Attention to corruption risks in M&A due diligence

Autumn of 2020 saw a number of developments in the fight against corruption. When closing M&A deals, it is advisable that companies are aware of these developments.

A tightened prosecution policy for foreign corruption

Recently, the highest body within the Public Prosecution Service (PPS), the College of Attorneys-General, published a new 'Designation for Detection and Prosecution of Foreign Corruption' in the Government Gazette. This policy is effective as of October 1, 2020 and replaces the old designation from 2013. PPS designations (guidelines) contain rules and regulations that are generally applicable and (must be) applied by members of the PPS. Citizens can derive rights from them. The focus in these instructions is on foreign official corruption. Bribery of civil servants is therefore not covered by this policy document of the Public Prosecution Service. In the background is the 1997 Anti-Corruption Convention of the OECD, the Organisation for Economic Cooperation and Development. This convention has been in force for the Netherlands since 2001. By doing so, the Dutch government has committed itself to a strict approach to foreign public corruption. The designation identifies the factors that are relevant to the investigation and prosecution and describes the legal framework in the light of various other international anti-corruption regulations. The new designation differs from the old designation in a number of respects. These changes can be seen as a tightening up of the prosecution policy of the Public Prosecution Service.

Clarity about the prohibition of facilitation payments

It is striking that, in contrast to the old designation, the new designation no longer contains any regulations on the assessment of so-called 'facilitation payments' (small bribes). The OECD Anti-Corruption Convention did not consider small 'facilitation payments' as payments to obtain or retain business or any other illicit advantage. The old PPS's Guidance contained factors to determine whether acceptable facilitation payments were at issue, despite the fact that kickbacks are punishable under Dutch law. However, one year after the old PPS's designation came into effect, an OECD guideline (mandatory) was issued prohibiting the offering or payment of facilitation payments and encouraging companies to resist such bribes. The new designation of 1 October 2020 puts an end to the lack of clarity in Dutch prosecution policy on this point. As a result, that policy has been brought into line with the OECD's obligation to ban small bribes and with the globally applicable 'gold standard' of anti-corruption, the UK Bribery Act. This legislation criminalizes all forms of bribery, including the payment of small bribes if they consist of relatively small payments.

Extension of factors influencing the prosecution decision

A second striking point in the new designation is the extension of the section 'Factors influencing the prosecution decision'. The PPS gives a number of non-exhaustive factors in the designation that can be taken into account when prioritizing foreign corruption cases. Examples are the size of the gift, promise, service or quid pro quo, the involvement of influential foreign public officials or politicians and the degree to which distortion of competition would occur. In the new designation, the following has been added as a factor: 'Bribery is a structural part of the way in which business is conducted'. This new circumstance is not explained, but logically relates to an assessment of the presence of anti-corruption compliance within companies and its effectiveness.

Self-reporting and transparency on discovered foreign corruption

Another new element is that the  PPS explicitly states that if companies report foreign corruption themselves, committed by or within their own organization to the PPS and are open about it, this will be taken into account in the method of settlement and possible punishment. However, the manner in which this weighing is carried out is not explained. The PPS has been working for quite some time to formulate a clear policy on this point, but concrete points have still not been made public.

Involving third parties

Finally, in the designation of 1 October 2020, a separate paragraph explicitly mentions third parties. The PPS points out that it is a well-known fact that third parties are often used when paying bribes abroad. Involving third parties cannot indemnify Dutch companies against criminal liability. If those companies are not alert to the nature and scope of the activities of foreign third parties - think of local agents, a representative or a consultant - they can be criminally prosecuted in the Netherlands.

The European Public Prosecutor also focuses on compliance

On 6 November 2020, the international law review Global Investigations Review published an interview with the brand-new European prosecutor Daniëlle Goudriaan, who has been representing our country in the College of the European Prosecutor's Office (EPO) since this summer. The EPO is a new authority in the field of criminal law enforcement and focuses on the detection and prosecution of fraud affecting the financial interests of the European Union. This includes active and passive corruption that is harmful to the Union's financial interests. Goudriaan points out that companies should be aware of the arrival of the EPO and the powers it has. Goudriaan warns that the world of criminal enforcement of cross-border fraud is changing. She emphasizes that companies need to pay a lot of attention to keeping the internal compliance system in order, because the EPO will also be looking into this.

The importance for the M&A practice

The advent of the EPO and the allocation of tasks that explicitly include the fight against corruption with a financial EU interest fits in perfectly with a trend that has already been observed in recent years: the fight against corruption is positioned high on the international agenda. The UK Bribery Act and the US Foreign Corrupt Practices Act (FCPA) have led to many corruption investigations resulting in millions and sometimes billions of settlements between prosecuting authorities and internationally operating companies. The special thing about this is that many of these companies are not even British or American. The geographical scope of this legislation is therefore enormous. This means that Dutch companies should also be aware of this when they are involved in takeovers. Regardless of the interference of the British and the Americans, there is now also the European Union to take into account, in the form of the EPO which has its seat in Luxembourg and has representatives in 22 EU member states affiliated to this authority.

The tightening of the prosecution policy of the Dutch PPS as it emerges from the new designation should have consequences for the risk analyses during takeovers. Buyers should be able to form a clear picture of the anti-corruption compliance of targets to answer the question of whether bribery is not a 'structural part of the way of doing business'. For targets it would make sense to have sound and effective anti-corruption compliance in place to prevent the successor liability from being put back on them. As part of the M&A practice, an integrity due diligence would be fully appropriate in addition to the usual financial due diligence and legal due diligence.

For the M&A practice, the other two new elements of the prosecution policy of the PPS in case of foreign public corruption mean that the importance of post-acquisition due diligence has increased. If during pre-acquisition due diligence it may not be possible to access all relevant information, a post-acquisition due diligence should not be omitted. In any event, a proper risk analysis of any third parties must be carried out. Finally, reporting any detected cases of corruption to the Public Prosecutions Service may have a beneficial effect on the settlement of a criminal case. In any case, this much has become clear since 1 October of this year. Unfortunately, the policy on this point has not yet been published in the Netherlands, as is the case in the United States and it was updated in June 2020. There, whether or not existing of extensive due diligence is part of the 'M&A' factor that Federal prosecutors look at - in addition to other factors such as risk analysis, business ethics, training of employees and staff and third party management - when assessing the effectiveness of compliance in the context of resolving a criminal case against a company.

Key take-aways

• In October 2020, the Dutch Public Prosecution Service tightened its prosecution policy with regard to foreign public corruption.

• These tightenings have consequences for the risk analyses in the context of M&A due diligence.

• Post-acquisition anti-corruption due diligence has gained in importance, as a good insight into the compliance of the target can then be obtained.

• Self-reporting of discovered bribery practices can lead to mitigating the sanction to be imposed.

• Businesses need to be aware of increased enforcement risks in the area of corruption.