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Fraud Risk in M&A Transactions

An acquiror is responsible for the bad behavior of an acquired entity. To avoid potential liabilities such as illegal kickbacks and transactions with sanctioned entities, the acquiror should conduct corruption due diligence prior to the acquisition. These procedures include conducting a risk assessment and a review of the companies’ anti-corruption program to see if they are addressing these risks. The acquiror’s key due diligence responsibilities also include conducting background checks, interviewing key employees, and performing data analytics to search for anomalies. The acquiree should be expected to clean up any discovered issues and implement the proper internal controls and compliance process to adhere to the acquiror’s procedures.

Certain red flags heighten the risks connected to a transaction and need to be addressed and properly documented. Some of these findings include the following:

  • The region where business is being conducted has a history of corruption
  • The industry has a history of corruption
  • The target company does work with foreign government agencies
  • The target company does not do sufficient due diligence on its third-party vendors
  • The target company does not do sufficient due diligence on its customers
  • The target company works with agents
  • The target company has questionable disbursements

It is critical to document the corruption due diligence procedures, subsequent findings, and remediation process. This documentation will be vital if regulators question the operations of the acquired company. Having these records readily available will likely reduce the acquiror’s civil and criminal penalties and reduce the risk of censure.

Citrin Cooperman’s Forensic and Litigation Advisory Services Practice professionals have extensive experience performing corruption due diligence. For more information regarding this process, please contact Ken Yormark at kyormark@citrincooperman.com.

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