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Conducting Due Diligence Today
We have been doing due diligence for close to a decade. First were larger due diligences involving anti-corruption issues while working at large firms. Now, our firm does mostly third-party service intermediaries and joint ventures. We have seen how companies use a range of different methodologies to conduct due diligence, and different ideas of what it means to have a risk-based process. There is no one-size-fits-all approach, but some methods are significantly cheaper and more aligned to the business than others.
For some context, third parties that interact with foreign government officials pose significant risk to companies. As most readers know, the U.S. Department of Justice (DOJ) and Securities and Exchange Commission (SEC) published a guide in 2012 collecting various documents associated with the U.S. Foreign Corrupt Practices Act (FCPA), including opinion letters, prosecutions and other documents. The FCPA Guide notes that companies commonly use third parties to conceal the payment of bribes to foreign government officials in international business transactions. Commentators have echoed this concern. Mike Koehler, FCPA guru and law professor, has noted that a significant percentage of anti-bribery violations are based on the conduct of agents, representatives, distributors or even joint venture partners. As prosecutions have increased globally, third parties have frequently been in the cross-hairs.
A Streamlined Process
Over the past few years, in our own work and benchmarking, we have developed a streamlined process that is risk-based, effective and minimizes unnecessary costs. Generally, for most companies with foreign bribery risk, a due diligence process consists of collecting information on the third party — whether it's a customs broker or a joint venture partner — evaluating that information for compliance issues (or red flags), documenting the information and evaluation, and forming a decision on whether the company can enter into the relationship and, if so, under what conditions. This process usually begins with the business' request to conduct due diligence and ends with a report.
The key to an efficient and effective process is simplicity, a risk-based approach, and adequate documentation. Unnecessary costs can occur when: the expectations/questions for the third party are unclear; the company uses overpriced tools or software to conduct database searches; efforts of different functions and external parties are duplicative; the reports are unnecessarily complex; and the process is a one-size-fits-all approach.
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