Due Diligence Guide
Due diligence generally refers to the care a reasonable person should take before entering into an agreement or a transaction with another party. It typically involves an investigation or audit of a potential investment and serves to confirm all material facts in regards to a sale or investment. Offers to purchase an asset are usually dependent on the results of due diligence analysis. This includes reviewing all legal and financial records plus anything else deemed material to the sale. It is generally advised that sellers perform a due diligence analysis of the buyer to determine the buyer's ability to purchase, as well as other items that would affect the purchased entity or the seller after the sale has been completed.
Below are sample due diligence checklists:
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Know Your Customer
In the wake of the September 11th, a new form of due diligence has appeared on the horizon. Know Your Customer (KYC) is the due diligence and bank regulation that financial institutions and other regulated companies must perform to identify their clients and ascertain relevant information pertinent to doing financial business with them. Typically, KYC is a policy implemented to conform to a customer identification program mandated under the Bank Secrecy Act and USA PATRIOT Act. Know your customer policies have becoming increasingly important globally to prevent identity theft fraud, money laundering and terrorist financing. In a simple form these rules may equate to answering twelve questions, but this is the tip of the iceberg and regulators now expect much more. KYC should not be thought of as a format to be filled - it is a process to be undergone from the start of a customer relationship to the end.
One aspect of KYC checking is to verify that the customer is not on any list of known fraudsters, terrorists or money launderers, such as the Office of Foreign Assets Control's Specially Designated Nationals list. This list contains thousands of entries that is updated at least monthly. As well as sanctions lists there are lists of third party vendors that track links between persons regarded as high-risk owing to negative reports in the media about them or in public records. Beyond name matching, a key aspect of KYC controls is to monitor transactions of a customer against their recorded profile, history on the customers account(s) and with peers.
Know Your Customer processes are also employed by regular companies of all sizes, for the purpose of ensuring their proposed agents, consultants or distributors anti-bribery compliance. Banks, insurers and export credit agencies are increasingly demanding that customers provide detailed anti-corruption due diligence information, to verify their probity and integrity.
Know Your Customer Guidance
Certain provisions in the Export Administration Regulations (EAR) require an exporter to submit an individual validated license application if the exporter "knows" that an export that is otherwise exempt from the validated licensing requirements is for end-uses involving nuclear, chemical, and biological weapons (CBW), or related missile delivery systems, in named destinations listed in the regulations. The Bureau of Industry and Security (BIS) has issued the following guidance on how individuals and firms should act under this knowledge standard. This guidance does not change or revise the EAR.
Decide Whether There Are Red Flags
Take into account any abnormal circumstances in a transaction that indicate that the export may be destined for an inappropriate end-use, end-user, or destination. Such circumstances are referred to as "red flags." Included among examples of red flags are orders for items which are inconsistent with the needs of the purchaser, a customer's declining installation and testing when included in the sales price or when normally requested, or requests for equipment configurations which are incompatible with the stated destination (e.g.--120 volts in a country with a standard of 220 volts). Commerce has developed lists of such "red flags" which are not all-inclusive but are intended to illustrate the types of circumstances that should cause reasonable suspicion that a transaction will violate the EAR.
If There Are Red Flags
If there are no "red flags" in the information that comes to your firm, you should be able to proceed with a transaction in reliance on information you have received. That is, absent "red flags" (or an express requirement in the EAR), there is no affirmative duty upon exporters to inquire, verify, or otherwise "go behind" the customer's representations. However, when "red flags" are raised in the information that comes to your firm, you have a duty to check out the suspicious circumstances and inquire about the end-use, end-user, or ultimate country of destination.
The duty to check out "red flags" is not confined to the use of general licenses affected by the "know" or "reason to know" language in the EAR. Applicants for validated licenses are required by the EAR to obtain documentary evidence concerning the transaction, and misrepresentation or concealment of material facts is prohibited, both in the licensing process and in all export control documents. You can rely upon representations from your customer and repeat them in the documents you file unless "red flags" oblige you to take verification steps.
Do Not Self-Bind
Do not cut off the flow of information that comes to your firm in the normal course of business. For example, do not instruct the sales force to tell potential customers to refrain from discussing the actual end-use, end-user and ultimate country of destination for the product your firm is seeking to sell. Do not put on blinders that prevent the learning of relevant information. An affirmative policy of steps to avoid "bad" information would not insulate a company from liability, and it would usually be considered an aggravating factor in an enforcement proceeding.
Employees need to know how to handle "red flags." Knowledge possessed by an employee of a company can be imputed to a firm so as to make it liable for a violation. This makes it important for firms to establish clear policies and effective compliance procedures to ensure that such knowledge about transactions can be evaluated by responsible senior officials. Failure to do so could be regarded as a form of self-blinding.
Reevaluate All Of The Information After Inquiry
The purpose of this inquiry and reevaluation is to determine whether the "red flags" can be explained or justified. If they can, you may proceed with the transaction. If the "red flags" cannot be explained or justified and you proceed, you run the risk of having had "knowledge" that would make your action a violation of the EAR.
Refrain From The Transaction
If you continue to have reason for concern after your inquiry, then you should either refrain from the transaction or submit all the relevant information to BIS in the form of an application for a validated license or in such other form as BIS may specify. [See how to report a possible violation].
Industry has an important role to play in preventing exports and reexports contrary to the national security and foreign policy interests of the United States. BIS will continue to work in partnership with industry to make this front line of defense effective, while minimizing the regulatory burden on exporters. If you have any question about whether you have encountered a "red flag,' you may contact BIS's Office of Export Enforcement or use this form to submit a confidential tip. [Please note that use of the form will not generate any return e-mail to you so that the information you submit will remain confidential.]
Background Check
A background check is the process of looking up official and commercial records about a person. This is often done when someone applies for a job that requires high security like a school or a bank. Information usually includes the following: past employment, credit worthiness, and criminal history. These checks are important because they allow better informed and less-subjective evaluations to be made about a person but also pose risks. Other uses include improper and illegal discrimination, identity theft, and violation of privacy.
There are a variety of types of investigative searches that can be used in undertaking a background check. Many private agencies offer specific searches to companies for a fee. Services like these will actually perform the checks, supply the company with adverse action letters, and ensure compliance throughout the process.
Many background investigations also involve a search of the most common government records such as criminal records and driving records, as well as education verification. Other searches such as sex offender registry, credential verification, reference checks, credit reports and Patriot Act searches are becoming increasingly common. Companies should consider the reason for the background check when determining which types of searches to include.
