Yesterday I considered the need for due diligence in the management of third parties. Today, I want to take a deeper dive and explore the levels of due diligence. Due diligence is generally recognized in three levels: Level I, Level II and Level III. Each level is appropriate for a different level of corruption risk. The key is for you to develop a mechanism to determine the appropriate level of due diligence and then implement that going forward.
First level due diligence typically consists of checking individual names and company names through several hundred Global Watch lists comprised of anti-money laundering, anti-bribery, sanctions lists, coupled with other financial corruption & 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.
Level II due diligence 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. I believe that Level II should also include an in-country data base search regarding the third party. Some of the other types of information that you should consider obtaining are country of domicile and international government records; use of in-country sources to provide assessments of the third party; a check for international derogatory electronic and physical media searches, you should perform both English and foreign-language repositories searches on the third party, in its country of domicile, if you are in a specific industry, using technical specialists you should also obtain information from sector specific sources.
This level is the deep dive. It will require an in-country ‘boots-on-the-ground’ investigation. According to Candice Tal, founder of Infortal, 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 things you 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 that such “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.”
Further 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 a 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 FCPA; you can use a Level III to determine if the third party willing to stand up with under the FCPA and are you willing to partner with the third party.
The Risk Advisory Group, created a handy chart of its Level I, II and III approaches to integrity and due diligence. I have found it useful in explaining the different scopes and focuses of the various levels of due diligence.
|Level||Issues Addressed||Scope of Investigation|
|One||· That the company exists
· Identities of directors and shareholders
· Whether such persons are on regulators’ watch lists
· Signs that such persons are government officials
· Obvious signs of financial difficulty
· Signs of involvement in litigation
· Media reports linking the company to corruption
|· Company registration and status
· Registered Address
· Regulators’ watch lists
· Credit Checks
· Bankruptcy/Liquidation Proceedings
· Review accounts and auditors comments
· Litigation search
· Negative media search
|Two||As above with the following additions:
· Public Profile integrity checks
· Signs of official investigations and/or sanctions from regulatory authorities
· Other anti-corruption Red Flags
|As above with the following additions:
· Review and summary of all media and internet references
· Review and summary of relevant corporate records and litigation filings, including local archives
· Analysis and cross-referencing of all findings
|Three||As above with the following additions:
· But seeking fuller answers to any questions raised by drawing on a wider range of intelligence sources and/or addressing specific issues of potential concern already identified
|As above with the following additions:
· Enquiries via local sources
· Enquiries via industry experts
· Enquiries via western agencies such as embassies or trade promotion bodies
· Enquires via sources close to local regulatory agencies
There are many different approaches to the specifics of due diligence. By laying out some of the approaches, you can craft the relevant portions into your program. The Level I, II & III trichotomy appears to have the greatest favor and one that you should be able to implement in a straightforward manner. But the key is that you must assess your company’s risk and then manage that risk. If you need to perform additional due diligence to answer questions or clear red flags you should do so. And do not forget to Document Document Document all your due diligence.
Three Key Takeaways
- A Level I due diligence should be only used where there is a low risk of corruption.
- A Level II due diligence is sufficient in a high risk jurisdiction if there are no red flags to clear.
- Level III due diligence is deep dive, boots on the ground investigation.
This month’s podcast series is sponsored by Opus. Opus helps free your business from the complexity and uncertainty of managing the risks associated with your customers, vendors, and third parties. By combining the most innovative Third-Party Risk Management and Know Your Customer Compliance SaaS platforms with unparalleled data solutions, Opus turns information into action so your business can thrive. Opus solutions include Hiperos ABAC accelerator, the leading platform for third party risk management. To learn more, go towww.opus.com.