Deep Dive Due Diligence: Part V – Level III Due Diligence as a Board Tool

Thomas Fox

Today, I conclude my exploration of Level III, deep dive due diligence, by discussing how a this should be considered as a best practices tool by a Board of Directors in a broader sense. I am joined in this exploration by Candice Tal, founder and Chief Executive Officer (CEO) of Infortal Worldwide, a corporate security and investigations firm founded in 1985 to serve emerging growth and Fortune 500 clients globally in a variety of sectors including biotechnology, financial services, high-technology, manufacturing and professional services. Tal’s extensive international experience and long-term relationships have enabled Infortal Worldwide to secure and deliver deep-level information not readily available through customary investigative channels.

Today, I want to consider how a Level III deep dive due diligence investigation should be used by a Board of Directors as an ongoing tool in the risk management process. Board involvement in general is key for a risk management process to work effectively as it sets the proper tone for an organization. Tal stated, “If a board is actively protecting the interests of the companies and its shareholders, then board transparency should be step one. So, if the board is screening new members and new additions to the board and screening directors on an ongoing basis that sets the tone at the top for the rest of the organization. It shows and demonstrates transparency. It shows and demonstrates how seriously the board takes the issues of risk. Risk over all, any type of risk, whether it’s executive risk or risk throughout the organization from things like bribery and corruption or through other types of crime, embezzlement, theft, loss of value of the various parts of the organization whether it’s a department or through a vendor in the supply chain.”

Beyond setting a proper tone at the top, Tal believes it is “important for a Board of directors to protect its shareholders from unnecessary risks as well as the Board itself.” Such an approach will demonstrate a Board is fulfilling its “fiduciary duty and also helps with compliance. It goes further to demonstrate effectiveness of internal controls for larger companies or any company really that’s publicly traded it would provide for a more effective risk management and so we identify the issues that can be exposed.” Tal went on to note this strategy of risk management can help your company to “minimize financial exposures, will reduce certainly business liabilities and certainly in M&A deals and in corporate supply chain ventures and then a deeper level evaluation of the information, especially the hidden and undisclosed information will help a company to get ahead of the issues and be able to go into damage control if necessary.”

The potential costs to a company are well documented. These costs could be the 20% of senior executives which Tal has found to have engaged in some type of activity or behavior which could financially damage a company or the up to 35% of third parties which have red flags raised and must be cleared. If a Board does not set the right tone for performing the requisite investigations to know whom you are bringing into management or with whom you are signing up to engage in business with going forward, such laxity will permeate the organization.

Tal went on to relate, “It’s really about shoring up and hardening the protection of the company from unnecessary risks and unnecessary threats and also to ensure that value is kept within the organization and that the company can get ahead of any issues that arise before they get exposed by the press.” Tal further noted that we “live in a society and an age of scandals and corruptions and failed deals. So, there are plenty of investigative journalists looking for interesting stories that are going to expose companies to situations they’d rather not find themselves in.”

These issues move beyond the executive hiring/promotion and third parties into mergers and acquisition (M&A) as well. Usually the focus in any acquisition is the financial due diligence. Yet Tal points out that knowing the background of the executive leadership team of any acquisition can be as critical to understanding not only whether the acquisition engaged in behavior which may have violated the Foreign Corruption Practices Act (FCPA) but also whether the acquired company will be a cultural fit down the road. Tal said, in many ways it is getting “really valuable meaningful information about those individuals. Having done a deep dive, Level III investigation can help your business avert a crisis because if you do not perform such an investigation, you might not even be aware that a crisis could occur or may already be unfolding.”

It is important to use a seasoned, experience investigative entity to perform such a Level III due diligence. Here two components from the recently released Department of Justice (DOJ) Evaluation of Corporate Compliance Programs are important to consider. Under the prong “Confidential Reporting and Investigation”, it states, “Properly Scoped Investigation by Qualified Personnel – How has the company ensured that the investigations have been properly scoped, and were independent, objective, appropriately conducted, and properly documented?” This prescription would certainly be applicable to Level III, deep dive due diligence.

Around M&A Level III, deep dive due diligence investigations Tal suggests that such language, “speaks to other types of issues like success and liability issues” because, “if we’re talking about acquisitions and it could be a small acquisition you know, $50 to a $100 million or it could be an extremely large acquisition.” Tal’s experience led her to conclude, “even in a very large acquisition, especially with global businesses that some of the key executives may have relationships that the Board is not very well aware of and we have seen situations where even at Fortune 100 companies the internal departments that are utilized to investigate these things don’t necessarily always have the resources that external companies like Infortal have to go and examine the situations in country.”

Many compliance professionals only consider a deep dive, Level III due diligence when evaluating third parties. However this type of investigation and information can be used by compliance practitioners and companies more generally in a wide variety of ways and for a wide variety of purposes. Your company would be well served to consider using such a tool in the future.

Candice Tal can be reached via email at

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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Thomas Fox

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