As compliance requirements continue to evolve in France, the guide offers focused, much-needed advice on three areas: audits as part of M&A, how and when to audit, and the outcomes.

Most companies know the consequences bribery or corruption allegations may have on them, both the legal risks and the reputational damage. Following the Sapin 2 law, more and more businesses have implemented compliance programs. These include measures to prevent risks within their organizations, as well as in their supply chain and distribution channel relationships. 

Under Sapin 2, French-based groups that employ (directly or through affiliates) at least 500 people and turnover more than €100 million must have a compliance program. This applies to the French holding companies and their subsidiaries, regardless of whether the subsidiaries have their registered office in France or abroad. Even companies that don’t meet these criteria are urged to implement a compliance program. This should be tailored to their size, their activities and the geographical areas they operate in. 

Over the past months, the focus in France has been increasingly put on corruption risks in mergers and acquisitions (M&A). In January 2020, the French Anti-Corruption Agency (Agence Française Anticorruption – AFA) issued a practical guide on anti-corruption audits in the context of mergers and acquisitions (Guide pratique: Les vérifications anticorruption dans le cadre des fusions-acquisitions).

Why carry out anti-corruption audits during an M&A transaction?

Under French law, criminal liability remains strictly personal. As such, it cannot be transferred in any way, not by way of a contract or any kind of agreement. In other words, the buyer may not incur criminal liability for alleged offenses committed by the target company before the M&A transaction was completed.

However, this observation must be tempered:

  • The target, if it hasn’t been dissolved, will remain criminally liable for offenses committed before acquisition.
  • If bribery and corruption allegations continue after completion of the transaction, then the new entity created and/or the parent company that absorbed the target may also incur criminal liability under certain circumstances.
  • Under Sapin 2, the buyer, or the target if it has not been absorbed, may incur administrative fines and sanctions pronounced by the AFA for failure to prevent corruption committed by the target before the acquisition.

In addition, the absorption of the target results in the transfer of its civil liability: in other words, potential victims of offenses could seek remedy compensation from the transferee.

As a result, the AFA urges buyers to look into the business integrity of their target company with anti-bribery and corruption (ABC) in mind. Indeed, buyers should assess whether the target could expose the buyer as a result of the transaction and determine what corrective action will be required.

How and when to audit 

The AFA suggests that an anti-corruption audit manager should be appointed to conduct or lead the audits and that audits must start at the earliest stages of the transaction and must deepen as the transaction progresses. After signing a memorandum of understanding, the buyer should carry out a more in-depth analysis as part of the due diligence. Here, special focus and care should be given to anti-corruption procedures.

In practice, such reviews can be carried out by sending a questionnaire, asking for documents to be provided, checking in-depth in publicly available databases, carrying out on-site interviews, carrying out investigations through an external consultant, and so on. The relevant information is usually part of the documents collected to create the data room. 

One area of audit focus from an ABC perspective relates to the third parties the target company is in business with, the countries and sectors it operates in, its business model, and its compliance background and history. 

Between signing and closing, to prepare the target’s integration, the buyer may inquire about the level of the existing anti-corruption procedures, in particular with regard to the most high-risk third parties, accounting procedures for transactions most at risk, and the effectiveness of the internal reporting and alert system.

How to integrate the target into the buyer’s compliance procedures

After the transaction closes, the final step is to integrate the target’s anti-corruption program into the buyer’s compliance procedures.

To this end, the AFA recommends a post-acquisition audit, in particular to identify failures and adapt the target’s anti-corruption program to the buyer’s specific risks. Audits may, for example, cover risk mapping, transactions identified in accounting as being at risk, or recorded internal alerts.

Following the audit, it is up to the buyer, depending on the situation of the target, to either implement an anti-corruption program within the target, update it, or ensure that its own program is extended to the target with the necessary adaptations.

What outcomes to expect

When an ABC audit reveals suspicions of wrongdoings or, more often, lack of a robust compliance program, the buyer must conduct a full investigation and, as the case may be, put an end to the unlawful behavior identified as soon as possible, take corrective action, and consider disciplinary proceedings against those involved. 

Given the significant legal risks and both reputational and financial exposure associated with alleged corruption, any doubt not lifted as part of the audit could be used to negotiate in price discussions. 

Finally, after closing, the AFA recommends the buyer consider approaching the prosecutor’s office about a potential Judicial Agreement of Public Interest (Convention Judiciaire d’Intérêt Public), newly created under Sapin 2.

ABC audits will become vital in M&A

Anti-bribery and corruption audits will play a growing role in M&A. In fact, the AFA sees M&A as a turning point for companies. A buyer can step in and examine its target’s compliance – which buyers definitely have an interest to do – to mitigate the financial, legal, and reputational risks. The guide is not binding on companies. That said, it must be seen as a strong signal from the AFA on what it will pay attention to in the coming months and years when it examines transactions and the due diligence undertaken on these occasions.