In M&A, crime definitely does not pay

M&A transactions are often complex and sometimes risky.

Will the merged group generate the revenue and cost synergies that have underpinned the deal price? How long will it take to complete post-merger integration and what is the risk, and the cost, of the integration being derailed? Are the potential cost overruns built into the transaction model? Are the buyer and target management teams as culturally aligned as the pre-merger discussions and human capital due diligence suggest?

Whilst buyers and their advisers will usually expend significant time in identifying and seeking to defray the risks of known and unforeseen liabilities and other issues materialising after completion, they will often overlook the risk of their own criminal liability arising from their failure to identify properly and report instances of money laundering that have taken place in the target group.

Under UK anti-money laundering laws (principally the Proceeds of Crime Act 2002 (POCA), the buyer (and possibly its advisers) and members of the buyer deal team could commit a criminal offence if they know or suspect a transaction facilitates the acquisition, retention, use or control of “criminal property” and fail to report their suspicions to the National Crime Agency (the UK’s principal law enforcement agency dealing with economic and organised crime) and obtain consent to proceed with the transaction. An offence may also be committed if those on the target or seller-side are tipped off that their activities may become the subject of investigation by law enforcement authorities.

The scope of the legislation is – by design – extremely broadly framed. For example:

* Money laundering offences under POCA are on an "all crimes" basis. This means
that the money laundering offences are not restricted to a particular type of underlying criminal offence that may have been committed by the target group or the sellers. Therefore, this could range from offences such as breaches of environmental legislation, all the way to false accounting, tax fraud, bribery,
sanctions evasion and human trafficking.
* The threshold for suspicion is low. Leading case law indicates that a person must merely think there is a possibility, which is more than “fanciful”, that the relevant facts exist.
* "Property" is defined to mean property of any kind, wherever situated, that represents, directly or indirectly, in whole or in part, the proceeds of crime.
* With a few limited exceptions, there are no materiality thresholds.
* The offences can be committed extraterritorially if the relevant “criminal conduct”
which occurred outside the UK would have constituted an offence in the UK if it took place in the UK.
* It is immaterial who carried out the criminal conduct or who benefited from it.

The consequences of falling foul of the legislation are notably severe: The maximum sentence for individuals is up to 14 years’ imprisonment. Depending on the facts, the relevant corporate entities in the buyer group could also be convicted for the same offences.

Indeed, the recent codification and extension by the Economic Crime and Corporate Transparency Act 2023 of the identification principle may increase the likelihood of the corporate entity being prosecuted for, and ultimately convicted of, the same money laundering offence. Meanwhile, the new offence, introduced through the same legislation, of failing to prevent fraud provides a further route for conviction of the corporate entity if the underlying offences committed by any of its employees or agents is fraud.

It’s therefore critical that a buyer and those individuals within the buyer group representing the buyer understand the nature of their obligations under POCA. The due diligence exercise conducted by the buyer needs to be sufficiently broad to elicit information not only about instances of historical bribery, corruption and other egregious economic crimes, but also lower-level cases of criminality that may have taken place in the target group or by the sellers.

The buyer group’s M&A playbooks and procedures may need to be reconfigured to actively push the buyer due diligence teams to ask the right questions, assimilate the responses and, depending on those responses, take the appropriate steps to protect the buyer group and the deal teams from the risk of serious criminal sanctions that could otherwise ensue from failing to report money laundering or tipping off the target or sellers.

Whether it’s the outside world or M&A, the message remains the same: crime does not pay.

Authors are Glafkos Tombolis, a partner in the Corporate, Commercial & Finance team and Jonathan Grimes, partner in the Criminal Litigation team at law firm Kingsley Napley.

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