Tackling the realities of due diligence in a global setting

by DLA Piper

The Resource Guide to US FCPA* (the Guidance) promulgated by the DOJ and SEC emphasizes the need for appropriate due diligence and vetting before engaging third parties.

The Guidance details the need to conduct risk-based due diligence in order to understand the qualifications and associations of prospective third-party partners; ensure they are not willingly forging alliances with partners who are likely to commit acts of corruption; and avoid subjecting themselves to possible liability under the FCPA as well as other anti-corruption laws.  It sounds pretty straightforward.

The reality however, is that for even the most conscientious of companies, real hurdles exist to conducting fulsome due diligence in a global setting.

Identifying beneficial owners, principals and other stakeholders: The first step in conducting proper due diligence and knowing your business partners is identifying who they are.  This may seem like an obvious place to start, but in practice it it may be easier said than done.  In many countries in Asia, for example, businesses tend to be run by families rather than individuals.  Similarly, in some countries in the Gulf there tend to be extensive and complicated networks of related companies.  In other instances, local practices may disguise the identity of key stakeholders.  For example, in Russia, silent partners may obtain an ownership stake by virtue of secret agreements.  In India, traditional “Benami transactions” allow purchasers to conceal their identity by acquiring property in another person’s name.  That is, to take this first step in due diligence, care must be taken to disentangle relationships, identify possible hidden partners and accurately identify those with whom you are actually partnering.

Properly evaluating the business purpose for the third-party and any necessary structures:  The Guidance instructs that a red flag should be raised when a third party is in a different line of business than that for which it is engaged.  However, the question of relevant qualifications may need to be evaluated in a wider context. Third parties may insist that some other party, such as offshore affiliates (yet another red flag) or partners with no qualifications relevant to the business in question, need to be introduced into the relationship. Possible justifications for this structure would be to ensure observation of local currency control laws, or to be able to import directly into the country (in some countries, only a limited sub-set of companies have import licenses).  In countries such as Russia and China, such claims may have some legitimacy.   Care must be taken to properly evaluate these justifications under local law to determine whether the stated rationale is with merit or is merely an attempt to disguise improper practices.

Evaluating red flags: The Guidance further explains that due diligence needs to establish a prospective third-party partner’s business reputation, and that the greater the number of red flags, the higher the level of scrutiny.   Again it is critical to consider local context. Chief among archetypal red flags is a reputation for past misconduct.  In assessing a prospective partner’s reputation and prior history of misconduct a company may learn that certain stake-holders have a police dossier.  A police dossier is akin to various law enforcement agencies’ files (i.e., information of interest comes to the attention of the agency and the result is memorialized for future use; it does not necessarily imply criminal charges or an ongoing investigation) or have otherwise been the subject of criminal allegations.  In many countries in central Europe, however, it is common for individuals to have police dossiers or be the subject of politically-motivated prosecutions.  When the State Security Service of the Federal Republic of Yugoslavia database was made public, more than one million Slovenians were found to be in the database – roughly half the country’s population.   Thus, while the existence of a police dossier may legitimately give rise to concern, it is important to put such a discovery into context.  Still another example is prior allegations of corruption appearing in the media.  In many countries, including Russia and South Africa, business competitors and politicians wield allegations as a tactic to discredit potential adversaries or competitors. When you evaluate the veracity of such allegations, it is important to note that all press is not created equal and may not be independent or a credible source.

Three key takeaways

  • There is no one-size-fits-all solution to due diligence.
  • Use reputable, established firms that are experienced in conducting diligence in the jurisdiction where you are seeking to engage a third party.
  • Due diligence must be culturally sensitive  to properly evaluate the meaning of any red flags and/or rationales provided.

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.

© DLA Piper | Attorney Advertising

Written by:

DLA Piper

DLA Piper on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.