Acquisitions | Risk Management and employees have little awareness of the gains from cooperation, a more thorough set of measures that combine communication campaigns with changes in normative prescriptions and financial incentives for cooperation was necessary to achieve the desired change.11 In this study, Fehr looked at a large organisation in Germany that had acquired a number of smaller businesses. The smaller businesses were able to pursue their own local business strategies. Fehr looked at what happened when the parent company wanted the local businesses to cooperate on a project that would increase revenues for the parent company, but drive business away from the local business in doing so. Fehr found that the acquired local businesses identified ways to formally implement the parent company’s project, and thus appear to be compliant, but did not really embrace those changes as part of their activities so as to actually be
Fehr’s observations around cooperation and the ingredients for a conducive corporate culture apply equally to compliance. In both the cases above, it was clear that while the significance of the sanctions’ restrictions were emphasised, the willingness to cooperate with the restrictions imposed was very low. When I read these cases I wondered: how were the acquired businesses expected to make up or replace the revenues they once generated from their business in Iran? How much time were they given to secure business in order to replace that revenue? What support was offered by the acquiring business to achieve this? I also wondered whether the nature of the training offered played a factor. Given the global scale of the sanctions that have been imposed on Iran, the problem was likely not the level of knowledge in both of these target companies. Both of these cases identified orchestrated efforts to circumvent sanction
compliance programme controls and to show them the mutual gains from cooperation The parent company and the target company management should work collaboratively to formulate a joint agreement where they define a new set of very specific appropriate behaviours to solve the cooperation problem, and each manager individually signs this agreement13 Include in any agreement how the managers will communicate with one another about the progress of integrating the parent company’s AFC compliance programmes, and the challenges experienced, as an ongoing process All managers agree to enforce the restrictions under the AFC compliance programmes at their respective companies i.e. ‘We will give direct feedback to those employees who do not comply’ Undertake an information campaign informing all employees of the new compliance requirements, at both the parent and target company. This should be undertaken by management at both companies and not solely the parent company Change financial incentives to ensure that all areas of the business comply with the AFC compliance programmes. Tie remuneration to the overall performance of the company group, instead of tying it to local operations, which may be significantly impeded by the new restrictions imposed by the parent company’s AFC compliance programmes Challenge confidence levels – this is my own addition. The board is key to challenging the confidence that an acquisition team has in the changes they propose to integrate an AFC compliance programme into a target company. In the cases noted above, why were the team confident to proceed with the deals knowing that the risk of violating the Iran sanctions existed? Why were the teams confident that the controls proposed (e.g. having managers sign agreements to comply with the new controls and not undertake business with Iran) would, at a practical level, work to mitigate this risk?
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CULTIVATING COOPERATION Both parties in an acquistion should look to ensuring AFC compliance
compliant and meet the parent company’s desired objective.12 What was needed was the voluntary, proactive, cooperation of the local businesses but, instead, the way in which their cooperation was sought was only perfunctory. The need to ensure that an initiative is both clearly communicated, but also is genuinely collaborative and shared as an objective, is the key to success. The sanctions cases I mention above were used by the regulator to reinforce the importance of post-acquisition monitoring to ensure that they are applying compliance controls as required. But I think that we are missing a trick here if we fail to acknowledge that the TUWKB problem has also played a role in, at times, distracting acquiring firms from understanding the significance of compliance culture and investing the resources necessary to mitigate the potential risks post-acquisition. www.ethicalboardroom.com
restrictions and conceal those activities. What sort of training, if any, would have achieved the desired outcome in these cases – i.e. achieving buy-in that the loss of business with Iran was far outweighed by applying the acquiring business’ compliance controls prohibiting it? How seriously were target company employees going to take SB&D AML compliance training or buy-in to cooperating in observing these restrictions, when it was undertaken with one employee over the telephone? This article is intended to provide some food for thought and ask the reader to consider whether they have experienced the TUWKB problem. Fehr provides some helpful advice, which I have paraphrased here, that I think might help to solve this problem:
Make target company managers aware of the benefits to applying the AML
Business growth by way of acquisition will continue to take place on a global scale. So too will the AFC regulatory landscape and the scope of controls and restrictions imposed by them. The integration of an AFC compliance programme may involve many different policies and procedures, and cause pain and disruption to a target company’s operations. But unless that integration strategy starts with a campaign to ensure that the right compliance culture is introduced and avoids the TUWKB problem, real and worthwhile cooperation with and implementation of the AFC compliance programme may prove elusive and, in some cases, costly. Footnotes for the article will be published in full online.
Spring 2019 | Ethical Boardroom 115