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- Over 20% of European investors in emerging markets undeterred by bribery, corruption or money-laundering; over 25% undaunted by criminal connections.

- Lessons to be learnt by Irish companies.

Irish companies should not ignore the potentially serious risks to their businesses when making acquisitions in emerging markets.

According to a study by Deloitte into pre-investment background checks (known as integrity due diligence) conducted by European foreign direct investors on acquisition targets in emerging markets, there has been an increase in the number of investors conducting such checks since 1999, but the depth of this diligence can vary dramatically, as can the response to the risks identified.

The study found that 21 per cent of international investors don’t believe that the dependence of a target company on political connections or bribes would be a deal killer, 54 per cent wouldn’t have a problem with an inappropriate use of political connections by the target, while 22 per cent wouldn’t be concerned with the target being involved in money laundering.

Emma Codd, forensic partner at Deloitte UK, said that companies that fail to make themselves aware of these risks before investing could be exposing themselves to legal, financial and reputational damage.

“There are significant gains to be made from investing in emerging markets,” commented Codd. “This is reflected in the 69 per cent of the companies surveyed reporting that most of their investments met or are exceeding expectations.

“However, in the rush to tap into the growth opportunities available in emerging markets, some investors are showing a willingness to ignore serious risks relating to a target company that – had they been related to a transaction in their domestic markets – would undoubtedly have killed a deal.”

“This report acts as a timely reminder to Irish companies that they need to be cognisant of these risks. The area of integrity due diligence is now a very necessary instrument that investors need to consider in evaluating potential acquisitions and investments. The sooner Irish investors recognise this, the more risks can be averted,” said David Carson, M&A Transaction Services Partner, Deloitte Ireland.

“Given the current climate of anti-corruption and proceeds of crime legislation, companies that ignore these issues are not only exposing themselves to financial and reputational damage, but also to criminal and regulatory sanctions both in their home jurisdictions and – in some cases - others, such as the United States,” said Codd.

Other key findings

75 per cent said they would not invest in a company founded on criminal funds, yet only 51 per cent actually make enquiries into the source of their partner’s start-up capital;
86 per cent of businesses said that if a partner had links to organised crime this would be an instant deal killer, yet 29 per cent fail to conduct enquiries into this issue.
Emma Codd added: “Despite a willingness by companies to conduct some level of integrity due diligence, this report also found that there is a disparity between what investors consider deal breakers, such as links to crime, and the due diligence they actually conduct to check these factors.  While there is no doubt that emerging markets present a great investment opportunity for many companies, they need to ensure that they have identified and addressed the associated risks before taking the plunge.”

Ends

Notes to editors

About the research

Deloitte interviewed finance directors and senior executives from 100 of Europe's top infrastructure companies to find out their views and knowledge of the inherent risks of investing in emerging markets (Eastern Europe, Asia, South America, Africa), and to see how their views had changed since the two previous pieces of research (published in 1999 and 2002). The full report is available on the Deloitte website at www.deloitte.co.uk/forensic.   

About Deloitte

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