Thursday, July 7, 2011
The UK Bribery Act and Private Equity Firms
The UK Bribery Act is back on everyone’s radar screen – where it should be.
Richard Alderman and the Serious Fraud Office (SFO) have been sending warning messages to a number of potential targets. Most recently, Alderman spoke to a meeting of private equity firms and let them know the risks they face.
Of all the industries for the SFO to focus on with its new UK Bribery Act, it is curious that private equity firms appear to be one of the early targets. Of course, private equity firms play a large role in the London finance community, but Alderman's warning message may be interpreted as a serious threat of SFO actions to come.
Alderman cited several potential areas for liability for firms which fail to comply. He stressed the need for private equity firms to create a corporate culture of compliance in companies owned, controlled, or invested in by the firm. Alderman boldly suggested that private equity firms could be prosecuted for failing to prevent bribery by an "associated" company, even where the private equity firm held less than a controlling interest in the company or only served on the board of directors of the company. Alderman also noted that private equity firms could be held liable under existing money laundering laws for benefits they receive from companies which derived revenues from illegal conduct even if such conduct was unknown to the firm.
The risks outlined by Alderman apply most easily to companies which are owned outright by private equity firms. Alderman suggested that the SFO will investigate whether the private equity firm owners had knowledge of any business dealings secured through bribes.
Private equity managers will need to pay close attention to compliance issues when undertaking acquisitions and investments, especially those arising when the private equity firm takes a controlling interest in a company. Given the speed with which private equity deals are reached and consummated, it will be critical for such firms to put in place real and meaningful due diligence procedures and overall compliance programs.
To this end, private equity firms should look at creating effective compliance triage teams that work post-acquisition to ensure proper controls are put in place, and efforts are made to integrate the new company with the overall compliance culture. Call it a Compliance Integration Team ("CIT") and give them the authority and resources to bring an acquired company into the fold.
Of course, this should not be too difficult for private equity firms since they already have implemented FCPA compliance programs and policies and should have updated them for compliance with the UK Bribery Act. If not, they are only asking for trouble and Richard Alderman will be happy to oblige by initiating an enforcement action.