There are many levels of due diligence investigation. In a multi-part series this week, I am going to focus on Level III, deep dive due diligence. I am joined in this exploration by Candice Tal, founder and Chief Executive Officer (CEO) of Infortal Worldwide, a global risk management and security company established in 1985. Tal is highly regarded as a specialist in global due diligence investigations and board advisory services. Infortal helps companies reduce their business risks globally by over 20% through improved regulatory compliance, protecting M&A transactions, more through vetting of senior executives and boards of directors to prevent PR nightmares. 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 will consider what is a Level III, deep dive due diligence.

A Level I due diligence investigation typically consists of checking individual’s and company names through several hundred Global Watch lists comprised of anti-money laundering (AML), anti-bribery, sanctions lists, coupled with other financial corruption and criminal databases.  These global lists create a useful first-level screening tool to detect potential red flags for corrupt activities. It is also a very inexpensive first step in compliance from an investigative viewpoint.  This basic Level I due diligence is extremely important for companies to complement their compliance policies and procedures; demonstrating a broad intent to actively comply with international regulatory requirements.

A Level II due diligence screening encompasses supplementing these Global Watch lists with a deeper screening of international media, typically the major newspapers and periodicals from all countries plus detailed internet searches. Such inquiries will often reveal other forms of corruption-related information and may expose undisclosed or hidden information about the company; the third party’s key executives and associated parties. A Level II should also include an in-country data base search regarding the third party.

Level III due diligence is a deep dive into the background of an individual or company. It requires an in-country ‘boots-on-the-ground’ investigation. According to Tal, a Level III due diligence investigation is designed to supply your company “with a comprehensive analysis of all available public records data supplemented with detailed field intelligence to identify known and more importantly unknown conditions. Seasoned investigators who know the local language and are familiar with local politics bring an extra layer of depth assessment to an in country investigation.” Further, the “Direction of the work and analyzing the resulting data is often critical to a successful outcome; and key to understanding the results both from a technical perspective and understanding what the results mean in plain English. Investigative reports should include actionable recommendations based on clearly defined assumptions or preferably well-developed factual data points.”

But more than simply an investigation of the company, critically including a site visit and coupled with onsite interviews, Tal says that some other areas to investigate include “an in-depth background check of key executives or principal players. These are not routine employment-type background checks, which are simply designed to confirm existing information; but rather executive due diligence checks designed to investigate hidden, secret or undisclosed information about that individual.” Tal believes this additional due diligence will uncover “Reputational information, involvement in other businesses, direct or indirect involvement in other law suits, history of litigious and other lifestyle behaviors which can adversely affect your business, and public perceptions of impropriety, should they be disclosed publically.”

Additionally, you may need to engage a foreign law firm to investigate the third party in its home country to determine the third party’s compliance with its home country’s laws, licensing requirements and regulations. Lastly, and perhaps most importantly, you should use Level III to look the proposed third party in the eye and get a firm idea of his or her cooperation and attitude towards compliance as one of the most important inquiries is not legal but based upon the response and cooperation of the third party. More than simply trying to determine if the third party objected to any portion of the due diligence process or did they object to the scope, coverage or purpose of the Foreign Corrupt Practices Act (FCPA); you can use Level III to determine if the third party is willing to stand up under FCPA scrutiny and whether you are willing to partner with the third party.

Through a very significant statistic, Tal emphasized how critical Level III due diligence can be going forward. She noted that in her 20+ years of experience performing this level of investigations, “we find 35% of businesses have corruption related issues.” To help resolve such issues, typically referred to as “clearing red flags” Level III due diligence would include “things like business operational information, trade reputation, how are they known locally. Are they known to operate corruptly in any way shape or form or are the executives involved in any underhand or shady relationships? Or perhaps they, on a routine basis, do business with countries and governments that are sanctioned by the U.S. that may not be sanctioned in their own country.”

Tal noted that a financial review could well not be dispositive. She said, “you know we may have some basic financial information and there’s no red flag on the global watch list but this is a startup company. They’ve only been around for a year or two and they don’t have all of their documentation lined up for the company or perhaps they have gone through and gotten their business license and they are paying taxes in the country of residence origin but they don’t have any website and yet they’re supposed to be a high-tech company.”

A Level III due diligence investigation is not required for all of your potential third parties but should be reserved for those which you identify as high-risk due to a variety of factors. For instance, if you are involved in the construction of a hotel in partnership with the son of a government official in a country known for known high propensity for corruption, a Level III, deep dive due diligence report into both the son of the government official and his company would be a critical factor in demonstrating an intent to comply with the FCPA or any other international anti-corruption legislation.

Tomorrow I will consider how to use a Level III, deep dive due diligence investigation in the senior executive searches.

[View source.]