Never wonder, always know: comprehensive checks for new business partners
February 2014 | SPECIAL REPORT: CORPORATE FRAUD & CORRUPTION
Financier Worldwide Magazine
A few years ago a famous German race track, the Nürburgring, was to be expanded with help from private investors and public funds. But the organisers were taken in by a cheque fraudster pretending to be the heir to an American millionaire. Even the state premier believed him. How are fraudsters able to reach this point for major investment projects such as this, despite all the due diligence checks?
There are two reasons why such incidents are currently increasing: firstly, fraudsters know how to exploit the fact that companies often have no knowledge of potential partners who are increasingly domiciled abroad. Submitted documents may seem authentic and fulfil the due diligence criteria, but in some cases the information included cannot be unequivocally checked. Responsible parties are often deceived by the visual impression of the documents and certificates. Alongside increasing internationality, the internet also offers fraudsters a range of new opportunities: they can create seemingly authentic company profiles, feign employees or establish networks in minutes.
In addition to the rise in cases of fraud, there is another reason why financing, participations and takeovers need to be checked more carefully than in the past: the public is playing a significantly greater role as judge and jury. If the new partner is linked to criminals or criminal organisations, exploits people or harms the environment, this becomes public much more quickly. This can result in a wave of public outrage, has a direct impact on the company’s success and damages its reputation in the long term.
As a result, an investigation of potential partners or takeover targets must now cover a range of different aspects. The depth of the investigation is comparable to traditional due diligence, but with a broader approach. Business investigators call this kind of check ‘investigative due diligence’. It considers the company’s reputation, the individuals controlling the company, links to other companies, suppliers and customers. Holdings are audited, the company history is examined and media databases and social media are used to track down reports on the company and its employees. It clarifies whether employees or the company have previously fallen foul of the law and whether social standards are complied with. All accessible information, such as details in brochures and on the website, is included in investigative due diligence. This not only involves reviewing the content of the submitted documents for completeness but also for authenticity. The comprehensive knowledge gained as part of investigative due diligence aims to prevent nasty surprises and improve the company’s security. The thorough investigation also demonstrably fulfils the requirements of internal compliance guidelines.
What can companies do to subject potential partners to this type of 360-degree check? There are two options: companies can carry out investigative due diligence using internal resources. Or, alternatively, they can employ an external service provider. In some cases, an internal investigation may be the only option. This may be the case if confidential business relationships or information are involved. Legal conditions may also be in place that prevent the appointment of external investigators. In some instances, only internal specialists may be able to interpret the relevant information.
For internal due diligence, the necessary workflows must first be defined and employees trained so that they are able to verify the authenticity of the submitted documents, images and PDFs, and identify plagiarism or manipulation. It often takes practice to identify whether details are missing or do not agree when provided with what is frequently an overwhelming amount of documents and publicly available information.
The other option is to employ external specialists. This is particularly useful for undercover research as the client does not have to disclose its interest in the external company, e.g., if it wants to keep its acquisition plans secret. In addition, employing a third party means that the company does not leave any traces of its research on the internet or when procuring certain information.
The appointment of external providers also has other benefits: specialist hardware and software is required for analysing complex corporate networks or large quantities of data, which is often only owned and used by experts. They have access to the information pools of numerous info brokers, with knowledge that goes beyond that of Dun & Bradstreet. Based on their experience and expertise, they are often able to act more quickly than an internal team. This is particularly important if contracts are due to be concluded within a short period of time. In emergencies, they are often also able to investigate on-site as they have access to an international network of investigators.
Whether investigative due diligence is performed internally or by external experts, both have their advantages and disadvantages. Where possible, companies should select a combination of both in order to link internal expertise with external investigative know-how to quickly obtain informative and reliable results.
When establishing internal resources, you must first define where the company’s potential risks lie. These potential risks must then be prioritised and used to define what you need to know about potential contacts/partners, subcontractors and corporate networks as well as individuals in order to avoid monetary and legal risks as well as loss of knowledge. What misjudgements could cost you dearly?
Companies should then use this risk analysis to develop a standardised approach for obtaining the necessary information from companies. For example, this may take the form of a self-disclosure checklist that is applied for all new contacts. This is used to request verifiable information, such as the company name, the company form, shareholders/management, date of foundation, VAT ID, address, website, purpose of the company, subsidiaries, number of employees and, potentially, insurance such as liability cover. This information may seem trivial, but the success of many fraudsters is based on minor name changes in documents.
All information needs to be checked for plausibility. Does the appearance match the information provided? Do the images used on the website belong to the company or have they been purchased, copied or even changed from other providers? Text blocks can also be easily taken from other sites. The plausibility check allows companies to distinguish between an enterprise’s carefully managed appearance and its actual, hidden personality.
Databases also provide corporate information on companies and corporate networks. In addition to international service providers, there are a range of specialist domestic information providers, such as Creditreform in Germany. Researching press databases for publications about the company also provides additional information.
If uncertainties still exist after obtaining and reviewing all the information, an on-site check becomes necessary. Is it a phantom company? Does the information provided coincide with the appearance on-site? A quick look at the actual location often tells you much more than outdated photos from Google Street View.
Jörn Weber is a managing director at Corma GmbH. He can be contacted on +49 2161 277 850 or by email: firstname.lastname@example.org.
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