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M&A Transactions in Latin America: Practical tips for multinationals conducting anti-corruption due diligence (Part 2 – Key Issues to Probe)

Author: Carlos Ayres

MAFCPA2Multinationals 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 (below) discusses some key issues to look at during the diligence. Part III discusses important sources of information in the due diligence process.

Although the specifics will vary from case to case, companies conducting M&A due diligence in Latin America should take a risk-based approach and pay particular attention to certain areas that are often problematic throughout the region. The four areas mentioned below (which are by no means exhaustive) have traditionally been the sources of compliance issues and have also been the subject of increased scrutiny by local authorities in the recent past.

Tax (including customs): The tax system in Latin America is costly and time-consuming. The 2013 Paying Taxes report, a study from PwC, The World Bank and The IFC, provides data on tax systems in 185 economies around the world and shows where Latin America fits in. The total tax rate for South America is higher than the world average, and the time needed to comply with tax requirements is significantly higher than the world average and the highest of any region. Brazil requires the most time out of any country in the world to comply. For example, a mid-size company is estimated to spend around 2,600 hours each year with tax matters.

Corruption issues often arise when companies try to expedite this process, reduce costs and obtain favorable tax treatment. Special tax programs in some countries can be particularly problematic as authorities have much discretion to grant them.

Licenses and Permits: Obtaining licenses and permits in Latin America is often bureaucratic and time-consuming. The 2013 Doing Business report, another study by The World Bank that assesses regulations affecting companies in 185 economies, indicates that Argentina, Brazil, Venezuela, and Suriname are among the slowest countries in terms of days necessary to obtain construction permits. According to the study, it takes 469 days to obtain all the necessary licenses in Brazil and an incredible 1,129 days in Haiti. In contrast, the average of the countries of the European Union is 182 days.

In general, throughout Latin America, construction, operational and environment approvals involve many different agencies. Procedures are complicated, expensive, and time-consuming. In this context, some companies might feel pressure to pay bribes to pass inspections and obtain and expedite approvals.

Public Procurement: Throughout Latin American, except for very few specific situations, governments can only purchase goods and contract services through public biddings designed to ensure equal conditions for all bidders. Such procedures usually have strict and formal rules. But compliance issues can arise in many forms, such as: i) the improper exclusion of bidders through shaping of the tender specifications; ii) unsupported disqualification of competitors; and iii) inappropriate declaration of waiver and unfeasibility of the public bidding process. Frequently, such activities are associated with bribery.

Political Contributions: As highlighted by Lucio Rennó, Associate Professor in the Program on the Americas at University of Brasília, in the book entitled Corruption and Democracy in Brazil: The Struggle for Accountability, “it is impossible to understand the Brazilian election without considering the impact of corruption.” The problem is often tied to official and unofficial political contributions, and is an issue throughout the region. As a result, companies should pay attention to political contributions when conducting their anticorruption due diligence. Not surprisingly, questions about political contributions are often among the most difficult ones for targets. Often no reasonable answers are provided for the rational of such contributions.

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, Procurement

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