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Integrity Due Diligence

What is the aim of integrity due diligence?

Integrity due diligence (also known as "enhanced due diligence") is not a replacement for more traditional financial due diligence, but a complement to the latter. In contrast to purely financial checks, integrity due diligence focuses on establishing the reputation and integrity of the business partner, agent or M&A target. Often a thorough investigation can uncover serious red flag issues, such as corruption scandals, poor labour conditions, involvement in organised crime or other nefarious activity.

What does it comprise?

Each integrity due diligence (IDD) project is different. As a general rule of thumb, however, this form of investigative DD will include the following:

  • identification of the registration details of the subject company at the corporate registry of the country and verification of the information through other open sources and third-party databases;
  • searches of media archives and open sources on the general activities, modus operandi and reputational track record of the subject company, its directors and major shareholders
  • searches of references to government links held by the company or its principals and any indication that such links may have been misused
  • searches of sanction lists and police watchlists
  • searches of litigation records and other court filings available in the jurisdiction
  • establishing the ownership and shareholding structure, including the ultimate beneficial owners of the company

Of course, different types of IDD projects will involve additional research. For instance, in the case of assisting with litigation, research may be conducted to reconstruct the history of a conflict through open sources or to establish the background and reputation of other parties or expert witnesses.

Why conduct integrity due diligence?

Investing in emerging markets like the Middle East, North Africa, China or Latin America, promises big rewards. However, those markets also present high risks in terms of exposure to corruption, litigation and other reputational issues. It is vital that your business protect itself from reputational damage and regulatory sanctions.

The Foreign Corrupt Practices Act (FCPA) in the US and the UK Bribery Act are two pieces of legislation that impact anyone who conducts business in the US or the UK, regardless of whether or not the headquarters of a company are located there. US and UK regulators have shown themselves capable of prosecuting both small and large companies for violations related to bribing foreign officials.

Another reason for IDD is the increased awareness of ethical issues on part of business clients and consumers. Unsafe work conditions, child labour, environmental pollution or breaches of human rights at one of your agents abroad can create serious reputational harm and endager business relations and future growth.

Finally, IDD enhances the confidence and trust you place in a business relationship and can provide you and your business with a crucial strategic advantage when negotiating deals or in an M&A process.

When should reputational due diligence be conducted?

Ideally, an IDD is carried out before a business relationship is established or finalized through a contract. However, often issues of concern only arise after a contract has been signed. In this case, IDD can be conducted ex post. In addition, regular checks of the reputation of the business partner should be carried out periodically.

How to select the right IDD provider?

When selecting a business intelligence provider, it is of vital importance that the provider has the prerequisite knowledge of the geopolitical situation of the jurisdictions covered in the research, as well as the local languages spoken there. As a boutique consultancy, we have both the expertise and the flexibility to respond to your integrity due diligence research assignments efficiently and in a timely manner.

Please contact us today to discuss your IDD research needs.

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