International Business & Corporate Due Diligence

International Business & Corporate Due Diligence

International Corporate Due DiligenceA cursory approach to due diligence on international business partners is no longer sufficient and is an important step for companies operating globally. A proper due diligence effort may delay a new business relationship, but taking shortcuts and failing to properly vet international partners can have a catastrophic financial and operational impact. To protect themselves from future disasters, businesses would be well advised to proceed cautiously and thoroughly, undertaking a systematic investigative approach that will unearth potential risks.

While gathering financial and legal details is important, they are only one part of several precautions a company should take when assessing an international business partner. Identifying the potential risk and history of the person(s) behind local or international companies, trade and investments is a crucial aspect of that enquiry.

Laws and regulations

It’s incumbumbent upon businesses to be aware of a country’s laws and investigate a potential business partner’s compliance with them

U.S. and Canadian governments enforce laws and regulations that promote national security, foreign policy, and economic interests for their respective states. This includes, but is not limited to, regulations related to exports, imports, trade sanctions, requests to comply with certain boycotts, and bribery. Civil and criminal penalties may be imposed on companies that are in violation of these laws and regulations. It is increasingly incumbent upon organizations doing business abroad to be aware of the involved countries’ regulations, and undertake an investigation that determines whether potential business partners are in compliance with laws and regulations.

How due diligence works

There are no hard and fast rules that govern standards or protocol for conducting international due diligence investigations. Like any investigation, you start with a fact finding process. Ask your potential business partner to complete a questionnaire providing specific and comprehensive information you will need to commence your research. Take an impartial, investigative approach, scrutinizing the information provided, while being vigilant to identify what is missing. Verify as much of the information as you can and consider hiring a professional investigator that is competent in this type of research.

Looking at the business numbers is only one part of the process. Who is behind the business and their background can be much more important. Once you have completed a “risk- based” analysis, take action to further investigate any red flags discovered by the initial research.

Due diligence errors: there are no good excuses

Unfortunately (and unwisely) many corporate due diligence investigations are begun after business relationships are entered into, often in light of information that is accidentally discovered, reported by authorities, or disclosed by business partners.  However the information is found, the fact that it wasn’t discovered early on is frequently because no investigation was conducted or an investigation was conducted poorly and didn’t verify all details provided or discover relevant undisclosed information.

No court or inquiry will accept “We didn’t know” or “We didn’t thoroughly investigate” as a valid legal argument

Any business partnership has risks, but risks are compounded exponentially for people and companies that begin relationships and subsequently discover misrepresentations, legal or financial irregularities. No court or inquiry will accept “We didn’t know” or “We didn’t thoroughly investigate” as a valid legal argument. When entering into business, it is your duty, not the court’s, to identify the illegalities or questionable practices of a financial partner. When these irregularities become your problem, shrugging your shoulders won’t cut it.

Disclosure questionnaire: a baseline of information

These questions are a basic baseline for due diligence

A solid foundation for due diligence can start with a comprehensive “on the record” disclosure questionnaire. The questions must be reasonable and relevant to the business partnership and should be drafted by a lawyer. Senior company officials with signing authority should complete the questionnaire. Areas of examination should include: the company’s background; owners’ business, financial and employment history; any civil, criminal or regulatory issues; corruption, jurisdictional laws; associations and public reputation; corporate patterns of behavior; training standards; and, safety practices. These questions are a basic baseline for due diligence – a good starting point that could keep you out of court.

Conducting background research

The investigator’s work must be allowed to proceed without any influence

How much research you conduct should be proportionate to the potential financial, legal, and personal risks. The aforementioned disclosure questionnaire is imperative, but should be followed up with an impartially conducted investigation carried out by an experienced, independent third-party with demonstrated expertise in international investigations. The investigator’s work must be allowed to proceed without any influence from the hiring parties. The investigator finds what he or she finds, and reports findings good, bad or indifferent.

Investing significant capital, time and energy into an international business venture is a serious undertaking that should be entered into after appropriate, thorough investigation. A comprehensive due diligence process will help protect your investment, lower the risk of costly and time-consuming legal actions, and protect your business and professional reputation.

Considering an international due diligence investigation? Contact Fathom.

About the Author

Pat Fogarty is a former organized crime investigator now leading Internet research and investigations at Fathom Research Group. Read more about Pat.