By Philippe MONTIGNY and Blandine CORDIER-PALASSE, Fusions acquisitions Magazine
Recently, the issue of foreign bribery has come to be seen as a major risk for companies. This is particularly true in the case of mergers and acquisitions. Today, a French company that pays an undue commission in connection with a foreign contract, either directly or through a subsidiary or commercial agent, may find itself prosecuted. It can also be convicted by a French court, even though all the constituent elements of the offence are outside French territory.
Until 30 June 2000, a French court could not prosecute an act of corruption committed by a French company abroad. This was the date on which the OECD Anti-Bribery Convention was transposed into French law.
More precisely, it was only possible for a magistrate to reclassify this act as an abuse of company assets. This was the case in particular when it gave rise to the payment of a kickback. Today, a French company that pays an undue commission in connection with a foreign contract, either directly or through a subsidiary or sales agent, can be prosecuted. A French court can convict it even if all the constituent elements of the offence take place outside France.
In addition, the company director may be held criminally liable. There must be proof that the act of corruption was decided upon individually by an employee or intermediary of the company. In addition, it may have been facilitated by the absence of an explicitly formulated corruption prevention policy. To date, 31 French companies (compared with 19 in 2008) are the subject of legal proceedings for an act of corruption committed abroad. More than half of these are the result of a report of suspected money laundering to Tracfin.1. In particular, this concerned the use of funds by the corrupt public official.
The French system for criminalising bribery on foreign markets was strengthened by the Act of 13 November 2007. This law broadened the definition of the offence, notably to include influence peddling. It gave the prosecuting authorities investigative powers previously reserved for the fight against terrorism. In addition, there is the crime of organised crime - infiltration, telephone tapping, image capture, etc.
The OECD Anti-Bribery Convention has now been transposed into national law in all signatory countries. Many prosecutions are now underway. A number of corruption cases have received considerable media coverage outside the courtroom. Examples include British Aerospace in the UK and Siemens in Germany and the United States.
The emergence of severe multi-jurisdictional sanctions
In addition to the risk incurred on national territory, there is also the risk of prosecution in other countries. At present, thirteen companies in the OECD zone, including three French companies, are the subject of multi-jurisdictional investigations. These investigations may result in prison sentences being handed down to the executive by a foreign court. There was the recent case of private corruption between Faurecia's German subsidiary and German car manufacturers. A German court sentenced the French CEO, Pierre Levy, in 2007 to a one-year suspended prison sentence.
The United States is the most active jurisdiction for prosecuting foreign companies listed in the United States. This provision is effective under the Foreign Corrupt Practices Act (FCPA).2. It has also taken legal action against companies with subsidiaries in the United States. For example, the Securities and Exchange Commission (SEC) can sue a French company listed on the US stock exchange. An act of corruption committed in France or in a foreign country constitutes grounds for prosecution.
Over the last six years, 112 companies have been sanctioned by the US authorities for an act of public corruption abroad. Of these, only 35 were not based in the United States. The most emblematic case concerned the German group Siemens. In 2008, it was ordered to pay a fine of 800 million dollars to the US Treasury. The group had already paid a fine of €775 million in Germany.
The issue of corruption in mergers and acquisitions
In the case of a merger and acquisition process, the issue of corruption arises in a different way. It arises whether you look at it from the point of view of the buyer or the seller. The first question that arises is that of the buyer's liability. This liability relates to the inheritance of the recently acquired company's criminal liabilities.
From this point of view, it is necessary to assess which jurisdiction would have jurisdiction. The aim is to criminalise bribery in connection with the acquisition.
To put it briefly, there are two jurisdictional areas. The first is that of the United States. The second is the one in force in most European countries, particularly France.
The American jurisdictional space
For the US courts, the acquirer is liable for the criminal liabilities of the acquired company. This does not apply if the acquirer has carried out thorough due diligence in this area and, on discovering corruption, has initiated or asked the company being acquired to initiate a voluntary disclosure procedure with the competent authorities, the Department of Justice (DoJ) and/or the Securities and Exchange Commission (SEC). These procedures must be carried out prior to the acquisition or, if the acquisition is hostile, immediately afterwards, by informing the authorities as soon as possible of any suspicion that acts of corruption may have taken place.
