[1]On August 31th, 2013, The Economic Times of India carried the headline: “Fear of anti-bribery laws slows down M&A deals in India [2].” This one short article, in the second-most widely read English-language business newspaper in the world, speaks volumes about perceptions and realities of the FCPA in the global economy.
FCPA issues need not end a deal. The article does a good job at showing how FCPA concerns can crater a merger or acquisition and highlights a trend: “[the] frequency of such breakdowns are increasing as investors are afraid of ending up on the wrong side of anti-bribery laws in the US and UK.” The author even does so with a sensational bent: “[FCPA concerns] may be at least one part of the reason why M&A deals in India have shrunk 38% to $15.43 billion in the first seven months of 2013.”
But the author does not tell the whole story. The FCPA Professor has described previous “misleading” [3] FCPA coverage by The Economic Times, and it appears to have happened in this article too. As FCPAméricas has discussed [4], while FCPA concerns can crater a deal, that is not the only possible outcome. Companies can still proceed with certain deals by remediating issues, terminating responsible employees, implementing heightened controls in areas of prior weakness, and quickly training personnel in high-risk areas. Whether or not to self-disclose these issues to authorities is another question. If a company chooses to do so, the acquiree should be concerned about its own potential liabilities.
Certainly, these efforts can be costly, and those costs can mount if the problems encountered are pervasive or complex. Acquirors may have price-related misgivings about how to value these potential liabilities, or deeper misgivings about the likelihood of changing a local company’s compliance culture. But such issues of price or compatibility are similar to many other issues that come up in mergers and acquisitions. As such, the FCPA is more practical in application than this article might otherwise suggest.
Silver linings. The article provides ample anecdotal evidence that companies are beginning to reject deals with Indian companies tainted by corruption. The author writes, “It’s not just foreign firms, Indian companies too are raising their guards.” Potential Indian partners or acquirees are learning that they can lose a deal if integrity-related due diligence uncovers issues. This creates a powerful incentive for Indian companies to clean up their own work. This, in turn, has the effect of improving market economies. As domestically-focused Indian companies learn that a “small” compliance issue (as described in the article) can torpedo a $1 billion acquisition, they will find a new and convincing reason to prioritize ethical business.
In this way, FCPA enforcement might truly be having the effect of leveling the playing field and raising the quality of markets for all parties. These are some of the positive outcomes of the FCPA that former Secretary of State Hillary Clinton discussed in her address [5] to Transparency International-USA last year.
This report also suggests that private equity firms may be increasingly likely to reject deals based on integrity concerns. If true, this would be a notable development in financial services and FCPA compliance spheres. FCPAméricas has discussed FCPA risks in private equity here [6].
Talking indirectly about bribes. One interviewee in the article states, “[I]n the course of due-diligence we found out that the person who was advising the deal had some kind of understanding with the Indian promoter to close the transaction in lieu of some favour.” This phrase reminded me of instances in which I have found the word “favor” to be an effective way of talking about bribery. In general, individuals are more willing to speak openly about corruption risks when they can couch them in kinder words, like “favor,” “special treatment,” or “under the table.” In a similar way, at one point the author of the article describes regulatory-related corruption in the following terms: “a small but significant regulatory obligation had not been complied with.”
Corruption grows if left unaddressed. The article ends with a quote from a local Indian lawyer: “If the same [minor corruption issue] had been overlooked, the risks to the client could have been manifold and jeopardized future operations.” This is a common dynamic in corrupt schemes. They start small and then grow over time. FBI informant Marc Whitacre has discussed the dynamic here [7]. FCPAméricas has discussed here [8] how, when left unattended, corruption can create Enron-sized problems.
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