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Compliance Tip of the Day

Compliance Tip of the Day: Lessons on Pre-Acquisition Due Diligence in M&A from John Deere

Welcome to “Compliance Tip of the Day,” the podcast where we bring you daily insights and practical advice on navigating the ever-evolving landscape of compliance and regulatory requirements.

Whether you’re a seasoned compliance professional or just starting your journey, our aim is to provide you with bite-sized, actionable tips to help you stay on top of your compliance game.

Join us as we explore the latest industry trends, share best practices, and demystify complex compliance issues to keep your organization on the right side of the law.

Tune in daily for your dose of compliance wisdom, and let’s make compliance a little less daunting, one tip at a time.

Inadequate pre-acquisition due diligence can put your company in serious legal, compliance, and reputational jeopardy.

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Blog

Deere FCPA Enforcement Action: Lessons on Pre-Acquisition Due Diligence in M&A

We recently had a Foreign Corrupt Practices Act (FCPA) enforcement action that reminded me that everything old is new again in anti-corruption compliance. The Securities and Exchange Commission (SEC) FCPA enforcement action involving Deere has bribery schemes that were torn literally from the first decade of the 21st century as they involved gifts, travel, and entertainment. In other words, it was about a low set of hanging fruit that any compliance officer would see. Today, I continue a multipart look at the case and see what lessons the enforcement action can provide to the 2024 compliance professional.

John Deere, a global leader in agricultural machinery manufacturing, became the focus of an FCPA enforcement action due to its acquisition of a foreign entity with significant operations in countries with high corruption risks. The acquired company had little in the way of a formal compliance program and had been engaging in questionable business practices, including bribing foreign officials to secure contracts.

Post-acquisition, these corrupt practices continued for a period, undetected by Deere’s compliance team. When the issues finally surfaced, the result was a significant FCPA investigation, costly penalties, and a tarnished reputation.

The core issue in this case? Inadequate pre-acquisition due diligence.

One of the central themes from the Deere case is the critical need for rigorous pre-acquisition due diligence in M&A. As a compliance professional, it’s your role to ensure that your organization is not inheriting illegal practices or corruption risks when acquiring a new entity. The risks of overlooking this step can be immense—both in terms of regulatory enforcement and damage to your organization’s reputation.

Let’s examine the key lessons from the Deere case and explore how compliance professionals can apply them to their M&A strategies.

  1. Conduct a Thorough Corruption Risk Assessment

The Deere case underscores the importance of assessing a target company’s corruption risk profile. This means understanding the countries where the target operates and the inherent risks associated with those jurisdictions. Countries with a high Corruption Perceptions Index (CPI) score are more likely to expose your organization to FCPA risks.

Before any acquisition, a detailed analysis of the target’s business activities in these regions must be conducted. Ask yourself:

  • How much business is done with government entities?
  • Are third-party intermediaries involved in securing contracts?
  • What are the target company’s existing compliance policies?

In Deere’s case, the acquired company operated in high-risk jurisdictions without adequate controls. A robust pre-acquisition risk assessment could have flagged this issue, allowing Deere to either walk away from the deal or insist on corrective actions before proceeding.

  1. Evaluate the Target’s Compliance Program and Culture

Another key lesson from the Deere enforcement is the need to evaluate a company’s business operations, corporate culture, and compliance program—or lack thereof. A target company may have all the right words on paper, but those policies are meaningless if the culture does not support ethical business practices.

In the Deere case, the acquired company had minimal compliance structures. This should have raised immediate red flags for Deere’s compliance team, but the issue needed to be addressed or given more weight during the due diligence process.

As a compliance professional, you must:

  • Review existing policies and procedures to assess their adequacy.
  • Interview key personnel to understand how those policies are implemented and followed.
  • Examine the company’s culture to see if ethical business practices are truly embedded in day-to-day operations.

A proactive approach would have helped Deere spot these weaknesses before the acquisition, allowing them to implement a more effective compliance integration strategy.

  1. Look for Red Flags in the Target’s Financial and Operational Data

Financial data can often reveal hidden compliance risks. In the Deere case, irregularities in how contracts were won, especially in high-risk countries, should have raised concerns. Yet, these issues were only caught after the acquisition.

During pre-acquisition due diligence, compliance teams should partner with the finance and audit departments to:

  • Review contracts and agreements with a special focus on deals involving government entities or third parties.
  • Analyze payment patterns for signs of improper payments, such as unusually high commissions or payments to offshore accounts.
  • Investigate any prior audits or investigations related to compliance or financial irregularities.

These financial indicators are often the first signs of deeper corruption issues and should be fully explored before moving forward with any acquisition.

  1. Engage Third-Party Experts When Necessary

In many cases, particularly when acquiring companies in high-risk jurisdictions, it is wise to engage third-party experts to conduct a thorough FCPA-focused due diligence. These experts can bring an external perspective and often have access to local intelligence that may not be readily available to an internal compliance team.

