Avoid the Biggest Due Diligence Mistake

Conduct a thorough background check on any company you take on as a partner

Posted by Joe Gerard in Corruption, Ethics & Compliance on June 22nd, 2011

You wouldn’t bring a new employee into your organization without checking their references, so why would you partner with a company without doing a thorough background check?

As the OECD cracks down on countries who aren’t complying with anti-corruption regulations, and new legislation, such as the UK Bribery Act, are poised to change the way companies do business overseas, it’s more important than ever to ensure you’re not taking on foreign partners with questionable practices.

“Anytime you’re doing any type of due diligence assignment you have to take some sort of standard of care in order to understand who you’re doing business with or going into business with,” says Brian Willingham, investigator and president of Diligentia Group, a company that specializes in background investigations, including due diligence on prospective overseas partners.

“There’s a whole set of reasons why you should do this, including FCPA violations. You want to know who exactly you’re dealing with. And taking some additional steps, in addition to what they’re representing as their books and records and what they’re representing as their business, is important,” he says. “It’s critical to take an independent look at the principles of the firm and the firm itself to see if they’ve had a history of violations, if they have been litigious or had regulatory issues, among other things.”

Procrastination Stalls the Deal

Performing due diligence on potential business partners or employees isn’t just a formality.
Performing due diligence on potential business partners or employees isn’t just a formality, and you should never leave it until the last minute, says Willingham, who cites this as the most common mistake he sees in the firms he has dealt with.

FREE Investigation Report Template

Prepare thorough, consistent investigation reports with our free report template.

Download Template

“It’s usually one of the last things that happens, and part of the reason for that is because they want to be really sure about whether the transaction is going to go through. So it typically happens at the last minute,” he says. It becomes a scramble to get the information and can end up holding up the deal, he warns.

“By the time the investigative process is started, people have effectively made up their minds about the transaction,” he warns. “They want the transaction to go through. They save it to the last minute but it’s the only thing holding it up.”

Avoiding Denial

He describes a scenario in which people are willing to overlook red flags due to time constraints and the amount of time invested.  “It’s not that they don’t care. It’s that they’re willing to discount it a lot more, given the amount of work and money that has been invested on the legal side and whatever accounting firm they’ve hired to do the financial due diligence… By saving it for the last thing, effectively they’ve made up their mind.”

Conducting the investigation early in the process means that any significant regulatory or criminal issues that are uncovered can be examined objectively without time and financial pressure. This puts the company doing the due diligence in a much better position to make an informed decision.

With the amount of information available to investigators, it’s unwise to skimp on due diligence, says Willingham. Treating it as a formality to be crossed off the list at the last minute can put you and your company in a difficult position when the moment of decision arrives.

 


Joe Gerard
Joe Gerard

CEO, i-Sight

Spend my days showing off the i-Sight investigative case management software and finding ways to help clients improve their investigations. Usually working with corporate security, HR & employee relations, compliance and legal teams.

Visit Website