Due Diligence Across Borders

Doing business in multiple countries can be beneficial, as can partnering with local firms in countries where the company is not headquartered. Local partners bring new markets, new customers, new suppliers, and a wealth of other tangible and intangible benefits. But entering into these partnerships increases the chance that the company will end up embroiled in legal controversy, such as being accused of breaking national and international antibribery and anticorruption laws. Thus, a thorough due-diligence investigation must be carried out before any alliance is forged.

There should be a full compliance review in a timely fashion, says Michael Runyan, CPP, who was the managing director of Pinkerton Consulting and Investigation’s Washington, D.C., office until earlier this year. That often isn’t done because “it takes too long…[and] the business development team finds it a lot more advantageous to shoot first and ask questions later,” says Runyan, who helped Pinkerton design due-diligence programs for its Fortune 500 and multinational clients. He now consults for Pinkerton.

Unfortunately, large companies “have so many different moving parts [that] communication breaks down. Business development doesn’t necessarily ever talk to security or legal before it tries to engage a business partner,” he says.

Before a due-diligence investigation takes place, the prospective partner should be asked to provide information for verification that is within the laws of that nation. Using that information, the company must do a full background check on the principals of the prospective partner. When that was done by Pinkerton on behalf of its clients, says Runyan, investigators examined proprietary and open sources to gain as much information as possible about the potential partner, including “its history, its financial status, any debarments, any legal actions, [and] any ongoing investigations—all to see if there is anything out there.”

To do this correctly, the investigator needs information from the client to know “exactly what these partners would be involved in with the company and why they are advantageous to the company…. A lot of times this is overlooked,” he says. 
Armed with the lowdown on what’s in it for the client company, investigators then want to ascertain what’s in it for the potential new partner. “You want to know what their interests really are, and sometimes that is not conveyed in the initial business discussions,” says Runyan.

Equally important are any factors that might become liabilities with regard to the new business partner. For instance, in the case of a prospective new third-party vendor, does this partner already have a parallel business line that is in competition? If so, might the prospective partner be intending to sell its own product line over the company’s product line? Another liability might be if the vendor is known to engage in poor business practices that might adversely affect the reputation of the company.

A company also needs to know who the real owners of the potential partner are. “For instance, China has a slew of state-owned companies, and it is often not so apparent what the ownership is and how that can impact the business,” Runyan explains.

Not every scrap of negative information found will, or should, lead to an abandonment of a prospective business partnership. One simple example might be finding out that someone working for the potential partner had several DUIs. “If that person doesn’t drive on behalf of the company, then that is typically not that big of a deal,” Runyan states. However, if it is found that one of the principals has previously been criminally investigated, has been accused of war crimes, or if the business has been involved in faulty product lawsuits, this might spell the end of the attempt to form a partnership.
Runyan says that quite often what is found is “fairly benign stuff. But these are things you may want to know because, down the road, the business parameters may change.” And when they do change, Runyan recommends a review of previous investigative information on file.

When conducting a due-diligence investigation, companies should keep in mind that a lot of incorrect information is out there, including database errors. Victims of identity theft, for example, will have incorrect information show up about them, and other people will have their good reputations confused with others of the same name who are not so clean. This makes it imperative that all information be verified by several sources, Runyan stresses.

Gathering reliable information in various countries is not easy. When the potential business partner is in a developing nation, the problems of information gathering are instantly compounded, he says, and the validity of what is obtained is often hard to prove. “You need a local or regional person to verify [information]—to go to the courthouse and pull a record or go to the actual address that the business claims to be at. It’s very important, because otherwise you’re basically doing an Internet search,” and that will leave you vulnerable to being scammed, Runyan says, noting that it is simple for anyone to set up an Internet presence—a “shelf company that looks like a legitimate storefront.”

This is where a due-diligence investigation consultancy can help, and it is especially the case for companies that are starting a business line in a new country without any established physical presence and with a different language. “You won’t have the staff or resources to do the local investigative work,” he notes.

For companies that choose to use a third party to conduct due diligence overseas, it is important not to settle for glorified background checks. “Due diligence is a lot more complicated than a background check, and it gets lumped in with background checks too often. You’re not verifying whether a person went to the school they say that they did; you’re verifying the quality of a person or a company’s character through multiple means. You’re going to end up with a 70-page report on one company versus a two-page criminal or educational background check,” explains Runyan.

In the end, even the 70-page, meticulously documented report might not provide a clear yes or no answer to the question of whether the client should enter into a partnership with the subject company. “It’s not a ‘Hey, you can do business,’ or ‘you can’t.’ It is really up to the company to decide what is acceptable as far as the risk level and what the company’s compliance and risk management policy is,” he says.

Reporting

Companies must keep in mind that under the U.S. Foreign Corrupt Practices Act, they are obligated to report to the U.S. Department of Justice (DOJ) any potential violations that surface. Runyan says that there has been a lot of argument over whether this self-reporting is valuable. In his opinion, if the DOJ hears about possible violations from a whistleblower or from media investigations, it will to be a lot harder for the company to defend itself.

Obviously, it’s hoped that due diligence will save a company from partnering with the type of company that breaks the law, but if it comes to pass that a partner does violate the antibribery laws, the company should self-report when it learns of the problem.

“If the company gathers the facts as much as it can and says, for example, ‘Look, we bought this other company, then we found out that these business lines have some issues, and we’re investigating that; we’re enforcing our compliance policy,’ then it is on much more solid ground,” he says. The action may not preclude the company from being investigated by law enforcement or from being penalized because it may have reaped the rewards of the corrupt activity; however, it may soften the enforcement action against the firm.

“There’s some argument that most of the countries putting laws on the books don’t have the teeth or the investigative resources to act to pursue anticorruption, but that is changing, and I think the global culture is coming around to say that corruption is not good, and it’s not helping anybody,” says Runyan.