Had Deere engaged such experts during its pre-acquisition process, they may have been able to identify the corrupt practices that eventually led to the FCPA enforcement action.

Engaging external resources is an investment in mitigating future risks. While it may increase upfront costs, the long-term savings in avoiding penalties, legal costs, and reputational damage far outweigh the initial expense.

  1. Ensure Post-Acquisition Integration is Swift and Effective

Even if certain risks are identified during the pre-acquisition phase, the true test comes during post-acquisition integration. In the Deere case, there was a failure to implement effective compliance controls post-acquisition quickly, allowing the corrupt practices to continue unchecked for a period.

Compliance professionals must ensure that:

  • Compliance policies are integrated quickly into the acquired entity’s operations.
  • Training is provided to the acquired company’s employees on FCPA and anti-corruption best practices.
  • Ongoing monitoring ensures that any potential risks identified during due diligence are mitigated.

The Deere FCPA enforcement action is a cautionary tale for all compliance professionals engaged in M&A activity. Pre-acquisition due diligence is not just a box-ticking exercise but a critical function that can help prevent serious legal and financial consequences for your organization. By conducting thorough corruption risk assessments, evaluating compliance programs and culture, scrutinizing financial data, engaging third-party experts when necessary, and ensuring effective post-acquisition integration, compliance professionals can help their organizations navigate the complexities of M&A in today’s global business environment.

The lessons from Deere reminds us that robust due diligence is the first line of defense in preventing FCPA violations and safeguarding a company’s reputation. Do not wait until after the acquisition to address these issues, as it may be too late.

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Compliance Tip of the Day

Compliance Tip of the Day: Lesson from The John Deere FCPA Enforcement Action – Pre – acquisition Due Diligence

Welcome to “Compliance Tip of the Day,” the podcast where we bring you daily insights and practical advice on navigating the ever-evolving landscape of compliance and regulatory requirements.

Whether you’re a seasoned compliance professional or just starting your journey, our aim is to provide you with bite-sized, actionable tips to help you stay on top of your compliance game.

Join us as we explore the latest industry trends, share best practices, and demystify complex compliance issues to keep your organization on the right side of the law.

Tune in daily for your dose of compliance wisdom, and let’s make compliance a little less daunting, one tip at a time.

Today, we review why pre-acquisition due diligence is so critical in any best practices compliance program.

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Compliance Into the Weeds

Compliance into the Weeds: Everything Old is New Again – The John Deere FCPA Enforcement Action

The award winning, Compliance into the Weeds is the only weekly podcast which takes a deep dive into a compliance related topic, literally going into the weeds to more fully explore a subject. Looking for some hard-hitting insights on compliance? Look no further than Compliance into the Weeds!

In this episode, Tom Fox and Matt Kelly take a deep dive into the recent Securities and Exchange Commission FCPA enforcement action involving John Deere.

The case centers on a $10 million civil penalty imposed by the SEC for bribery activities in the Thailand office of a newly acquired subsidiary, Wirtgen Group. This transgression spanned from 2017 to 2020, and despite having a code of business conduct, Wirtgen employees flouted rules by falsifying expenses, entertaining government officials at massage parlors, and engaging in a luxury sightseeing tour under the guise of a factory visit.

A critical issue was John Deere’s delayed integration of Wirtgen into its compliance program, leading to internal control lapses and obvious red flags in expense reports. Although Deere has since taken significant remedial actions, including firing culpable employees and enhancing its compliance and internal audit programs, the situation underscores persistent compliance challenges even for large, sophisticated firms. This episode serves as a reminder of the essential compliance lessons from past decades that firms must steadfastly adhere to.

Key Highlights:

  • Details of the Bribery Scheme
  • Internal Control Violations
  • Pre- and Post-Acquisition Due Diligence Issues
  • Remedial Steps and Improvements
  • Root Cause Analysis and Lessons Learned

Resources:

Matt in Radical Compliance

Tom

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Compliance Into the Weeds

Compliance into the Weeds: New M&A Safe Harbor

The award-winning Compliance into the Weeds is the only weekly podcast that takes a deep dive into a compliance-related topic, literally going into the weeds to explore a subject more fully. Are you looking for some hard-hitting insights on sanctions compliance? Look no further than Compliance into the Weeds! In this episode, Tom and Matt consider the recent speech by DAG Lisa Monaco, creating a Safe Harbor for M&A under the FCPA and beyond.

The Justice Department has recently unveiled a new policy aimed at fostering cooperation and compliance within the corporate sector, especially during acquisitions. This policy, which offers companies the chance to avoid charges for compliance violations discovered during the acquisition process, has sparked a lively discussion among compliance experts. Matt views this policy with a mix of curiosity and uncertainty. He acknowledges its potential benefits but also raises concerns about its practical execution, particularly in relation to antitrust enforcement and the treatment of companies new to acquisitions.

