By José Claudio Treviño, Partner at Forensic & Financial Crime, Deloitte Spanish Latin America
Mergers and acquisitions remain a priority for companies looking to expand their operations into new regions and markets. However, as businesses acquire new ventures or continue to expand globally, they must not overlook the increasing exposure to financial crime risks and anti-corruption laws, including Mexico’s Federal Anti-Corruption Law in Public Contracts.
The Need for Robust Anti-Corruption Programs
Given this, there is a genuine need for companies engaging in global acquisitions to have a robust anti-corruption program that includes thorough due diligence as part of its scope. Hidden risks in cross-border transactions can be substantial.
Consequences of Regulatory Non-Compliance
Decisions by global regulatory bodies have shown that negative consequences such as penalties, fines, and reputational damage can be avoided if a proper review of third parties is conducted before initiating any business relationship. Failure to comply with regulations can lead to severe consequences, including criminal penalties, imprisonment, civil sanctions, disqualifications, lawsuits, and reputational damage.
Importance of Knowing Your Business Partners
In both merger and acquisition environments and risk mitigation through third-party operations, local and international norms dictate that companies must “know” their business partners. Many fail to gather sufficient information about their third parties or conduct timely due diligence, potentially leading to coercive measures from authorities like the U.S. Securities and Exchange Commission (SEC) or Department of Justice (DOJ).
Benefits of External Verification
Engaging an external firm for third-party background checks can be advantageous due to their access to extensive information sources and independence during the selection process. This support extends beyond onboarding, continuing through ongoing monitoring throughout the business relationship with the third party. This enables identifying risk factors and making informed decisions when a supply chain member is involved in scandals or, worse, included on “blacklists.” Professional investigators can help minimize the risk of overlooking crucial information and lend credibility to the independence of the process, free from commercial interests.
Anti-Corruption Due Diligence Process
An anti-corruption due diligence evaluation begins with an exercise to understand a company’s culture, organizational structure, and business model. This includes analyzing the existing management stance on ethics and transparency in operational practices, known as “tone at the top”: the attitude and philosophy of a company’s senior executives towards fraud and corruption.
Simultaneously, understanding the business structure and internal control framework, along with its demonstrated (or lack thereof) ability to mitigate risks—including corruption—is crucial.
Revelations from Questioning Exercises
Responses obtained through questioning exercises are often revealing about the inherent risk level a company may face due to potential corruption-related non-compliance. Moreover, understanding the business model can involve reviewing accounting systems and records to identify suspicious accounts potentially used for improper payments or those violating the U.S. Foreign Corrupt Practices Act (FCPA).
Transaction Testing
The next step in due diligence may involve transaction testing to confirm that the information gathered through interviews and documentation aligns and is consistent.
The Risks of Operating with Third Parties
Operating with third parties is surrounded by risks. Therefore, conducting background checks and anti-corruption due diligence exercises is indispensable.
Key Questions and Answers
- Q: Why are background checks and anti-corruption due diligence important for companies?
A: These processes help identify hidden risks in cross-border transactions, ensure compliance with anti-corruption laws, and mitigate potential reputational damage from non-compliance.
- Q: What are the consequences of failing to comply with regulations?
A: Consequences can include criminal penalties, imprisonment, civil sanctions, disqualifications, lawsuits, and reputational damage.
- Q: Why is it crucial for companies to know their business partners?
A: Companies must understand their third parties to avoid coercive measures from authorities and ensure compliance with local and international norms.
- Q: What benefits do external verification firms provide?
A: External firms offer access to extensive information sources, independence during selection, ongoing monitoring, and professional investigators who minimize the risk of overlooking crucial information.
- Q: What does an anti-corruption due diligence process entail?
A: This process involves understanding a company’s culture, organizational structure, business model, management stance on ethics and transparency, internal controls, and potential risk factors.
