New laws are continuing to hold companies in the financial and corporate sectors increasingly liable for third parties’ acts of corruption or bribery. With added pressure placed on businesses to conduct proper due diligence on their partners, Creditsafe USA has put together this article to help explain why you should complete these checks.
So first of all, what is due diligence?
To put it simply, due diligence is research carried out on an entity or individual a company plans to conduct business with—‘doing your homework’ so to speak. This usually consists of investigation into all relevant aspects of a third party’s past, present, and predictable future.
Why is due diligence conducted?
Before any money changes hands, there are numerous reasons you should check who you are about to conduct business with. These could be—but not limited to—confirming that the business is what it appears, outlining any reputational risk incurred should the third-party have any adverse media written about them, identifying any ‘deal killing’ factors such as the business appearing on a sanction or watch list, and verifying that the transaction complies with investment or acquisition criteria. These are the some common reasons due diligence is performed; however, there could be any number of reasons to complete research on a business.
Who conducts due diligence?
From an industry perspective, obviously the financial sector is under more stringent guidelines when it comes to money changing hands. With the advent of ever-increasing presence and publicity surrounding acts such as the UK Bribery Act and FCPA, corporations are beginning to follow suit by implementing adequate due diligence processes.
From a company perspective, the person within the organization actually completing these checks differs from industry to industry. In the corporate sector it tends to fall to a Compliance Manager/Director or someone in a prominent legal function—Legal Counsel for example. Financial institutions tend to put compliance issues more to the forefront of what they are doing due to regulatory responsibilities, and often have large teams completing this compliance based checks.
How much time does it take to complete adequate due diligence?
How long is a piece of string? Organizations will have their own compliance guidelines, but due diligence really needs to be looked at on a case by case basis. If you are employing a contractor to come and put a shelf up in your office, a quick internet search may suffice. However, with acquisitions or large supplier agreements it sometimes take months to look through detailed financials coupled with using specialist tools—such as Creditsafe USA’s Search—to build an in-depth picture of the company in question.
How much does due diligence cost?
The investment is an essential expense, more than compensating for the cost of failing to conduct adequate due diligence. If you think compliance is expensive, just try non-compliance! Regulatory fines and loss of business through reputational damage far outweigh the costs of implementing an adequate due diligence process.
Does due diligence insure a business transaction will be successful?
In a word, no—however—it will improve the odds sufficiently. Risk never disappears completely and there is always something that can go wrong. Sufficient research into a company before transacting with them mitigates the risk of the deal going sour. Unfortunately, no transaction— no matter how safe it appears— comes without any risk.
Can I get into legal trouble for not completing due diligence checks?
In this litigious world, you’re liable to be sued for just about anything, and failing to conduct due diligence is no exception. Parties involved in a business transaction may find themselves being sued by their clients, investors, and customers—but more worrying is the risk of conducting business with a corrupt entity or someone linked to terrorist funding. Regulatory bodies have been coming down harder and harder on organizations pleading ignorance when it comes to due diligence procedures.
Mitigating this risk is simplistic in theory: having a compliance procedure in place that adheres to the specifications of your industry and the locations you do business, keeping an organized record or ‘audit trail’ to show that you had completed these checks before any transactions took place, and continued to check them on a regular basis.