The application of the policy across various DOJ divisions and its interactions with other enforcement organizations intrigue Tom. He also questions whether acquiring companies will still receive a “free pass” if the acquired company engages in antitrust behavior. To delve deeper into these perspectives and explore the potential implications of this new policy, join Tom Fox and Matt Kelly in the latest episode of the Compliance into the Weeds podcast.

Key Highlights:

  • Cooperation and Compliance Incentives for M&A
  • Exemption of Acquisition Target’s Aggravating Factors
  • DOJ’s Emphasis on Pre-Acquisition Compliance Involvement
  • Enforcement Policy’s Impact and Curiosity

 Resources:

Matt in Radical Compliance

Tom 

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31 Days to More Effective Compliance Programs

One Month to More Effective Compliance For Business Ventures – Why engage in pre-acquisition due diligence? The Business Perspective

Why should a company engage in pre-acquisition due diligence in the M&A context? In this episode, I am joined by Affiliated Monitors founder Vin DiCianni to explore the business reasons for engaging in what may be seen as a compliance exercise.

Financial, legal, or reputational risk can have a significant impact the valuation or a transaction or its desirability. Factors such as current or historical bribery/corruption discovered at any point in the acquiring company provide the compliance practitioner with strong ammunition when confronted with a management that fails to understand the need for a robust due diligence in a M&A transaction. By not focusing on the regulatory aspects of M&A transactions, but more on the market reasons for engaging in the appropriate due diligence, you can emphasize the business reasons for compliance.
Three key takeaways:

  1. There are numerous legal and business reason to engage in anti-corruption due diligence in the M&A space.
  2. ESG can present significant corruption risks in emerging markets.
  3. Present your analysis in high, medium and low risk formats.
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All Things Investigations

All Things Investigations: Episode 15 – The Power of Pre-acquisition Due Diligence with Mike Huneke

 

Welcome to the Hughes Hubbard Anti-Corruption and Internal Investigations Practice Group’s Podcast, All Things Investigations. In this podcast, host Tom Fox and returning guest Mike Huneke of the Hughes Hubbard Anti-Corruption & Internal Investigations Practice Group highlights some of the key legal issues in white-collar investigations, locally and internationally.

 

 

Mike Huneke is a partner in the firm’s Washington office. Among other things, Mike advises clients on navigating and resolving multi-jurisdictional criminal or Multilateral Development Bank (MDB) anti-corruption investigations. He assists companies subject to post-resolution monitorships or other commitments and designs and executes risk-based strategies for due diligence on third parties.

Key areas we discuss in this podcast:

  • The commentary on mergers in the FCPA space is largely around post-acquisition.
  • The reason for pre-acquisition due diligence.
  • Questions a potential acquirer should ask before buying a business.
  • Even if they don’t have a program for some voluntary due diligence, sellers with nothing to hide shouldn’t be scared of buyers asking questions.
  • In advance of a sale, ensure you have clear records of tax considerations and that they are ready to be shared.
  • The basic mandates from the DOJ around post-closing.

 

Resources

Hughes Hubbard & Reed website 

Mike Huneke

Anti-Corruption Due Diligence Can Help Buyers, Sellers, and Their Advisers to Facilitate Acquisitions

 

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31 Days to More Effective Compliance Programs

Pre-acquisition due diligence


The compliance component of your M&A regime should begin with a preliminary pre-acquisition assessment of risk. Such an early assessment will inform the transaction research and evaluation phases. This could include an objective view of the risks faced and the level of risk exposure, such as best/worst case scenarios. A pre-acquisition risk assessment could also be used as a “lens through which to view the feasibility of the business strategy” and help to value the potential target.
I suggest a four-step process to plan and execute a strategy to perform pre-acquisition due diligence in the M&A context.

  1. Establish a point of contact.
  2. Collect relevant documents.
  3. Review the compliance and ethics mission and goals.
  4. Review the elements of an effective compliance program.

There are multiple red flags which could be raised in this process, which might well warrant further investigation. They include if the target has ineffective compliance program elements in their compliance program or if there were frequent breach of policies and procedures. Obviously, a target which is in financial difficulty would bear closer scrutiny. Structurally, if the company did not have a formal ethics and compliance committee at the senior management or Board of Directors’ level, this could present issues. From the CCO perspective, if the position did not have Board or CEO access or if there were not regular reports to the Board, it could present an issue for compliance. Conversely, if there were frequent requests to waive policies, management over-ride of compliance controls or no consistent consequence management for violations; it could present clear red flags for further investigation.
Three key takeaways: 

  1. The results of your pre-acquisition due diligence will inform your post-acquisition integration and remediation going forward.
  2. Periodically review your M&A due diligence protocol.
  3. If red flags appear in pre-acquisition due diligence, they should be cleared.