Why doing a due diligence ?

The due diligence process allows any decision maker to obtain the clearest possible vision of a “target” in total independence.

Due diligence and business intelligence

regulatory Framework

operational Framework

Focus on the concept of “due diligence”

What are the targets of a due diligence?

A company as part of an acquisition, buyer side
A company as part of an acquisition, seller side
A company as part of a credit, credit institution side
A material or service provider, buyer side
A client for the provision of equipment or services, seller side
A company as part of validation of a job
A company as part of validation of an intermediary or provider of business or market (OECD anti-corruption, FCPA)
A bank or credit institution in the process of KYC
A bank or EoC under the AML process (anti-money laundering) or other financial regulations (MiFID, FATCA …)
An investor in choosing a team or investment vehicle (AIFMD, UCITS IV)
A fund management company as part of the validation of an investor profile (KYI, MiFID, MiFID

Which due diligence process?

The duties of due diligence:

It should reflect as closely as possible the facts, just the facts
It must give, if not the truth, at least a perception of truth
It must be a fundamental factor for decision support
It should be concise but documented
It must be discreet, but not secret
It requires great humility, method, curiosity, ability to challenge, intellectual agility, luck (serendipity factor).

However :

It is not limited to mergers and acquisitions (M & A), or to the financial analysis
It is not limited to the buyer
It has nothing to do with espionage, spinning, intrusion, coercion in any manner.

Due diligence and Business Intelligence

In France,Business Intelligence

The due diligences are “about the economic, commercial, industrial or financial environment” to “protect themself against risks that threaten their business, their heritage, their intangible assets or reputation” and “to promote their business by influencing business developments or decisions of public or private persons “. Source: National Assembly LOPPSI Act 2

Due Diligence’s origin

Roman law concept of Caveat Emptor (“the buyer beware”).

External audits, prior to a transaction, a decision without direct solicitation of the “target”
Internal audits for third parties within a “target” entity for the payer.

Definitions from the Official Journal of the French Republic, december 28th 2006

Due Diligence: Investigation involving the use of experts, including accountants, financial, legal or tax whose findings form the basis for the decision of an investor.

Blend of due diligence and business intelligence

Due Diligence: Set of legal requirements which impose on credit institutions and any person raising funds, controls aimed at identifying interlocutor and origin of its resources.

The due diligence process is an essential step in the validation of an opportunity for a business.

As such, it is fully integrated into the cycle of economic intelligence, as an instrument of standardized measuring risks and opportunities.

It is an essential decision-making tool at strategic and operational levels in an organization, and contributes to the identification, measurement and control of internal and external risks of the company, through its decisions and external organic growth.

Why do due diligence will rule the world ?

Investment decisions, misjudgments and blindness are not allowed in economics and finance for several reasons:

The actual cost and the induced costs of a bad decision (60% of acquisitions mergers end in failure)

The systemic consequences for the economy:

Subprime loans without any control on the part of banks and real estate credit agencies US

Blindness general, including the US regulator, before the Madoff scandal broke.

The internationalization of trade, particularly with non-OECD countries (“emerging”), with little reference standards, social, legal, ethical.

The existing or futur legal environment imposes to economic actors, financial or otherwise, to govern their decisions on the basis of operational due diligence or advanced (enhanced due diligence)

Regulatory Framework

Anti-corruption

The Foreign Corrupt Practices Act (FCPA) American and the OECD Convention on the fight against corruption are the two largest references of anti-corruption legislation.

http://www.justice.gov/criminal/fraud/fcpa/

A legislative basis

In France these texts have direct consequences for listed companies in the United States or registered in one of the countries that have adopted laws based on the OECD Convention.
The documents are similar and both prohibit bribery of foreign officials, directly or through third parties, in order to obtain or retain business. These laws require companies to exercise greater vigilance and perform due diligence before hiring key staff, or contractors.

The scope of due diligence

The texts also serve as an important framework for the realization of a due diligence, they prohibit the bribery in order to obtain information about an investigation.

Download the text: fcpa-french

The OECD Anti-Money Laundering Convention

“Programmes or measures of ethics and compliance to prevent and detect foreign bribery subject to contractual arrangements, third parties, such as agents and other intermediaries, consultants, representatives , distributors, contractors and suppliers, partners in consortia and joint ventures (“Business Partners”) including, among others, the following essential elements:

Due diligence based on risks and documented adequately, for the commitment and the exercise of appropriate and regular monitoring of trading partners;
Information business partners on the commitments made by the company to respect the laws on the prohibition of foreign bribery, and the program or the company’s measures on ethics and compliance to prevent and detect this corruption;
The search for a reciprocal commitment with trading partners; “

Source : http://www.oecd.org/fr/investissement/anti-corruption/conventioncontrelacorruption/44884414.pdf

The Foreign Corrupt Practice American Act

The Foreign Corrupt Practice Act is a US law since 1977 but little used until the 1990s.

The FCPA governs the codes of conduct for US and foreign companies in terms of access to foreign markets and fight against corruption of American states agents and / or third countries.

It provides sanctions for non-US companies that could enter a market in a third country through corruption of public officials.

Some European players complain about the rigidity of the FCPA (limited to € 70 gifts, etc.), including the views of current practices in some countries to gain access to public or private markets.

The FCPA therefore imposes a duty of care for US companies, non-US, third country agents, suppliers, etc.

Due diligence, business intelligence and internal control

The Foreign Corrupt Practice Act is a US law since 1977 but seldom used until the 1990s.

The FCPA governs the codes of conduct for US and foreign companies for access to foreign markets and fight against corruption of American states agents and / or third countries.

It provides for appropriate sanctions for non-US companies that could enter a market in a third country through corruption of public officials.

