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By Michele Bate

When people ask me what I do, I sometimes say "I save people from embarrassment". I can't stop them from showing themselves up in the local karaoke bar, but I can help them avoid being associated with people or companies that might potentially damage their most valuable commodity - their reputation. In other words, I do due diligence research.

What?

So what do I mean by due diligence? It can mean sifting through a company's accounts or poring over the legal aspects of a potential deal. But I specialise in looking at the people behind a company or other organisation - the shareholders and directors. Using publicly available records, I examine their backgrounds to determine whether damage to my client's reputation might be caused through association with them.

Why?

Reputational risk is increasingly recognised as an important part of risk assessment and appears to be counter-cyclical in these challenging economic times - with fewer deals being done and fewer senior staff being hired, it is even more important not to make a mistake.

In some industries, there is a regulatory requirement for a company to know who it is dealing with - in the UK, for instance, banks, accountants, lawyers, estate agencies and auction houses all have ‘Know Your Customer' compliance requirements to guard against money laundering. In the USA, the Patriot Act and Sarbanes-Oxley Act of 2002 have focused attention on the importance of due diligence. Whilst ‘Know Your Customer' compliance software and databases are good starting points, they usually need to be backed up by additional research because of the high incidence of "false positive" hits on names.

Also, because there have been numerous well publicised cases where people and companies have turned out to be not what they seem on the surface - think of Enron or WorldCom. An article in the British newspaper The Times on 21 February 2008 quoted research by World Check, which found that the names of almost 4,000 directors of British companies appear on international watchlists of alleged fraudsters, money launderers, terror financiers and corrupt officials. Would you want to do business with these people, without checking them out first?

When?

When is due diligence necessary? Here are some examples:

• Investment in companies, especially overseas
• Joint ventures
• Mergers and acquisitions
• Hiring senior staff - does the information they provided on their CV check out?
• Checking out potential (and existing) clients
• Checking out suppliers
• Charities checking out prospective generous donors

How?

Due diligence usually starts with thorough research, to answer questions such as these about a director, shareholder or prospective employee:

• Are they who they say they are?
• Is the information they have provided correct? Are there any glaring omissions?
• Are there any financial skeletons in the closet? Have they been made bankrupt? Do they have any judgments (or liens) against them?
• How have they acquired their wealth?
• What is their track record? Are they well thought of by their peers?
• Have they been involved in litigation as either a plaintiff or defendant?
• Do they have any alleged links to organised crime? Money laundering? Terrorism funding?
• Who are they close to politically? Are there any allegations of corruption?
• What are their corporate affiliations? Have they been associated with any liquidated companies? Fraud? Dubious clients? Undesirable associates?
• Are there any regulatory issues?

For companies, the following questions are also often posed:

• Who actually owns the company?
• Has it received bad publicity for environmental issues? Social concerns? Health and safety problems?
• Who does it compete with? How does it compare to their competitors?

This is by no means an exhaustive list - the areas researched will vary depending on the jurisdiction of the subject, the nature of the proposed relationship (and often the project budget!) Sometimes clients will want particular issues addressed because they are pertinent to their circumstances (for example, whether a subject company is involved in gambling or alcohol) or they may have heard rumours which I seek to prove or disprove.

Quite often, the research I do in publicly available online sources will be supplemented by local experts who can discreetly make enquiries of well-placed contacts to get a more subjective view of how the subject is viewed in their sphere of influence.

Where?

Due diligence researchers tend to have an armoury of resources up their virtual research sleeves, painstakingly built up over a long period of time because the focus of each project can be totally different - I might be studying a small Nigerian oil company one minute, a large UK company with international operations in the US, Russia and Singapore the next. That said, many of the core online sources are the same as those used in general business research - it's often a case of using the same databases to look for different information, or interpreting the findings in a different way.

