Due diligence is one the key anti-bribery compliance services that TRACE provides to its members. As such, we’ve done a great deal of research and given this a lot of thought. With commercial transparency at the heart of our mission, we have found that due diligence is most effective when conducted in a robust and meaningful but open and transparent manner with the intermediaries’ participation and consent. This approach will yield, in most circumstances, more accurate information and a better, more cooperative business relationship. It also mitigates some of the data privacy and related confidentiality concerns surrounding collection of due diligence materials covertly.
The most common question we get from new member companies is whether an intermediary can deliberately withhold or fabricate information during a TRACE review. Of course they can, which is why the intermediary can never be the sole source of the information gathered. On the other hand, certain critical information related to the intermediary’s business – such as audited financial statements or the names of the employees assigned to a company’s account – can only be obtained from the intermediary. (And wouldn’t it be embarassing to uncover negative information years into the relationship and have the intermediary shrug and say: “you never asked”?) Numerous independent external checks can be built into a due diligence system to provide a full and robust picture. If an intermediary deliberately provides false information and your company learns of the misrepresentation through these external checks, the decision about whether you want to work with the person or entity will be a simple one. They’ve been caught “red-handed”. The process is cumulative and the intermediaries’ own disclosures was an important starting point. If the right cross-checks are in place, dishonest intermediaries will be uncovered and challenged quickly.
On the other hand, if the covert approach turns up worrying information, it can be extremely difficult and expensive to confirm it and more difficult still to lay it to rest. Typically, the source of such covert information won’t be revealed. Well-meaning sources can easily provide inexact information simply because they are one or more steps removed from the people or entity at issue. In some cases, the information comes from competitors, who often will have little incentive to provide accurate information to the questioner. No matter what, the information compiled will be less thorough and there is no place to go with it.
Like transparent due diligence, covert due diligence also includes information from local and international data bases and media searches. The problem here, too, is that media reports can be unreliable, if not actually malicious. Even when this is not the case, the media often report a dispute or allegation, but not the ultimate resolution. We have seen companies spend tens of thousands of dollars chasing media reports down rabbit holes. When the more transparent approach is taken, the simpler resolution is to ask the intermediary about the report. In some cases, they’ll be able to provide a rationale explanation and often documentary proof: summary judgments resolving litigation in their favor, evidence that the report was about another individual with the same or a similar name, etc. If they can’t refute the story, you still have the information you need to support a decision not to proceed.
There will always be situations in which approaching an intermediary directly simply isn’t possible, at least initially: certain M&A activity, follow-up to serious allegations on current business partners, etc. TRACE undertakes arms’-length due diligence too. But in most cases, intermediaries will provide timely, accurate and thorough information to satisfy potential business partners. Explaining the purpose and process behind the due diligence at the outset of the relationship, especially in conjunction with a high level of engagement and commitment by the local business staff, will go a long way toward ensuring “buy-in” from the intermediary. This will generally ensure that the intermediary is also more open to training, which most companies will want to provide, and updates to or audits of the due diligence process. From the outset, the relationship can be based on respect and trust and the intermediary can be integrated into the company’s compliance program quickly and effectively.
Companies must take all reasonable steps to guard against the potential both for false disclosures by the intermediary and false disclosures about the intermediary; the company will have more options when they are already in communication with the intermediary. Any discrepancies, inconsistencies or “red flags” can be pursued rigorously. If the intermediary is found to have misrepresented information in light of this, the resolution will be equally clear. Either way, transparency wins out.
