Risk management and due diligence


Financier Worldwide Magazine

April 2013 Issue

April 2013 Issue

Winston Churchill once said that “There are times when there is nothing left to do but what is required”. Such is the case with risk management and due diligence. When making an investment of debt or equity into a business, what is required is appropriate action on the proper due diligence necessary to make the most informed decision possible. Being casual about this process is a failure to execute the proper level of investigation regarding the assets being financed or purchased or the management team being backed and vetted. 

Managing risk and due diligence is a serious business that should begin with a policy and a plan. Here we will focus on the human element of risk management, specifically background investigations.

Whether you are financing a business investment, purchasing a business inclusive of its management team and directors, replacing some or all of the management team and its directors, or simply making day to day management and directorship hiring decisions, a thorough and proper background investigation is essential. 

So what is thorough and proper? It begins with investigating that person in every relevant court jurisdiction, those being every county, borough, province or settlement where he or she has lived, otherwise owned real property or done business as far back as the investigation goes. This includes state and federal courts of these jurisdictions as well. To skip even one of these could mean missing the possible deal-killer issue. Using a ‘dual searching’ methodology is also essential, whereby the investigation firm searches online and on-site at county, state and federal courthouses for litigation (civil and criminal), tax liens, judgments, and bankruptcies. Online-only databases can lack tenure, currency and accuracy; often they do not track back far enough, or do not immediately update new court filings, and they may misspell a name occasionally. In addition to a history of, and current possibly fraudulent legal issues, investigating degrees, certifications and resumes are also required areas of investigation. People misrepresenting their educational background and work history are more commonplace today than ever.

Reading media in all relevant jurisdictions is essential as well, since media often provides leads to follow, such as an issue pending litigation. We have uncovered dozens of legal issues on the heels of adverse media written about the subject or someone else, in which our focus area was mentioned.

So how does all this tie together? Take the case of a US Fortune 100 company whose Worldwide Human Resources Manager, while working the renewal of the company’s credit facility, died of a heart attack at a relatively young age. Shortly thereafter, the accounting department saw invoices arrive which the HR Manager would have in past approved – invoices for recruiting fees for executives not employed by the subject company. Posthumously, it was discovered that the HR Manager was paying money into accounts that he controlled, generated for recruiting fees for executives who were never on the company’s payroll. Further investigation showed that he had a previous felony record for stealing money from a high club account where he was the principal. It also emerged that he did not have the PhD in Education that he had always represented on his resume. He was part of an acquisition made several years earlier by the subject company, which had not thoroughly and properly vetted him. His fraudulent past would have revealed itself much earlier and long before he became embedded in this fine and respected subject business.

Another example was a felony in waiting. At the time of the investigation for a US bank, the CEO of a subject US public company was being investigated by regulators in Canada for securities fraud, for which the CEO was ultimately convicted. A media search in Canada led to an article that in turn led to the proper regulatory individuals who corroborated the finding. Had this CEO, a Canadian citizen, been thoroughly and properly vetted by the HR management and the board of directors of this subject company, he would not have been hired in the first place.

It is worth remembering that fraudsters are not usually one-time criminals and they have learned to lie well. Fraudsters do not discriminate based upon sex, age, education or national origin. The largest frauds are committed by the most senior level executives because they have the best access to accounting and financial practices, procedures and policies.

Trust but verify. Thank you President Reagan. 


Jerry Oldham is the Chief Executive Officer of 1stWEST Financial Corporation. He can be contacted on +1 (303) 670 3443 or by email: j.oldham@1stwest.com.

© Financier Worldwide


Jerry Oldham

1stWEST Financial Corporation

©2001-2019 Financier Worldwide Ltd. All rights reserved.