Bribery Is Top Risk For PE Firms, Says Corporate Investigator

Bribery Is Top Risk For PE Firms, Says Corporate Investigator
By Nicholas Elliott

Ken Springer is a corporate sleuth who spends his days investigating companies and their managers, often on behalf of private equity firms.

Springer has just released a book, “Digging for Disclosure” about how investors can protect themselves against fraudsters. When it comes to private equity, though, at the top of his risk list at the moment is a different issue – foreign bribery.

“Until the last six months or so, people didn’t think that the FCPA impacted them,” Springer said in an interview, referring to the Foreign Corrupt Practices Act, a law that bans paying bribes to foreign officials. “The Justice Department is going to have its sights on private equity firms to send a message.”

Private equity firms aren’t ready for such scrutiny, Springer says. “Private equity firms are 10 years ahead of hedge funds in understanding the importance of vetting management teams in onsite due diligence,” Springer says. But, unlike hedge funds, when it comes to compliance, “most firms are winging it.”

Nor is Springer encouraged by plans among many firms to hand the compliance job to the chief financial officer or general counsel rather than carving out a specialist role. “The problem is that if they’re wearing two or three hats they’re not doing an adequate job,” he warns.

With many private equity firms looking overseas for investment opportunities, they’re far more likely to run afoul of the FCPA. The issue has come up several times recently. The Securities and Exchange Commission is investigating possible bribery on the part of a German printing press company that is a portfolio company of Allianz SE. Sensata Technologies Holding NV, a sensor company backed by Bain Capital, said in October that it was investigating possible bribery in China. Allison Transmission, which is backed by Carlyle Group and Onex Corp., is being sued by a former employee who alleges he lost his job after reporting bribery in China.

China is widely seen as holding massive investment potential, but Springer says that corruption is rife and takes many forms, from paying to expedite the movement of goods to paying to cover up regulatory lapses at a factory. Discovering such transgressions is a problem because the amount of public information is “minuscule,” so that on-the-ground investigations are necessary.

Like many experts who advise on the FCPA, Springer stresses the importance of having the right procedures in place and ‘fessing up as a way of winning more lenient treatment from anti-bribery regulators. “It’s important to show that you’ve taken steps,” to prevent bribery, he says. When bribery is discovered, “it’s better to go to the regulators than to have them come knock at your door.”