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M&A Transactions in Latin America: Practical tips for multinationals conducting anti-corruption due diligence (Part 3 — Sources to Review)

Author: Carlos Ayres

MAFCPA3Multinationals should take into account certain local particularities when conducting M&A due diligence for anti-corruption compliance. Part I of this series describes how to manage resistance to due diligence from local companies. Part II discusses some key issues to look at during the diligence. This post discusses the following important sources of information in the due diligence process:

Local public databases: In addition to issuing questionnaires and conducting interviews, it is important to conduct an independent background check on the target company. For that exercise, databases of public data are important sources of information. Many vendors offer these services for a reasonable price, providing information from an extensive list of databases ranging from terrorist lists to The World Bank’s list of ineligible firms and individuals.

But, in this process, companies (and vendors) sometimes miss important local databases. For example, since 2008, the Office of the Comptroller General (CGU) in Brazil has kept a public website with the names of individuals and companies debarred at the federal level and in some states. It is essential that such local sources be checked since the DOJ and SEC would not look kindly on a situation where issues arise when public negative information could have been easily obtained.

Past legal cases: Often, as part of due diligence, targets are asked to provide information about prior convictions or pending legal cases. For these inquiries, it is important to keep in mind that, in Latin America, civil law is the dominant legal tradition. Among other things, the system is bound by strict procedural rules and, often, cases are dismissed because the rules have not been followed. This means that the ruling in a bribery case could be related to a procedural issue and not the merits, even when the evidence would justify a conviction. Because of this, when such cases are identified during due diligence, they should be reviewed closely for relevant information that will help a buyer assess the integrity of a target. Local counsel can help the company understand the specific kinds of civil, administrative, and criminal procedures normally used by local authorities and uncover relevant closed cases.

Tax documents: As discussed in detail in Part II of this series, corruption issues often arise in connection with tax matters in Latin America. Companies should look at the target’s history of inspections and fines. In some jurisdictions, that information is registered in the tax books that companies are required to maintain and should be easy to obtain. Such documents can contain useful information to identify potential red flags. Odd frequencies of tax inspections or official reviews that did not identify tax issues – while the ordinary tax due diligence conducted at the target indicated otherwise – are some examples of issues that potential acquirers might want to clarify before moving forward with the acquisition.

Public procurement records: Potential acquirers might want to consider looking to a sample of records of public procurement related to sales made by the target to government entities. Such documents can identify participants in the tenders, disqualification of bidders, appeals presented, final prices, and other issues. These documents, for example, might reveal allegations that technical specifications were tailored to the target company raising a red flag. This is because government officials are involved in developing such specifications. As a general principle of procurement, companies should compete under equal conditions and specifications should not be tailored to any specific one.

This series of posts highlights the importance including local expertise in your team conducting due diligence. They are positioned to identify clues that signal corrupt behavior. Experienced local lawyers should be involved from the early stages. Their advice on local risks and legal requirements, as well as cultural issues, are of great benefit to the due diligence process. Their knowledge will often be essential to discovering potential FCPA violations, enabling companies to avoid or minimize liability that could otherwise have been avoided.

The opinions expressed in this post are those of the author in his or her individual capacity, and do not necessarily represent the views of anyone else, including the entities with which the author is affiliated, the author`s employers, other contributors, FCPAméricas, or its advertisers. The information in the FCPAméricas blog is intended for public discussion and educational purposes only. It is not intended to provide legal advice to its readers and does not create an attorney-client relationship. It does not seek to describe or convey the quality of legal services. FCPAméricas encourages readers to seek qualified legal counsel regarding anti-corruption laws or any other legal issue. FCPAméricas gives permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author and to FCPAméricas LLC.

© 2013 FCPAméricas, LLC

Carlos Henrique da Silva Ayres

Post authored by Carlos Henrique da Silva Ayres, FCPAméricas Contributor

Categories: Anti-Corruption Compliance, Due Diligence, English, FCPA, M&A

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