In the Titan/Lockheed Martin case, the merger agreement was signed on 15 September 2003. Under the terms of the agreement, Lockheed would acquire Titan for $1.83 billion (or $22 per share at a time when the stock was trading at around $7). The agreement also specified "that no subsidiary, officer, director, agent or employee of the company or any of its subsidiaries had committed any act that would place the company or any of its subsidiaries in violation of the Foreign Corrupt Practices Act". However, during the due diligence carried out by Lockheed, it emerged that intermediaries had made illicit payments. These intermediaries work for Titan in Benin and Saudi Arabia.
On 13 February 2004, Lockheed and Titan decided to bring these facts to the attention of the Department of Justice and the Securities and Exchange Commission (SEC). In April 2004, because of the risk of buyer liability, Lockheed required Titan to reduce the purchase price by $170 million. This corresponds in particular to a discount of 9 %.
At the beginning of June 2004, the SEC announced that it would bring an action against Titan for violation of the FCPA. The SEC indicated that other violations might be discovered in third countries. On the 26th of the same month, Lockheed announced that it was abandoning the acquisition because of the risk involved. This decision led to a fall in the share price of more than 40 %. This triggered a series of class actions by small shareholders and institutional investors who were hurt by the sharp fall in the share price.
In March 2005, the SEC ordered Titan to pay 28.5 million dollars. In June 2005, L-3 communication took over Titan at a price of 23 dollars per share. This was certainly the nominal price initially offered by Lockheed. However, this must be tempered by the fact that between June 2003 and June 2004, the Nasdaq had appreciated by around 30 %.
The French judicial area
Under French law, and in most European jurisdictions, the acquirer is not generally liable for the acquired company's criminal liabilities. However, they may be guilty of concealment. This is the case if, once the company has been acquired, he continues to benefit from undue advantages linked to illegal practices. More generally, there is a risk that a corruption pact will be concluded before the acquisition. There is also a risk that it will continue without the knowledge of the new directors. They may then be liable to prosecution for failing to put in place tools to prevent corruption. To this must be added sufficiently effective tools for monitoring commercial practices.
This situation characterised the Faurecia case tried in Germany. It would undoubtedly have prevailed in France had the case been pursued there. In October 2000, Faurecia acquired the German company Allibert Sommer AG. In May 2005, the German tax authorities discovered irregularities in the accounts of Allibert Sommer, which had become Faurecia's German subsidiary. These suggested that undue commissions had been paid in connection with contracts with German car manufacturers. The tax authorities passed this information on to the public prosecutors in Frankfurt and Munich.
The investigation uncovered a system of corruption set up in 1998. It was set up before Faurecia acquired the company. The system involved payments of between €600k and €800k per year between 1998 and 2005. When the facts came to light, Faurecia's CEO, Pierre Levy, took up his post in 2000. He took up his post after the corruption pact had been put in place. As a result, he was forced to resign in 2006.
In addition, the German court sentenced him to a one-year suspended prison sentence and a €300,000 fine. It is particularly interesting to note that in its conclusions, the court acknowledged that the CEO had not been at the origin of the bribery pact. The CEO had therefore not enriched himself fraudulently. He was guilty of failing to take the necessary steps to put an end to these illegal practices. Finally, the judgement may seem harsh. However, it is interesting to note that the financial press at the time described the penalty as lenient.
The issue of corruption in the sale process
The search for corrupt practices is increasingly common in acquisition procedures, not only because it protects the buyer's criminal liability, but also because it can be a way for the buyer to lower the acquisition price, as in the case of Lockheed, which obtained a 9 % reduction from Titan on the price initially agreed. To protect themselves in this situation, a number of companies carry out in-depth due diligence prior to the sale of a subsidiary. However, the consequences of uncovering corrupt practices can be severe, as illustrated by the case recently encountered by ABB.
In 2003, the Swiss company ABB wished to divest two entities: ABB Vetco Oray UK Ltd. and ABB Vetco Gray Inc. During an internal audit, it was discovered that corrupt practices had taken place in Nigeria with a view to influencing public officials during the awarding of contracts. ABB then decided to carry out an in-depth assessment of its two subsidiaries. In 2004, ABB called in 100 external lawyers who audited more than 4 million pages of contracts and conducted nearly 200 interviews in 21 different countries. ABB then carried out a major reform of its commercial procedures and control methods. As a result, ABB decided to plead guilty before the US authorities.
The Department of Justice fined ABB $10.5 million and demanded repayment of undue profits of $5.9 million, for a total penalty of $16.4 million, which was considered very heavy at the time given the depth of the audit initiated by ABB, the cost involved and the scope of the reforms undertaken.
