FAQs

Industry research has indicated that close to 90% of companies transacting deals plan to conduct a background/integrity check to help identify potential problems before consummating their next acquisition, joint venture, or relationship with a distributor or licensee.

Government legislation such as the USA PATRIOT Act of 2001, Sarbanes-Oxley, Foreign Corrupt Practices Act, and Anti-Money Laundering programs require many institutions to become more sophisticated in managing their customer relationships, financial transactions, and equity positions. This has placed a spotlight on the need for dependable information and has made due diligence a critical, long-range compliance issue.

The growing trend of conducting detailed transactional due-diligence is fueled further by that fact that companies are quickly learning that it is more than “checking a box.” Investors are demonstrating a much greater awareness of the broader reputation and integrity issues that can impact business success. In fact, 75% of the companies surveyed by a Big Three consulting firm renegotiated the terms or structure or pulled out of the transaction of a possible merger, acquisition, equity investment, or business relationship as a result of information on the target company or its principals identified as a result of a background/integrity check.

The Internet teems with ads from companies offering “background checks.” However, these services offer very little value when conducting true due diligence due to the very cursory nature of the searches. A thorough investigation should probe personal associations and business practices going back at least five years and possibly ten. The appropriate sources include:

• court records of personal or business bankruptcy proceedings, civil litigation, misdemeanors, criminal convictions, regulatory proceedings, uniform business code filings, securities law actions, officer and director records, and other business-related matters; and
• media references, such as profiles and quotes in local and national periodicals, the Internet, and trade publications.

If the subject of the investigation has lived in more than one area over the period covered, the search should extend to all local and nearby jurisdictions—that is, records in all counties of residence along with those in adjoining counties. In any case involving a foreign national, the investigation will require global reach, exploring personal associations and business practices both domestically and overseas in all places where the subject has lived and worked. A thorough investigation can involve massive quantities of data—and collecting the data is just the first step in making it useful. At the very least, the investigation must verify, for example, whether the “John Smith” named in this record is the same “John Smith” named in another. In the case of court or regulatory proceedings, it is equally important to know what issues were involved and how each case was resolved. Assuming civil litigation, did the subject settle out of court, or contest the suit in a trial? What was the result? Assuming criminal or regulatory proceedings, what violations did the proceedings involve? What was the result?

We have established an exceptional reputation over the last decade of serving the largest and most respected investment banks, private equity firms, hedge funds,  fund of funds, law firms, pensions, and corporations.

Due diligence investigations are especially prevalent under the following circumstances:

• Completing a merger or acquisition
• Making a direct investment
• Forming a partnership
• Accepting a new client
• Finalizing a franchise or a license agreement
• Establishing overseas relationships
• Hiring new employees

Financial and legal due diligence process is an inside process (information is coming from within the company themselves). Transactional or deal due diligence comes from outside of the company from public records, open sources, and live sources.

Investments and business transactions in emerging markets requires additional diligence including:

• Sources of wealth and business track record: One of the key questions an investor should be asking is what is the local business partner or target’s source of wealth? Understanding this can provide comfort over not just illegal dealings or involvement with money laundering, but also personal allegiances.

• Interference by state or public bodies: Many emerging markets pose very particular challenges with regard to the political and economic environment.

• Unnecessarily complex corporate structures: Complex corporate structures (often offshore) may frequently be associated with major fraud and money laundering cases, yet the existence of such structures may not be questioned, or even recognized, by potential investors. It can be difficult to identify true beneficial ownership, particularly where records are unreliable or non-existent. Through the use of such structures, dishonest parties may hide the identities of true beneficial owners or siphon off assets.

• Weak corporate governance: The issue of corporate culture is becoming increasingly important to companies in key developing markets. Poor corporate governance makes it difficult if not impossible to embed a strong anti-fraud culture.