ABC Oil Services (not their real name) started as a small services business operating in the oil fields of Alberta. For 10 years, the owners worked hard and expanded the business overseas, entering high-risk markets in countries where competitors feared to go. Their business plan paid off—ABC grew their annual revenues from $3 million to $40 million.
No surprise that ABC became a very attractive acquisition target. Sure enough, a multinational company, with oil field operations around the world, came calling. “GlobalOil” and ABC seemed a perfect match—until GlobalOil’s lawyers started asking questions about anti-corruption and trade control laws, catching ABC completely off-guard.
Everything was going so well¦
GlobalOil was concerned about ABC’s small but significant activity with countries subject to economic sanctions and in regions where the likelihood of government corruption was high. ABC had employed agents and consultants because they needed someone with the right connections to give them better access to the local marketplace. ABC also established strong relations with government-owned oil companies, which were a particularly lucrative market.
GlobalOil’s lawyers started talking about statutes and regulations—the Corruption of Foreign Public Officials Act, the Special Economic Measures Act, the Export Control List, the Area Control List—that the owners of ABC were unfamiliar with. These laws, ABC was told, prohibited companies from bribing public officials, either directly or through agents, and controlled the kind of business companies could engage in abroad.
ABC was soon on the receiving end of a long list of unanticipated questions: Why didn’t ABC have a written compliance policy? Had ABC been screening its customers, suppliers and other business partners against the lists of designated or blocked companies and individuals? How was ABC monitoring its agents’ activities to ensure they weren’t providing payments or other benefits to government officials?
Negotiations between ABC and GlobalOil became bogged down. GlobalOil started to talk about delaying or re-pricing the deal.
In the end, GlobalOil walked away, saying that the company had been burned on an earlier acquisition of a business with compliance failures, and they couldn’t risk that happening again.
What went wrong
I often act on behalf of acquirers in transactions like the one between ABC and GlobalOil. I also see many SMEs struggling with the same anti-corruption and trade control issues when seeking a capital infusion from private equity groups, financing from their bank or even when they are preparing to go public.
Even though investors and creditors are more concerned than ever about anti-corruption and trade control compliance, many Canadian SMEs don’t understand their obligations and their exposure to compliance failures.
New and expanding anti-corruption, and export control and economic sanctions measures, along with increased enforcement in Canada, the U.S. and elsewhere, have made this an increasingly important part of an SME’s business model. The consequences of failing to comply with compliance legislation includes multi-million dollar penalties, delayed or cancelled customer orders, debarment from doing business with government, and even criminal investigation and prosecution.
Actual, or even perceived, compliance failures have now become “bet-the-company” issues.
Five steps you should take if you’re doing business outside Canada
Dealing with compliance issues from the start is critical in order to avoid entering a transaction or negotiation that gets delayed or scuppered later.
Here are five steps you should absolutely take to assess if your company is at risk of non-compliance:
- Assess the risk of the countries you are doing business with by checking out how those countries are ranked on indices such as Transparency International’s Corruption Perceptions Index. You can also check if those countries are the targets of economic sanctions on Canada’s website.
- Determine where and how you interact with government officials through all stages of your business operations.
- Consider the nature of your products, services and technology to determine whether they are subject to export control. Information on Canada’s export controls can be found on the Foreign Affairs, Trade and Development Canada website.
- Review how you use third parties in your business operations, and how you screen, approve, retain, pay and monitor these third parties.
- Do a 360: Think about the current controls, due diligence and training programs you have in place.
This information will help you determine how best to protect your company and make it attractive for future acquirers, investors and other business partners.
In my next column, I’ll show you what an effective anti-corruption and trade compliance program looks like.
Related: Why You Need an Anti-Bribery Policy
John Boscariol is a partner and Leader of the International Trade and Investment Law Group at McCarthy TÃ©trault LLP and advises on enforcement and compliance matters related to cross-border trade and investment regulation, including anti-corruption, export and technology transfer controls and economic sanctions measures. He is Co-Chair of the American Bar Association’s Export Controls and Economic Sanctions Committee and Co-Chair of the Canadian Association of Importers and Exporters’ Export Committee.