Preventing the risk of corruption through the quality of human capital
An effective system for preventing corruption not only protects the company but also secures its capital in the event of a sale.
Companies have long been aware of the importance of their intangible assets: know-how, patents, business processes, image and even brand. However, few are yet aware of the value of their ethical assets.
From 2000 onwards, companies listed on the New York Stock Exchange began to take account of the provisions of the Sarbanes Oxley Act on internal control and fraud prevention, which were added to the extra-territorial provisions of anti-corruption legislation. The considerable fines imposed on companies for corrupt business practices (KBR was fined 800 million dollars in the United States this year) demonstrate just how costly a failure to comply with ethical practices can be for a company.
Furthermore, in France, the law of 3 July 2008 and the order of 8 December 2008 transposing the Eighth Directive have given new responsibilities to directors. As a result, they are called upon to meet high expectations in terms of ethics and must ensure that risk management procedures are effective, even if it is up to management to put effective procedures in place.
But preserving our ethical heritage is not something that can be decided by decree urbi and orbi. It is not enough to strengthen internal control procedures. It is essential to make employees aware of the value of integrity and to arouse their conviction in order to get everyone on board. In this way, preserving our ethical heritage is achieved by putting in place an appropriate organisation and appropriate prevention and control procedures.
To this end, companies generally draw on an ethics document, a repository of culture and values. This document can be adapted in the event of a change in the company's scope as a result of a merger, acquisition or demerger.
Some have been forced to develop this approach by external demands, particularly from stock market regulators (the French AMF and the US SEC). Extra-financial rating agencies are also demanding this approach. The reference framework has evolved to include questions about the way in which companies deal with a particular ethical risk (corruption, lobbying for industries dependent on regulatory authorisations, advertising sales practices for consumer goods companies, sponsorship, respect for privacy, etc.). What's more, companies are imposing new conditions on each other. Buyers require suppliers to comply with the provisions of their ethical documents. In particular, American buyers are asking to check the anti-corruption procedures of the companies they deal with.
The development of compliance systems in France is linked to the strengthening of internal control requirements. It is also linked to the international expansion of groups.
Companies that expand internationally, and particularly in certain countries, are aware that they are increasing their risks. They are exposed to the application of extraterritorial rules (particularly in relation to corruption) and to a globalisation of their legal risks. These risks relate in particular to competition, labour law, human rights, health, safety, sustainable development and the environment. The economic crisis has revealed how quickly defaults can spread on a global scale. Companies that were in a quasi-monopolistic position and are now entering the competitive system are worried about new temptations.
The emergence of 'compliance' policies
To address these risks, French companies are beginning to adopt compliance policies. In practice, ethics often refers to business ethics. It is essentially based on integrity and compliance in business practices and individual behaviour.
Compliance seeks to protect, maintain and develop a company's reputation and competitiveness. The primary aim of the compliance function is to ensure that the company's activities are conducted in compliance with civil and criminal laws and regulations. The concept is designed to prevent and detect wrongdoing. Secondly, it provides an educational tool on the scope of the applicable rules. Finally, it must put in place prevention and control procedures.
Some groups have a compliance-oriented approach. On the one hand, there is a highly centralised frame of reference in the form of an ethical document that is often universally applicable, with locally adaptable variants. The aim is to respect cultural differences. On the other hand, there is a more extensive network of compliance officers. They are responsible for raising awareness and monitoring compliance, while guaranteeing anonymity where necessary.
The personalities of the founders or managers, the history and culture of each company influence its approach to ethics and compliance.
Some organisations want to pass on solid values. The aim is to maintain integrity of behaviour, particularly because of their business model or corporate purpose. This is the case, for example, with mutual societies, cooperatives and public services. Family businesses, on the other hand, are socially committed to passing on a strong corporate culture.
Other companies (industrial or service companies that contract with governments) are exposed to legal risks (such as corruption or undermining competition). These companies are also subject to the American legal system (listed on the New York Stock Exchange). As a result, they are developing legal and fraud risk prevention measures.
Setting up an Ethics and Compliance department
Deploying a compliance policy generally involves setting up an Ethics and Compliance department.
By definition, the Ethics and Compliance department must be independent of the operational sphere in order to be able, for example, to refuse the choice of a commercial agent whose integrity is questionable to the point of putting the company at risk. But this independence must be coupled with a perfect understanding of the company's business and the way it acquires and retains business, without which it would have little credibility.