Some European players complain about the rigidity of the FCPA (limited to € 70 gifts, etc.), including the views of current practices in some countries to gain access to public or private markets.

The FCPA therefore imposes a duty of care for US companies, non-US, third country agents, suppliers, etc.

Operational framework

A collecting and analyzing process clearly defined

Declaratory or investigative?

The best environment to establish a due diligence is probably a balance between investigative and declarative, as part of a process of collection and analysis :

Risks and due diligences

Areas of major risks in partnerships or joint ventures are especially those involving foreign partners, hidden defects, misunderstandings, differences and ulterior motives, or failure to comply with applicable laws.

Any of these elements can lead to a difficult and costly conflict, which may result in termination of the agreement, partnership or merger, and the potential liability of the company is engaged.

National laws sometimes require a principal “sponsor” local partnership operates and holds a majority stake.

Partnerships and joint ventures with offshore companies also require special precautions.

Risks can occur for various reasons. In some business circles corruption is endemic.

An activity deemed inappropriate by the exporting firm from a partner may, in certain circumstances, exposing others to risk.

The mutual ignorance of company policies often are the source of counterparty risk.

Rights and due diligence

The Due diligence also provide protection in jurisdictions where the law does not require actual knowledge of the prohibited conduct (eg the “deliberate ignorance” or “willful blindness” may be interpreted as knowledge of illegal events).

standards and due diligence

The search for socially responsible purchase or investement creates a strong need for due diligence.

International standards called SRI (Socially Responsible Investment) and CSR / CSR (Corporate Social Responsibility Company) are set up, and will push asset management companies to garner a stronger adhesion to the sourcing of the nature of the assets and methods Management.

Criteria used to assess the environmental impacts on a company or Social and Governance (ESG) in the financial management of a company.

These criteria form the company Sphere of Influence.

Set up a due diligence process

The implementation of an operational and strategic due diligence resembles a Commando Operation:
A leader, a strong team and complementary
Target: a mission, a clear objective
Deadlines, means, supports
A possible “parachuting” on site, depending on the mission.

The process must also take into account the associated risks:

Consideration elements

Qualifications, membership of professional bodies: verify the authenticity of the professionnal body and in some cases, verify the authenticity of the Issuer itself, for example, is there a requirement or qualification or simply pay a fee for membership?
References Business and Career history: Obtain independent confirmation about the potential partner or employee. If the candidate provided written references, verification should be obtained through the due diligence.
Financial references: If the audited financial statements for the last two years are not available, a third party may request confidentially provide notice of reliability, financial capacity and probity.
Companies Registry: Verification of the property, shareholder, director, accounts and other relevant official documents.
Criminal record of individual (if permitted by law in the country concerned).
Court judgments: Trials related to business, personnel management, the corporation’a customers.
Rating: Checking the credit rating for the partner or the individual. But be careful interpreting credit scores.
black lists and embargoes: Verify that the potential partner or target is not on a local list, national or international (black lists, embargos, Interpol, etc).
Classification “PEP” Politically Exposed Person: The scale of the risks must be adapted to an individual is considered PEP either by international or national lists, or simply because of his activities or political mandates or its proximity to a political person.
Media Research: Simple and effective, the use of free databases and / or subscription to the Research Associate or individual is recommended. It is also important to check archival sources.
Legal advice: if advices are not available in-house, a local reputable firm can be engaged. Local lawyers can often assist in the verification of local business entries, or records of criminal or civil court.
Fieldwork: Information regarding partners or employees can be discovered by the discrete and sensitive research conducted ethically and legally.

« Flagging » Examples

An official holds shares in companies or other interest in the target company.
A foreign public official recommended the applicant, particularly if the officer has discretion over the project.
An officer, director or key employee of the company has an interest in another company that could be considered a competitor.
There is uncertainty in the business or financial references.
The words quoted by the company or individual differ from local conditions.
Payment instructions cited by the company or individual include payments to third parties apparently unrelated, or an offshore bank account.
There is a case in progress or pending or a criminal conviction or civil action of a current employee of the company for corruption or similar offense, concerning corruption.
The business or person was the subject of insolvency proceedings.
There is a significant difference between the remuneration rate quoted by the company or individual and local market rates for similar goods or services. This rate is lower or higher than the market price.
The applicant indicates that he is unable to comply with all local and international laws on corruption and it can not comply with company policy payer on ethics.
The applicant requests that his identity, or if the applicant is a corporation, the identity of the directors, owners or employees, not be disclosed.

The Red Flags operations are unlikely to be discovered until contract’s signature and supply of goods or services.

They should not be considered “acquired”, but in terms of trading potential (price, conditions) or disposal activities with the counterparty:

Payment instructions on incoming invoices are frequently modified.
Bill payment is requested in cash.
Payment is required to a third party bank account or offshore numbered.
Aadvance payments are often requested.
Complex payment instructions are given, which may include fractional payments.
Urgent requests are made for the payment of unspecified large expenses.
A number of complaints about the non-payment or standards are received from contractors.
Reliable sources or media indicate improper payments made on behalf of the principal.

Offshore registers

Offshore company

Offshore companies are usually defined as companies registered in other countries than their principal business place.

Many recognized offshore centers does not require the official submission of lists of shareholders or directors or, if a file requirement exists, no public access to the lists is given.

In most cases, local laws on banking secrecy reinforces the lack of transparency inherent in the recording of government systems in these countries.

The most common offshore schemes

Anguilla
Bahamas
Belize
British Virgin Islands
Cayman Islands
Cyprus
Gibraltar, Guernsey, Isle of Man, JerseyHong-KongLiberia Liechtenstein
Monaco
Panama
Seychelles
St. Kitts & NevisSt. Lucia St. Vincent (and Grenadines)Switzerland Turks & Caicos Western
Samoa