially untrue or breached and indemnities for any liabilities caused as a result of bribery or corruption Integration plans should be put in place and a compliance review should always be carried out, as well as compliance training and unifying internal controls 11 Prevention / Deterrents Eliminate those factors which lead to it taking place e.g.: motivation or pressure; opportunity; rationalisation Implement a truly effective compliance procedure six general principles - Ministry of Justice Guidance: Proportionate procedures Top-level commitment Risk assessment Due diligence Communication (including training) Monitoring and reviewing 12 6

7 What to do if suspicion of bribery arises Ensure that the questionable conduct has stopped Ensure that an independent and thorough investigation is carried out Seek appropriate external legal advice - as early as possible Keep notes of steps taken and decisions made and ensure that these are backed up Consider reporting obligations Manage communication legal privilege 13 7