The legitimacy of an Ethics and Compliance department rests on two pillars, the first of which is its position in the company's organisation chart. It must be sufficiently close to the CEO and show that it has his absolute support. Its director must have access to the company's governing bodies: executive committee, management committee or management board, as the case may be. Of course, it is essential that it has direct access to the audit committee, which must provide regular information on its activities.
The second pillar guaranteeing the legitimacy of this management consists of the legitimacy of the person of the director. The director must be a man or woman whose integrity is beyond doubt and who enjoys a reputation for independence and rigour. A certain amount of charisma is also required because, in addition to implementing and monitoring anti-corruption procedures, the aim is to "bring ethics to life" within the company, whether in the operational departments or in the support functions: human resources, legal affairs, audit and internal control.
The interpersonal skills of the Compliance Director and his or her team are fundamental in conveying conviction and winning the support of all employees. Employees must take ownership of compliance with the rules and procedures that have been put in place, and must be able to identify with the values that are widely promoted within the company.
This eminently cross-functional function must cooperate and interact with all operational and support functions:
-Finance, Audit, Risk Management and Internal Control. They are also involved in the fight against fraud;
-The Human Resources Department is involved in setting up appropriate training programmes. The aim is to make employees more vigilant in preventing corruption;
The Legal Department is involved in enforcing compliance with anti-corruption obligations, particularly in contracts.
The ethics and compliance officer must therefore position himself in relation to these different departments. Their position at the highest level gives them the legitimacy to issue an "independent" opinion on the issues raised. He or she can do so in complete confidentiality and in the confidence of employees or management.
The cooperation and involvement of the various operational departments and support activities varies according to three key factors:
- the nature of the risks to which the company is exposed;
- the history of precedence and legitimacy of the various functions ;
- the legitimacy of the ethics and compliance department. This depends in particular on the personality and charisma of the director. Added to this is the legitimacy provided by the highest level of the pyramid within the company.
Base prevention measures on empowering employees
The success of a policy to prevent corruption depends on the mobilisation of all employees. It is therefore important for the Ethics and Compliance Department to be able to rely on a network of compliance officers. These compliance officers are spread across the Group's various entities and countries. Depending on the size or risk of a subsidiary or country, these compliance officers may be either dedicated to this function full-time or share it with their primary responsibility: legal, human resources, audit or finance. Finally, some companies are adopting a formula whereby regional compliance officers work full-time. Those working in the countries concerned do so on a part-time basis.
There is no standard qualification for a compliance officer. These correspondents generally have a threefold role of raising awareness, advising and reporting. Compliance programmes include training on increasingly targeted risks. These include corruption, anti-competitive behaviour, purchasing practices and human rights.
Their role is assigned on the basis of their personal profile. This assignment is also based on the nature of the prevailing risks in the business or country. Depending on the case, they may have a legal, accounting or auditing background. However, there are often excellent compliance officers who are former sales or operational managers. They may also be former administrative or human resources managers, or even communications managers.
A team of compliance officers needs to bring together a range of complementary skills and talents. These include imagination in devising the most appropriate procedures for the company's businesses. Then there is the rigour of analysis to identify potential risks. There is also the psychology involved in convincing operational staff on the ground to strictly apply precautionary principles that can slow down their activity.
Financial and human resources are therefore deployed. The commitment of each employee is a prerequisite for these measures to be fully effective. Once again, the value of human capital is fundamental. The aim is to ensure that the systems put in place are effective and respected.
The company's top management must set an example. Supported by management, it has a fundamental influence in ensuring the legitimacy of the entire approach. The aim is to develop a compliance reflex throughout the Group's organisation and international business.
The long-term future of the company and its international development can be assured. This will be possible under better conditions of legal, financial and operational security. This will help to strengthen the overall security of the company and its human capital. It could also contribute to a constant improvement in the value of the company.
In this way, the compliance policy contributes directly to the creation of value within the company. More specifically, it certifies that the company's sales are based on commercial practices. These practices must comply with legal requirements and public expectations. Today, it is particularly scrutinised during the acquisition process. The credibility of the figures on which negotiations are based depends on it.
1 French anti-money laundering unit
2 Foreign Comipt Pracaces Act 1977. Revised in 1998 to transpose the OECD Convention into US domestic law
