Due Diligence Statement

Due Diligence Law

Many due diligence laws impact international trade relations.

Companies must therefore do more than just comply with their own country’s own laws. Global companies must comply with international laws on the prevention of economic crime, including the following two pieces of legislation:

• The UK Bribery Act
• The US Foreign Corrupt Practices Act (FCPA)

Although both acts are national regulations of their respective countries, they affect foreign companies if they have links with these countries directly—even via subsidiaries, subcontractors or their staff. The law enforcement agencies can initiate investigations of companies beyond their jurisdiction, because the acts apply regardless of where the bribery takes place.

The Panama Papers Scandal of 2016 led to international calls for greater transparency with regard to beneficial owners.

Who needs a due diligence check?

A due diligence check is needed for all companies and organizations planning to engage in:

• Company mergers
• The acquisition of stakes
• The purchase of real estate
• Business transactions such as for insurance
• Relationships with investors or business partners—especially if international

To ensure compliance, ongoing due diligence is required for all your business partners, vendors, buyers and sellers. It is also a good idea to assess your target company or prospect before signing a sales contract to avoid issues in future.

Who Performs Due Diligence?

Due diligence is primarily carried out by equity research firms, fund managers, individual investors, firms and broker-dealers. At the same time, individual investors are free to conduct their own due diligence. Broker-dealers, on the other hand, are required by law to undertake due diligence on security before selling it.

How to Perform Due Diligence?

Assume you are purchasing a business in a certain location. Before signing the contract, you will need to perform due diligence which entails going over a company's documents and financial statements, verifying references, and looking for information the company may have hidden. That's why hiring specialists who have experience in this area is recommended.

At the beginning of the due diligence process, you and the other business owner will sign a confidentiality agreement: to prevent you from approaching any person(s) or companies for further information about the business or product.

Why do companies and organizations need a due diligence check?

Due diligence helps companies protect their interests—for example in the context of M&A activities. By undertaking due diligence, you can safeguard the value chain and comply with sanctions, as well as relevant legislation on anti money laundering, bribery and corruption. Due diligence and continuous market monitoring help companies in four ways:

1. Taking legally required steps to prevent corruption and money laundering, to assess risk and to screen business partners and subcontractors involved in international cooperation:
   International companies must protect themselves from links with bribery or other forms of corruption financial crime, via a business partner or a subcontractor within the supply chain. Companies and organizations that are not internationally active are also subject to legislation such as the GWG.
2. Preventing financial consequences:
   When the target company lacks the necessary integrity, this can flag risky business partners early on. Working with such partners can lead to heavy financial penalties and even prison sentences.
3. Preventing reputational risks:
   Companies that are linked to economic crime risk severe damage to their reputation. Even if the company itself meets ethical and legal standards, inappropriate behaviour by business partners can still damage its reputation. In recent years there have been a number of examples of well-known companies whose suppliers have been found to be involved in practices such as dubious or illegal working conditions in China.
4. For economic reasons:
   Companies use a due diligence check to verify the quality of a takeover candidate or an acquisition prospect. The check is performed on the basis of a systematic analysis that includes an assessment of strengths and weaknesses and serves to safeguard the purchase and assess the risks.

Who Helps Companies With The Check?

Because of its complexity, it is advisable to call on trained staff (in-house employees) or external advisors (tax consultants, auditors, lawyers, technical experts, management consultants) to perform a due diligence check. For corporation tax purposes, due diligence costs can be deductive if they are:

• Charged to the profit and loss account, and;
• Are for good use of the trade or business.

As a general rule, the greater the potential risk, the greater the resources that should be invested in a check.

Forms of Due Diligence Check

There are various forms of due diligence check covering various areas. The most common are:

• economic, technical and organizational due diligence checks
• checks of managers and staff
• legal and tax checks
• operational due diligence (ODD) to assess the risks and appreciation potential of the target object
• market due diligence to explore and analysis the current and future market position of the targeted company

The Due Diligence Process

A manual due diligence process can quickly become problematic if a company has insufficient employee resources or cannot access relevant and up-to-date information. Companies should therefore make use of appropriate technology to automate checks, support due diligence investigations and ensure continuous risk monitoring.

1. Identification

The due diligence process typically starts with identification. The most important information is collected directly from the future partner or via a third party. Simple questionnaires can be used for this purpose.

• In the case of incorporated companies, the information collected includes details of the company, shareholders, beneficiaries, group structure, and members of the board and their political links. Official documents and contracts may also be requested at this stage.
• In relation to individuals, the information required may include proof of identity and sources of financing, political links and other details depending on the nature of the planned business transactions.

2. Sanctions List Check

The second step involves cross-checks with global sanctions lists, as well as lists relating to prosecutions, disqualification and individuals named by government agencies. Frequently, companies also have lists of other companies with whom they do not wish to do business. Politically exposed persons (PEPs) are identified, checked against PEP lists and, if necessary, subjected to a risk assessment.

3. Risk Assessment

On the basis of the results of the investigations, the risk assessment is now performed and a risk-based approach is drawn up. Further information is available in the white paper Due Diligence - from Business Burden to Business Benefit.

Due Diligence Report

The due diligence report provides a detailed summary of the checks and also records the process involved. The scope of the report varies from case to case, but generally includes questions such as:

• What countries am does my business operate in, and where are my partners and clients located?
• Are foreign laws applicable to my business?
• How much risk is the target company associated with? 
• Have I reviewed the target company’s financial records?
• Are any politically exposed persons (PEPs) involved in the business relationship?
• Have I investigated any negative media reports about my potential business partner?
• Is the entity currently engaged in legal disputes, or have they been in the past?
• Have I obtained information to confirm the true beneficial owners?
• What common external and internal threats do I need to consider, before signing off on any contracts?

Sample reports are available as templates. The report serves as evidence of compliance with due diligence requirements.