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Addressing Corruption Risk

Addressing Corruption Risk

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Published by PwC
The current global economic environment has posed various challenges for US investors, including private equity firms, domestic corporations, and multi-nationals. However, we expect deal activity to intensify as companies look for new ways to grow and meet their strategic objectives. In particular, the pace of US deal activity may increase as companies seek to find value and expand through mergers and acquisitions with international targets. For more information visit http://pwc.to/1duDCrD
The current global economic environment has posed various challenges for US investors, including private equity firms, domestic corporations, and multi-nationals. However, we expect deal activity to intensify as companies look for new ways to grow and meet their strategic objectives. In particular, the pace of US deal activity may increase as companies seek to find value and expand through mergers and acquisitions with international targets. For more information visit http://pwc.to/1duDCrD

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Published by: PwC on Sep 05, 2013
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02/20/2014

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 At a glance
Get up to speed onhow to mitigate risk in
US outbound M&A activity and recent changesin the global ghtagainst corruption.
2013
 Addressing corruption risk in M&A transactions
The international balancing act
 
2
PwC
 Addressing corruption risk in M&A transactions
 Introduction
The current global economic environment has posed various
challenges for US investors, including private equity rms, domestic
corporations, and multi-nationals. However, we expect deal activity to intensify as companies look for new ways to grow and meet their strategic objectives. In particular, the pace of US deal activity may 
increase as companies seek to nd value and expand through mergers
and acquisitions with international targets.
 Addressing corruption risk in M&A transactions:
The international
balancing act
 As companies grow, they ndthemselves operating in a globalenvironment, whether from anoperational, sales, or investmentperspective. Barriers to business and
market penetration are disappearing
as domestic and internationalborders blur. Although this createsopportunities for US investors, it alsopresents even greater challenges.
Consider that more than 70%
1
of the world is deemed to have highcorruption risk—and that companies venturing abroad are likely to beoperating in unfamiliar culturesand locales.
1 The percentage is calculated based on theTransparency International Corruption PerceptionIndex (“CPI”) 2012, taking into account thosecountries with CPI below 50
In response, many governmentsare taking a proactive, aggressive,and vocal approach to combattingcorruption, and making publicstatements about enhancedenforcement and legislation.Ultimately, these countriesunderstand that corruption stealsscarce resources from those thatneed it most, undermines the publicinterest, and creates an unevenplaying eld for global businesses.We will provide insights into thecorruption risk for US outboundM&A activity and changes in globalanti-corruption enforcement. Tolearn what companies can do tomitigate corruption and regulatory risk, understand potential remedialmeasures post-closing, and betterassess deal value, simply turnthe page.
 
3
The international balancing act
 
 An overview
What anti-corruptionregulatory developmentsare we seeing globally?
Keeping pace with the changinglandscape of global anti-corruptionenforcement is often a complex anddifcult task. The US Department of Justice (DOJ) and US Securities andExchange Commission (SEC) continueto lead the charge against corruptionthrough use of the Foreign CorruptPractices Act (FCPA). The agencieshave brought approximately 250
3
FCPA enforcement actions against companiesand individuals since 2008, resultingin over $5 billion in penalties, nes,and disgorgement. Of these actions,10% and more than $1 billion wereassociated with joint ventures (JV) andM&A activity in 40-plus countries.In a bid to attract foreign investors,many of these countries have recently begun to address local corruption risk by enforcing or amending existinglaws and introducing new laws andmeasures. These laws are intended toincrease government transparency andcriminalize bribery and corruption,not only domestically, but also abroad. As such, in an effort to avoid runningafoul of relevant laws, regulations andcustoms, business leaders should striveto understand the current regulatory environment and laws that governconduct in their home country as wellas those in which the target entity islocated and does business.
3 PwC analysis based on publicly availabledocuments including various fling documents insupport o the SEC and DOJ actions
 How can you mitigatecorruption risk and better assess deal value?
Corruption risk associated withoutbound activity should be targetedand mitigated through specic anddeliberate measures, includingproactive pre-acquisition duediligence steps and post-acquisitionintegration measures. Specically,pre-acquisition due diligence assistsinvestors in estimating the target’s‘true’ value. For example, contractsobtained through bribes may be legally unenforceable; business obtainedimproperly may be lost when bribepayments are stopped; there may beliability for prior illegal conduct; andthe prior corrupt acts may in turn harmthe investor’s reputation and futurebusiness prospects.Similarly, post-acquisition integrationestablishes compliance programmeasures, expectations, and denitiveobligations of target management tomitigate the risk of any ongoing orfuture corrupt activity and relatedtransactions. Additionally, as moreinvestors and companies realize theimportance of an anti-corruptioncompliance program, establishingproactive measures to identify andmanage related risks can enhance acompany’s value and attractivenessto future potential business partnersor purchasers.
 Are you aware of corruptionrisk associated withoutbound M&A activity?
US investors continue to seek high-growth opportunities abroad.However, approximately 25%
2
has
occurred in countries that posesignicant corruption risk accordingto Transparency International 2012Corruption Perceptions Index (CPI).The majority of this activity has takenplace in Brazil, India, and China—three of the world’s fastest growingeconomies, which also have a high risk of corruption based on the CPI.This risk is exacerbated whenoutbound deal activity involvesan industry with a high degreeof government oversight andinvolvement, where bribes to publicofcials may be used to obtain, retain,or facilitate business transactions.
2 Thomson Reuters 2012 Data, including M&A deals announced and executed by US investorsinternationally in the domestic and well asinternational market

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