Making
the Case for Due Diligence
After 9/11,
a global franchiser decided it would be prudent to obtain background
information on their existing and potential international franchisees.
The majority of franchisees were reputable and financially stable
firms with competent senior personnel. However, a due diligence
search on a potential partner revealed that their CEO was among
those listed in a report delivered to the local government by
the United States Central Intelligence Agency. The list contained
the names of individuals and companies affiliated with Bin Laden
and named six banks in the region that are said to have ties
with his terrorist organization. As a result of receiving this
information, consideration of any business relationship with
the company ended immediately.
This story
is one of many that illustrates that in the aftermath of September
11th companies have recognized the need to be more informed
about any person or business that may become a potential business
associate. The growth of global commerce has investors desperate
for assurance that they are connecting with legitimate foreign
entities.
Federal
Law
The
onus is on you to prove that you have done everything in your
power to ensure all business associates are legitimate. Congress
passed the Foreign Corrupt Practices Act (FCPA) in 1977 in an
attempt to end bribery by U.S. multinational corporations. The
FCPA is enforced jointly by the Securities & Exchange Commission
and the Department of Justice and consists of two parts: the
anti-bribery provisions and the record keeping and accounting
provisions. A violation of either of these provisions carries
potential criminal and civil penalties.
Additionally, the signing of the USA Patriot Act on October
26, 2001 placed new guidelines on financial institutions and
franchisers. The act expanded upon previously enacted legislation
and is designed to prevent financing of terrorist activity and
money laundering by domestic and foreign criminals. The Patriot
Act requires companies to verify the identity of the international
prospect, including the beneficial owners, and the source of
deposited funds. Furthermore, companies must identify "customer
risk indicators" that would trigger additional scrutiny,
such as a customer refusing to identify or indicate a legitimate
source for deposited funds.
Companies
are increasingly faced with difficult decisions in light of
the stiff penalties and growing intolerance of corruption by
the Government and public. Multinational companies must employ
techniques to detect and prevent FCPA and Patriot Act violations.
The most effective means to do this is by performing in-depth
due diligence investigations.
Definition
Due
diligence is the assessment that a prudent person might be expected
to exercise in the examination and evaluation of risks affecting
a business transaction. It should be the first step taken before
embarking on any successful national or international business
venture.
Information
Requirements
Potential
franchisee should complete a thorough application questionnaire;
consisting of:
- Corporate
Details
- Incorporation
Information
- Domestic/International
References
- Biographies
on Senior Management, including specific identifiers such
as Date of Birth, Citizen ID Numbers, and Passport Numbers
Due to increasing
privacy initiatives, an authorized release permitting information
to be obtained and verified by either internal or external sources
is often required.
This information
should then be verified and crosschecked with various Government
Denied Party Lists. Additional research should be conducted,
including criminal/civil/bankruptcy litigation, media review,
and regulatory contacts (Embassy, Consulates, Ministries, etc.)
to determine the local credibility and reputation of the parties
involved.
Investigation
If
you do not have the time or resources to conduct these investigations
internally, an outside firm can assist in the process. The price
and delivery time will vary depending on the firm, the geographic
region, and scope of the investigation. Only highly qualified,
professional investigators with a local knowledge of the region
should be utilized in the process.
Red Flags
Through
the completion of the application and due diligence review be
looking for "Red Flags" such as:
- Failure
to provide basic documentation
- Address
is determined to be a mail drop
- Prior
judgments, liens, or bankruptcies
- Non-disclosure
of civil or criminal litigation
- Criminal
arrests
- Failure
to verify any of the provided information
- Failure
to confirm references
- Applicant
becomes argumentative over basic requests for information
If any of
the above situations are found, ask direct questions of the
applicant. There may be a suitable explanation, especially when
dealing in foreign locales. However, what may seem like a minor
detail or omission, can lead to a trail of deceit and corruption.
Do the
Due Diligence
A
little due diligence can go a long way in protecting your business
capital and reputation. There is no substitute for a thorough
investigation. In these days of strict adherence to regulations,
extra effort is what it takes to protect your company when your
business growth leads you into uncharted territory.
Experience
has demonstrated that time and money invested in due diligence
investigations has saved many corporations from financial disaster
and irrevocable reputation embarrassment. Due diligence is no
longer a luxury; it is a requirement to meet legal and regulatory
requirements and to promote corporate integrity and customer
confidence.
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