To date, the SEC has never charged a private equity firm for the inappropriate conduct of one of its portfolio companies (the DOJ has been involved in a few investigations: see Vetco International Ltd.; Omega Advisors; and, Leo Winston Smith). However, with recent news of both internal and external bribery-related investigations into Allianz Capital Partners (manroland AG), Bain Capital (Sensata Technologies Holding NV), Carlyle Group and Onex Corp. (Allison Transmission), private equity’s protective bubble may soon be burst. At least, this appears to be the message being relayed by the DOJ and SEC, which have announced that they will target the conduct of specific industries to determine their compliance with the FCPA.
In an interview published in Wall Street Journal’s Private Equity Beat Blog, Ken Springer, author of “Digging For Disclosure,” states that while private equity firms may be ten years ahead of hedge funds as far as understanding the importance of vetting management teams in onsite due diligence, unlike hedge funds, they are not prepared to face the intense scrutiny dealt by the DOJ and SEC when it comes to anti-corruption compliance.
Despite a possible unpreparedness to dodge the firing squad of the DOJ and SEC, the results of Deloitte’s 4th annual “Look Before You Leap” survey of corporate executives, investment bankers, private equity executives and hedge fund managers, found that 63 percent of respondents reported that the FCPA and anti-corruption issues caused their companies to renegotiate or pull out of planned business relationships, mergers or acquisitions over the last three years.
Additional key findings include:
- A clear majority (60 percent) of respondents said that they have either pulled out of a transaction or adjusted deal pricing to reflect compliance and integrity-related issues.
- China is highest on the list of countries or regions ranked according to concerns about the potential for compliance and integrity-related issues when doing business. More than 80% of respondents said they were significantly or somewhat concerned about China.
- Entities from Mexico appear to be very finely attuned to compliance and integrity due diligence issues, and highly confident in their ability to meet the challenges.
Private equity firms may face liability under the FCPA even if a corrupt act occurred prior to the acquisition of a portfolio company. Not only may liability be inherited for a company’s past actions through the concept of successor liability, but a firm may also be under fire for any ongoing consequences of corrupt acts, even if there is no direct evidence that the fund or its officers knew of the corrupt acts. Additionally, as with the pending investigation into Allianz SE, liability may arise for corrupt or irregular payments made by a portfolio company, which in Allianz’s case arose as part of an internal audit investigation initiated by manroland AG and prudently self-reported to the authorities.
For a detailed account on recommendations for private equity companies in preparing themselves for increased anti-corruption regulation, please refer to Financier Worldwide’s November 2010 “A brave (but scary) new world: why private equity is not exempt from US and UK anti-corruption laws” by Carol M. Welu and Yevgenya Muchnik.