The benefits of bribery busting

The US and UK governments are clamping down on corrupt investment practices. Private equity firms should welcome their efforts.

Corruption as a corrosive force has long been on the agenda of many governments.  Of late, the US and UK authorities have been particularly active in stepping up their anti-bribery policies.

In the US, following the financial crisis of 2008, the Securities and Exchange Commission and the Department of Justice began taking a closer look into company shareholders suspected to have breached anti-corruption laws. The UK has introduced similar efforts under the recently enacted Bribery Act. It has also barred “facilitation payments”, i.e. payments made to government officials during routine business matters. 

Faced with the prospect of greater scrutiny, US and UK private equity firms are ramping up due diligence procedures to identity potential corruption pitfalls – especially when doing business in emerging markets. Prior to the clampdown, GPs might have been able to remain blissfully ignorant of a service provider or a portfolio company manager engaging in questionable behaviour. Now, compliance policies will have to be updated to document that efforts were made to ensure that all “associated persons” are playing by the book. 

One consequence will of course be more bureaucracy and greater compliance costs. However, private equity firms should not perceive increased enforcement of anti-corruption laws as a negative trend. The overwhelming majority of private equity shops already refuse to engage in any type of bribery. An enhanced reputation as a firm that does not engage in palm greasing can also deter future bribe-seekers who may fear being reported. By the same token, a bribery-related accusation could, in reputational terms, prove catastrophically costly to a manager. 

An enhanced reputation as a firm that does not engage in palm greasing can deter future bribe-seekers who may fear being reported

Other advantages relate to returns. Aside from the savings born from simply not paying a bribe, selling a portfolio company with good corporate governance and a clean bill of health on the corruption front will fetch a higher premium. 

As fiduciaries, GPs have a clear responsibility towards their investors, which in and of itself renders even a whiff of ethical shortcoming intolerable. Likewise as providers of capital to businesses, in particular in countries where the fight against corruption is still at an early stage, GP also have a duty to steer clear of any questionable behaviour. 

In the final analysis, a bribery-free playing field will increase the opportunity set for private equity in any market. The case for the industry throwing its weight behind the work of governments ultimately has its root in self-interest. This makes it a very persuasive one. Expect the industry to fully buy into it.