Whether due to the financial crisis or the sheer fact that many of today's investment opportunities are global in nature, the number of foreign anti-corruption probes has grown at an alarming rate.

Last year, the U.S. Securities and Exchange Commission brought more Foreign Corrupt Practices Act cases than ever before, against 23 entities and seven individuals, producing more than $600 million in disgorgement and civil penalties. The U.S. Department of Justice imposed $1 billion in fines related to FCPA-enforcement actions, the largest in the history of the act. In all, eight of the top 10 corporate fines in FCPA history occurred in 2010.

The crackdown on FCPA violations and corruption is part of a larger enforcement trend. Congress has enacted sweeping new reforms on Wall Street, such as the Dodd-Frank Act and the Consumer Protection Act, which include whistleblower provisions intended to thwart corporate fraud.

The FCPA makes it illegal for publicly traded companies to pay foreign government officials in order to help them obtain or retain business. Historically, private equity has been largely unaffected, at least in terms of direct prosecution, by anti-corruption liability and the FCPA. However, compliance has begun to play a more prominent role as dealings with sovereign wealth funds increase and investments shift to Brazil, Africa and Asia, chasing heftier returns, but also producing greater risk exposures.

As a result, private equity firms may begin to re-evaluate how well their internal compliance programs -- both on a firmwide level and as it relates to potential acquisitions -- stack up with the FCPA and other anti-corruption laws, such as the U.K. Bribery Act. The costs for financial buyers are high, and they include criminal and financial sanctions.

Earlier this year, the SEC launched an investigation into several financial firms for their relationships with sovereign wealth funds. Sovereign wealth funds, owned and/or controlled by foreign governments, have drastically expanded their exposure to the U.S. In 2010, assets grew to $3.98 trillion, up 11%, according to Preqin Ltd. Nearly 60% of these funds invest in some form of private equity. Often, these funds represent a vehicle whereby private equity investors may gain access to investment in foreign companies.

Anti-corruption issues may surface in any number of operational decisions made by a private equity firm. Activities such as attracting capital from a sovereign wealth fund, opening an office in a foreign country and gaining approval as an investor in a foreign entity require clearing regulatory hurdles. Any instance in which a government requirement must be satisfied increases the risk that a private equity firm may be scrutinized for potential unlawful influence of government officials.

Private equity firms also face the prospect of corruptive practices at the portfolio company level. Beyond the risks that may inure to the firm as a result of any corporate governance responsibilities it may have with respect to its portfolio companies, corruption at a portfolio company can greatly influence divestitures made by a private equity firm and greatly impact its exit strategy. In some cases, for instance, a prospective buyer could insist that the portfolio company have a robust compliance program in place as a condition to a transaction.

Frequently, the companies in which a private equity firm invests are not well established and lack the infrastructure necessary to facilitate an effective anti-corruption program. Practices in some foreign countries that would be considered violations of the FCPA are viewed as "normal" ways of conducting business in the local country, irrespective of whether such practices comply with local law. Thus, simple reliance on an organization's management or employees' instincts to "do the right thing" is fraught with danger.

The due diligence phase represents an opportunity for private equity firms to reduce risk. Here, a comprehensive review of an acquisition target and its business relationships can help to identify any red flags. Red flags could include the standards of ethics of the target's management team, the nature of the company's third-party relationships and its ties to government officials. A private equity investor should review the existing compliance program within the target company.

Greater attention during due diligence can enable firms to make more prudent decisions as to whether or not to proceed with a transaction. However, the identification of a potential corruption problem may not necessarily mean violations have occurred or that a private equity firm should pull out of a transaction. Rather, the findings in the due diligence phase may provide an opportunity to identify the extent of the problem, fix it or be more selective in the transactions into which it enters. As part of any due diligence, difficult questions must be asked: Does the target possess a formal anti-corruption policy, and if so, have its employees been trained? Do the company and its employees have a particular tie with the local government or possess certain licenses? Does the entity possess an exorbitant number of outside consultants or advisers, and have these relationships been analyzed?

Unfortunately, there is no one-size-fits-all approach to FCPA compliance. When engaging in an investment opportunity or transaction, a prudent approach is to conduct a thorough risk assessment of the entire situation that accounts for all of the different risk factors involved. These include the nature of the underlying business, the geographic territories in which the target does business, its interaction with governments, the amount of goods and persons that travel and go through customs and immigration, the use of licenses and permits in its business operations, and so on.

The real risk for private equity firms lies in identifying a problem in the eleventh hour (or not at all). Besides delaying a transaction's closing, deals may be repriced or their terms renegotiated. And, once a deal has closed, successor liability is such that private equity firms and their directors may be liable for anti-corruption violations even if they were committed by the company they acquired before the acquisition.

In certain cases, a financial buyer may be best served by moving forward with a transaction despite the perceived risks. It may choose to take action following the completion of an acquisition, such as hiring a new compliance officer or appointing a third party to evaluate and improve the company's compliance program.

Whatever course of action a firm may take, it is prudent that the cost of developing a transparent compliance program in the target be built into the economic models behind the transaction. By developing an understanding of anti-corruption issues involved in an acquisition, including a review of the target and third parties before the deal closes, private equity firms can dramatically decrease the economic risk associated with a given transaction.

Private equity firms must be proactive in how they address compliance. Identifying risk is only a small part of risk mitigation. Firms should implement procedures that can effectively reduce risk to acceptable levels in their businesses. Remediating the risk of anti-corruption threats through proper internal controls requires effective compliance programs and experienced professionals. Those professionals should be deployed across the globe and be well-versed in the language and business practices in the country in which the portfolio company or acquisition target resides. It's also important for firms to recognize that because problems can surface in real time, they must be prepared to respond quickly.

Often, the initial instinct of those discovering a corruption problem is to assume it is limited to a particular transaction, region or portfolio company. Yet, it may well be symptomatic of a larger problem. A silver lining in an anti-corruption investigation is its ability to foster a more extensive analysis of the organization's risk exposure. The firm has an opportunity to delve deeper into its global operations to identify red flags before they evolve into serious problems.

Harvey Kelly is a managing director with AlixPartners LLP, responsible for the firm's global corporate investigations practice. Rob Morris is a managing director and heads AlixPartners' corporate investigations and litigation support practice in Asia.