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Bribery and corruption risks in acquisitions

A case for forensic data analytics

When a well-known pharmaceutical company acquired a competitor in the late 2000s, it created a global health care powerhouse by expanding its operations, product lines and manufacturing capabilities. Little did it know, however, that it had also inherited significant bribery risk that would ultimately cost the company millions of dollars.

Soon after the pharmaceutical firm had closed the acquisition, a due diligence review of the acquired company’s operations revealed evidence of illicit activity, which was ultimately reported to the Securities and Exchange Commission (SEC). Several years later, the SEC alleged that subsidiaries of the acquired company had been bribing government doctors across multiple countries in Asia well before the acquisition. In the scheme, doctors promoted products to patients in exchange for cash and other incentives, which were concealed using fake invoices. The two companies eventually agreed to separate settlements amounting to tens of millions of dollars in disgorgement and prejudgment interest to the SEC.

Such cases are hardly rare, but they illustrate the importance of conducting thorough pre-deal anti-bribery and corruption due diligence and the repercussions of failing to do so. The potential impact of hidden bribery and corruption risks on a company are extensive and may include convictions of employees and executives, mounting compliance costs, reputational damage and loss of future business.

While the consequences of these risks are abundantly clear, signs of bribery, corruption and fraud are often less obvious — especially prior to closing a deal — as such illicit activities are intrinsically elusive. Some legal experts say that organizations often underestimate these liabilities even though they may be held responsible for the corrupt practices of a target organization if they fail to carry out proper due diligence during the acquisition phase. (See “FORUM: Managing corruption risks in M&A pre- and post-transaction,” Financier Worldwide magazine, Feb. 2018.)

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