Due Diligence

Perform due diligence checks, mitigate relevant business risks to comply with sanctions and legislation on prevention of bribery and corruption.

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What is due diligence?

Due Diligence meaning or the definition of due diligence: the concept of due diligence enshrined in German law refers to the exercise of reasonable care in the course of business. A due diligence check involves careful investigation of the economic, legal, fiscal and financial circumstances of a business or individual. This covers aspects such as sales figures, shareholder structure and possible links with forms of economic crime such as corruption and tax evasion. A check of this sort is necessary as soon as a company initiates relationships with business partners or plans to buy up another company or a property or make investments in real estate.

According to Cambridge Dictionary, the meaning of due diligence is: “The detailed examination of a company and its financial records, business transactions, done before becoming involved in a business arrangement with it.”

The German Institute for Compliance (DICO) defines a business partner as “any party which has business contact with a company and is not an employee or manager of the company”. Regardless of the extent or type of the business relationship, this includes customers, suppliers, subcontractors, sales representatives, advisors and partners in joint ventures as well as small service providers, intermediaries and investors.

Why is due diligence important?

Due Diligence is an important business technique to consider before making any key business decisions or acquiring a company. Before you put your company finances into action, you need to understand its due diligence and how to do it correctly.

Due Diligence is a process that involves risk and compliance check, conducting an investigation, review, or audit to verify facts and information about a particular subject. In simple words, Due Diligence means doing your homework and acquisitions of required knowledge before entering into any agreement or contract with another company.

Why do companies and organizations need a due diligence check?

Due diligence risk and compliance check tool helps companies protect their interests, for example in the context of M&A activities, to safeguard the value chain or comply with sanctions and with legislation on the prevention of bribery and corruption. Due diligence and continuous market monitoring help companies in four ways:

  • Taking legally required steps to prevent corruption, to assess risk and to screen business partners and subcontractors involved in international cooperation:

Legislation such as the UK Bribery Act and the US Foreign Corrupt Practices Act (FCPA) on the prevention of corruption is binding on German companies if they are directly or indirectly represented in these countries. They must therefore protect themselves against being linked to bribery or other forms of corruption 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.

  • Preventing financial consequences:

Working with business partners who lack the necessary integrity can lead to heavy financial due or penalties and even prison sentences.

  • 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 behavior 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.

  • For economic reasons when buying or merging with companies and organizations:

Companies use a risk and compliance check tool for third party due diligence to verify the quality of a takeover candidate or an acquisition prospect. The due diligence 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.

What does a due diligence check look for?

Both existing and potential business partners and their subcontractors as well as the responsible persons are assessed and reviewed. Among other things:

  • Head Office
  • Red flags
  • Negative reporting in the international press
  • Sanctions lists with regard to persons or companies involved
  • PEP lists (Politically Exposed Person) with regard to persons involved
  • Results and balance sheets
  • Assets and liabilities, budgets
  • Work processes
  • Qualification of employees
  • Company image
  • Quality control
  • Board members, shareholders, beneficiaries
  • u.v.m.

Who conducts due diligence checks?

Due Diligence is primarily carried out by equity research firms, fund managers, individual investors, risk and compliance analyst and 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.

Who needs ongoing due diligence monitoring?

While a due diligence check is needed for all companies and organizations if they engage in company mergers or acquire stakes, property, real estate, investment, investors or insurance transactions in other companies, or If they work with business partners, especially in an international context.

An ongoing due diligence is required for all your business partners, vendors, buyers & sellers to ensure compliance.

It is also a good idea to assess your target company, prospects before signing a sales contract to avoid issues in future.

Who helps companies with due diligence checks and monitoring?

Because of the complexity of the requirements it is advisable to call on trained staff (in-house employees, risk and compliance analyst) or external advisors (tax consultants, auditors, lawyers, technical experts, management consultants) to perform a due diligence check. There are also due diligence checklists that provide a good (initial) overview of the subject. However, they do not always cover the specific circumstances. The due diligence costs may be tax-deductible. For corporation tax purposes, the 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.

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.

How can LexisNexis help with due diligence checks and monitoring?

Nexis Diligence+™ uses a wealth of enriched data from an unmatched number of content sources to give you a comprehensive, 360-view of any person or company.


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