Establishment and preservation of reputation is a primary concern for every organization. In the present era, investors prefer to avoid getting embroiled in regulatory inquiries caused by illegal practices observed by a potential joint-venture partner. Prior to any association, it is vital to ascertain the background of the organization and its key individuals to prevent future impediments. The practice of Due Diligence is tailored to assist decision makers in analysing past transactions, reviewing and monitoring current scenarios and assessing potential future risks.
Around 20 years ago, a majority of business transactions were conducted with the help of known associates, including friends and relatives. With new political orders and an explosion of entrepreneurial activity across major economies around the globe, corporations and investors face challenges when seeking growth prospects in emerging markets. From a country previously seen as embroiled in political and financial scandals, India has moved on to develop and focus on corporate governance, compliance and modern age business practices.
A due diligence plays an integral role in supporting strategic risk management of business ventures in international and domestic markets. Private equity firms, hedge funds, banks and other financial institutions can, at times, find it difficult to keep abreast of local nuances and changes in regulation. Added to this are complex business ownership structures, some of which may be closely associated with fraudsters, criminals or PEP's. Conducting an integrity due diligence when operating in Asia is internally mandated for several organizations by law, while others see it as a prudent business practice.
Assiduous background screening can help determine political connections, conflicts of interest and hidden beneficiaries. A comprehensive stakeholder survey can help understand the market reputation of the partner entity's officers and shareholders, their other ownerships interests, source of funds and social lifestyle. Instances linked to organized crimes, fraudulent third-party business transactions and partaking in civil or criminal proceedings have been unearthed.
Allegations of corporate malfeasance, inter-personal issues and fabricated qualifications can have an adverse impact on a prospective deal. Hence an integrity due diligence becomes critical to identify PEPs, along with issues relating to bribery, corruption, unacceptable labour practices and financial crimes.
Innumerable directives and regulations create concern for compliance teams, but a comprehensive due diligence highlights areas for regulatory and legal attention. Ironically, the skill sets required to administer regulatory risks are also in short supply. The due diligence process window is imperative to identify and evaluate key risks to mitigate subsequent financial and reputational loss.
Once such risks have been identified companies can develop internal controls to establish sound compliance practices by employees and suppliers. Such efforts will not only enable organisations to comply with modern and digital regulatory requirements with transparency, but also support ethical practices, corporate social responsibility and sustainability. Failure to safeguard against such risks can severely affect brand integrity and consumer confidence.
An in-depth pre-transactional integrity due diligence is conducted to identify red and yellow flags and to assess the opportunity in an unbiased manner. The benefits of this type of due diligence significantly improves the chances of an investor associating with a high integrity and reliable business partner.
According to various global and Indian surveys, senior management believe that integrity due diligence is an essential component of fraud prevention. As businesses grow and new relationships form, it is crucial that organizations engage with an experienced and specialist due diligence firm to better mitigate risks arising from new partnerships.
Contraventions of the US Foreign Corrupt Practices Act of 1977, India's Prevention of Corruption Act of 1988 and UK's Bribery Act of 2010 can be prevented by ensuring consistent and regular integrity due diligence checks.
Contributed by Deepak Bhawnani, Founder-CEO of Alea Consulting, a risk consulting, due diligence and corporate intelligence firm which is ISO 9001:2015 QMS certified. He has been in the international Risk Consulting industry for over 30 years and actively working in India since 1995.