Turkey: Fundamentals of an M&A/Joint Venture Due Diligence Checklist – Understanding the Anti-Corruption Risks

Last Updated: 7 March 2018
Article by Gönenç Gürkaynak Esq and Ç. Olgu Kama

Most Read Contributor in Turkey, March 2019

Gaining substantial momentum in the last couple of years, anti-corruption compliance has become a significant part of the day-to-day business of many multi-national and local companies. Those who do not set up effective procedures to prevent, detect and deter wrongdoings—i.e., those who do not establish compliance programs—risk towering fines, reputational damage, and loss of trust from commercial partners, stakeholders, the public, and even possible debarment and exclusion from projects that are funded by international financial institutions. Hence, the establishment of compliance programs is vitally important for companies of all sizes and varying business interests. However, one specific element of anti-corruption compliance programs is especially important for those companies who wish to expand their operations to different jurisdictions by acquiring (or merging with) other companies, namely anti-corruption due diligence.

There are several advantages to conducting anti-corruption due diligence before acquiring or merging with a company. The acquiring company will pay a significantly lower amount for the transaction, if it becomes aware through due diligence that the target company is involved in corrupt activities. As a result of its assessment and ensuing awareness of the corrupt practices of the target company, the acquiring company may even choose to walk away from the deal, or disclose the past corrupt acts of the target to the relevant authorities and hopefully obtain a non-declination decision. Once the acquiring company has become aware of the corruption risks associated with the target company, it will be able to set up a compliance program specifically tailored to deal with those particular risks. Thus, this process of pre-transaction due diligence and post-transaction integration will mitigate the transaction-related anti-corruption risks of the acquiring company.

According to "A Resource Guide to the FPCA," a sample merger and acquisition due diligence would include: (i) reviewing the target company's customer agreements, sales and third-party agreements (e.g., the distributor and consultant agreements), (ii) performing a risk-based analysis of the target company's customers, (iii) performing audits on selected transactions, and (iv) speaking with essential personnel of the target company, such as the general counsel, sales managers and other key managers of the company, regarding the company's potential corruption soft spots. When reviewing the agreements, the acquiring company should check to see if these agreements include anti-corruption clauses. Here, the third-party agreements and the congruence between the payment terms stipulated in writing and the actual payments made will be of particular significance. The absence of such congruence/harmony will be a significant red flag suggesting past corrupt actions and crucially useful for determining whether to continue to work with the supplier in question. The interviews with the key company personnel should be focused on understanding the business processes of the target company and getting a sufficient grasp on the potential incompliance infractions that the employees may have committed.

There is one exception to the potential anti-corruption liability inherited through a merger or acquisition: There would not be any FCPA successor liability if the target company was not subject to the jurisdiction of the FCPA before the transaction. Needless to say, this does not completely rule out anti-corruption liabilities that a company may face following the transaction for those that are not subject to the FCPA regulations. However, it does mean that, in case the acquiring company is not a U.S. company, does not have any subsidiaries in the U.S., is not considered as an issuer under the FCPA, the act is not perpetrated in the U.S. and the perpetrating employees are not U.S. subjects, then liability may not be triggered at all. With that said, each case should be thoroughly reviewed in accordance with the applicable laws and in light of its own specific circumstances in order to determine whether the target company was subject to FCPA jurisdiction.

Case Examples: In January 2017, Mondelez International, Inc. ("Mondelez"), a U.S.-based food beverage and snack manufacturer, along with its subsidiary, Cadbury Limited ("Cadbury"), agreed to pay a $13 million civil penalty to settle charges with regard to its violation of the FCPA. Mondelez had acquired Cadbury and its subsidiaries, including Cadbury India Limited ("Cadbury India"), in February 2010. Subsequently, Cadbury India hired an agent in order to obtain licenses and approvals for a factory in India. However, it failed to conduct appropriate due diligence or to sufficiently monitor the agent. After receiving payments from Cadbury India Limited, the agent withdrew most of the money (a total of $90,666) from the account in cash. According to the Securities and Exchange Commission, Cadbury India failed to keep accurate books and records with regards to the agent's purported services, and Cadbury also failed to implement adequate controls regarding its subsidiary, Cadbury India. This case highlights the importance of post-transaction integration of the target company with the acquiring company's existing compliance program.

In June 2017, the Department of Justice ("DOJ") closed its investigation with regard to Linde North America, Inc., and Linde Gas North America, LLC (collectively known as "Linde"). According to the DOJ, Spectra Gases, Inc. ("Spectra"), a company that Linde had acquired in 2006, bribed foreign public officials in the Republic of Georgia between 2006 and 2009, in relation to Spectra's transactions with the National High Technology Center ("NHTC"), a state-owned and state-controlled entity in Georgia. The DOJ records indicate that three high-level executives of Spectra entered into an arrangement with NHTC officials and a third-party intermediary, whereby the parties would share the profits of income-producing products sold by NHTC to Spectra. Throughout the course of this scheme, Spectra entered into an agreement with a company established by NHTC officials, which allegedly provided consultancy services to Spectra, and in return, received a certain amount of profit from the transaction in question.

After Linde learned of the corrupt arrangement, it withheld the $10 million payment due to the Spectra executives, and refused to make any further payments that were due to the companies controlled by the NHTC officials. Consequently, the DOJ declined to prosecute Linde due to its newly acquired subsidiary's corrupt activities. The decision was based on Linde's withholding of payments (which was viewed as a remediation step), Linde's timely and voluntary disclosure, full cooperation, and its termination of the employees and business partners who had taken part in the corrupt arrangement, as well as the fact that it had agreed to disgorge any profits it had received due to the corrupt arrangement, among others.

The above cases stress and illustrate the significance of not only anti-corruption due diligence before the acquiring company engages in a corporate transaction, but also of post-transaction integration. If proper due diligence is not exercised, this could result in negative consequences for the acquiring company, such as fines, reputational damage, loss of trust of commercial partners, stakeholders and the public, or debarment and exclusion from projects that are funded by international financial institutions. Not engaging in due diligence could also be a problem in the integration phase, as the acquiring company may not be able to tailor its compliance program to the specific risks posed by the target company. Exercising pre-transaction due diligence, on the other hand, not only enables the company to enter into a successful integration phase, but also gives the acquiring company the chance to disclose the wrongdoing to the relevant authorities and hopefully obtain a declination decision.

This article was first published in Legal Insights Quarterly by ELIG, Attorneys-at-Law in March 2018. A link to the full Legal Insight Quarterly may be found here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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