The McLane Group has successfully completed hundreds of engagements around the world ranging from performing individual due diligence to creating comprehensive risk management programs. However, as due diligence has become more of a compliance issue our clients have more questions about this topic than any other. The top questions regarding due diligence that we receive include:
What kind of companies do you work with?
Why do companies choose to create an executive or business profile?
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?
A thorough investigation must weigh these and many other questions, painting as complete a portrait of the character and business dealings of the subject as possible.
What kind of companies does The McLane Group work with?
What government legislation and policies impact the need for due-diligence?
Failure to comply can result in penalties of up to $1 million, and/or imprisonment.
Know Your Customer (KYC): the due diligence and bank regulation that financial institutions and other regulated companies must perform to identify their clients and ascertain relevant information pertinent to doing financial business with them. Typically, KYC is a policy implemented to conform to a customer identification program mandated under the Bank Secrecy Act and USA PATRIOT Act. Know your customer policies have becoming increasingly important globally to prevent identity theft fraud, money laundering and terrorist financing.
Foreign Corrupt Practices Act: prohibits U.S. companies and their subsidiaries, as well as their officers, directors, employees and agents, from bribing "foreign officials" in order to secure business or some other improper advantage. FCPA also stipulates the required levels of due diligence about individuals and entities doing business with the company.
Office of Foreign Assets Control (OFAC) list: administers and enforces economic and trade sanctions against international narcotics-traffickers, targeted foreign countries, and terrorists and terrorism sponsoring organizations, based on US foreign policy and national security goals. Any business that doesn't check the OFAC list and conducts business with a prohibited party faces civil and criminal penalties.
How do The McLane Group's services differ from typical financial and legal due diligence?
My firm is considering an investment in an emerging market. What additional concerns should we be aware of?