Business teams, investment bankers and legal counsel are all likely familiar with the concept of due diligence.

Due diligence is essentially an investigation into the risks of a proposed project and can cover not only legal or financial matters, but even technical and operational ones.

Due diligence findings can find their way into the transaction agreement usually in the formulation of representations and warranties, indemnification clauses, or even the setting of the purchase price or investment amount. The results of a due diligence exercise can delay or even scuttle a deal.

PROBITY
A challenging due diligence focus is probity. While legal diligence exercises will certainly need to cover compliance with laws, a probity inquiry is specifically interested in an enterprise’s ethical behavior and adherence with principles of accountability and transparency.

For example, a potential buyer can be concerned with how a target deals with regulatory agencies and whether inappropriate behavior is part of that target’s playbook. After all, the buyer can inherit potential liabilities or at the very least suffer a reputational fall-out. Foreign investors might be liable under their own laws insofar as the latter can capture violations of offshore affiliates. Further, the buyer will need to seriously assess whether a target’s financial performance is even replicable post-closing, where new management complies with more stringent business ethics.

This can be a sensitive and difficult exercise. Representatives of a target will rarely be willing, if at all, to admit to unethical behavior, and the nature of the problem is such that it may be hard to track potential issues through an ordinary examination of corporate documentation and records.

There are consultants that can gather background and anecdotal information; financial forensic investigation may be able to identify money trails that are suspicious. But especially where the project at hand will be structured as a joint venture, a buyer or new investor may need to have a candid (and likely painful) discussion about probity with the target or other counterparty.

RELEVANT LAWS
Part of the preparation for such a conversation is understanding what the local laws on graft and corrupt acts are. If a buyer or a new investor is a foreign company, it should determine how different the relevant local regime is to that of its home jurisdiction.

The Philippines has anti-graft-related laws, the principal ones being:

– The Revised Penal Code (with provisions on bribery and corruption of public officials)

– The Anti-Graft and Corrupt Practices Act

– Presidential Decree (PD) No. 46 (Making it Punishable for Public Officials and Employees to Receive, and for Private Persons to Give, Gifts on any Occasion, including Christmas)

– Code of Conduct and Ethical Standards for Public Officials and Employees

– Republic Act No. 7080 (An Act Defining and Penalizing the Crime of Plunder)

DIRECT/INDIRECT BRIBERY
Bribery is a key red flag and an investment team will need to recognize its forms. What is penalized is the demand, solicitation, and receipt, as well as the offering and giving, of gifts, benefits or other things of monetary value if done: (a) by reason of position, or (b) in exchange for the doing or not doing of something related to the recipient’s public functions.

Donating or giving funds to a public officer even where no actionable matter (such as a case, application, franchise hearing etc.) is before the officer could be considered as indirect bribery, having been done by reason of that officer’s position.

Some of the anti-graft statutes impose penalties regardless of the nature and value of the gifts, benefits or things. For example, under PD No. 46, the solicitation or receipt, as well as offering or giving, of any gift or benefit is penalized when it is given by reason of recipient’s public office and regardless of whether or not the same is for past favors or the giver hopes or expects to receive a favor or better treatment in the future from such official in the discharge of his official functions or in consideration of past or future favors. The value of the gift is immaterial.

COMMERCIAL BRIBERY
The United Nations Convention Against Corruption (UNCAC) defines commercial bribery as bribery in the private sector. Here the giver and solicitor of the gift or benefit, in exchange for the doing or not doing of an act, is a private person or entity. The Philippines is a signatory to the UNCAC, but no laws have been enacted imposing penal sanctions on private sector bribery in the Philippines pursuant to UNCAC. Depending on the circumstances, however, private sector bribery might still be penalized. For instance, if the act involves the solicitation of any gift as a consideration for refraining from taking part in any public auction, or causing bidders to stay away from a public auction by gifts or promises, such act may be punishable under Article 185 of the Revised Penal Code.

OTHER APPROACHES
A probity audit could also involve determining if a target has an anti-bribery policy, procedures to ensure transparency, training seminars on business ethics, and other safeguards. Of course, having a policy is one thing; observing it is another.

The views expressed herein are his own and does not necessarily reflect the opinion of his office as well as FINEX.

Rose Marie M. King-Dominguez is a senior partner of SyCip Salazar Hernandez & Gatmaitan and the head of the firm’s Special Projects Department. She is a FINEX member.