Here are a few of my favourite sources:

• UK companies: Companies House - an excellent starting point for "plain vanilla" information on companies and directors in England, Scotland, Wales and Northern Ireland. There is also a link to corporate registries in other countries, including offshore jurisdictions.
• UK litigation: BIALII - great for performing free litigation searches in the UK and Ireland. Also provides links to similar services in several other countries. For US searches, I usually start with the Pacer database
• Sanctions: the US Office of Foreign Assets Control Specially Designated Nationals and Blocked persons list details suspected terrorists - a good starting point if you do not have access to aggregated databases of watchlists such as World Check or Complinet. Other useful lists include the UK Treasury list of financial sanctions which can be found at: http://www.hm-treasury.gov.uk/documents/financial_services/sanctions/fin_sanctions_index.cfm and the World Bank listing of firms ineligible for procurement.
• News databases: Factiva, Lexis-Nexis, DataStar and Dialog, plus local news databases such as AllAfrica because I often need as long a historical archive as possible.
• Multicultural name analysis: http://www.trackingthethreat.com/tools/lasnvg.jsp - handy for working out the most common permutations of Arabic names.

What next?

So once I've found as much information about the subject as possible, how do I go about turning it into useful intelligence? Depending on how much knowledge the client already has, I usually build up a picture of the subject, highlighting any negative issues ('red flags'). It's often a case of what I call 'squaring the circle' - trying to find links between scraps of information to prove that they refer to the subject and not one with the same or a similar name. This is where the detective work comes in.

Here's an example. I know that Paul X, an American, is the chief executive of ABC Company in Saudi Arabia. I have discovered via a news archive database that ABC Company also has interests in the US, so I run the company name and Paul X's name through US litigation databases. I discover that someone with the same (quite unusual) name as Paul X was declared bankrupt in the US in the mid-1990s and was the defendant in a string of court cases. I then have to try and find evidence to support my hunch that they are the same person. On the Internet, I find a directory entry for ABC Company which gives an address in New York for its US operations. After more digging around on the Internet, I find a document referring to the US bankrupt Paul X and his wife, whose name I know from property records, giving the same address. Et voilà - not necessarily conclusive proof, but enough to warrant the client making further enquiries.

It's vital to reference the sources of all the findings you report to the client and keep the background information where you can find it. So when the client says 'Gee - I don't believe that nice Mr X is a convicted arms dealer' you can tell him exactly where the damning material came from. This is particularly important for information gleaned from the Internet, where web pages and whole websites can suddenly disappear.

Although I evaluate the information I find (for example, observing that a company has a high media profile in its own country but there is very little mention of it in international press) and provide context where possible (for example noting that to do business in a particular company historically, a company may well have had to pay bribes) I do not make recommendations - it is up to the client to assess the material within its own risk framework.

What makes a good due diligence researcher?

You have to be meticulous, with a real eye for detail. You also need to possess the curiosity gene, or you won't enjoy all the digging around and sifting through reams of information that is required. Good recall helps, for making connections between scraps of information - recognising a company name, or an address, for example and connecting it to something you've read elsewhere. For those of us with less than great memories, software such as Copernic Desktop is invaluable for dredging up half-remembered information from the depths of the computer hard drive. A strong understanding of confidentiality is also essential - due diligence cases are often highly sensitive, particularly when connected to a deal or senior hire, with research conducted "behind the scenes", so you can't just phone a friend at a newspaper to get the information you need.

And finally

Although I have found extremely damning information in several cases, clients need to be made aware that not all information is available in the public domain. A large part of my job is educating them on what is and isn't possible - for example, companies registered in offshore jurisdictions such as Guernsey and the British Virgin Islands are often obliged to file very little publicly available information. In England, criminal records are not available to third parties without a signed consent form from the subject and only then via organisations registered with the Criminal Records Bureau and designated Umbrella Bodies. So caution and caveats are the order of the day when reporting findings.

Michele has over twenty years' business research experience, gained in corporate investigations, banking, corporate finance, executive search and management consultancy. Before becoming a freelance researcher six years ago she was the Research Director for the corporate investigations practice of Control Risks Group. Her company Archer Van Den Broeck offers a bespoke research service, specialising in due diligence, litigation support and other investigative research. Michele is an active member of the Association of Independent Information Professionals.

Other related FUMSI stories:

• Vigilant Due Diligence
• Finding Competitive Information for Growing Companies
• European Unions: what you need to know about international mergers and acquisitions

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