International business partner due diligence: How much is enough?

Government agencies may require more systematic investigation of potential partners

While the need to conduct due diligence on international business partners is clear, there is no regulatory guidance specifying the depth to which companies need to investigate the background of third parties.  However, Securities and Exchange Commission (SEC) and Department of Justice (DOJ) judgments in Foreign Corrupt Practices Act (FCPA) cases in which U.S. companies have been fined for not performing sufficient due diligence on third parties indicate that a cursory approach will no longer suffice. Increasingly, companies will be expected to conduct a deeper, more systematic investigation of potential international business agents and partners that involves collecting information from the business partner, verifying the data and following up on identified red flags.

Common due diligence pitfalls

In a previously cited case,[4] the DOJ stated that a company official would typically request a Dun & Bradstreet profile after receiving internal documentation on a potential business partner and noted that the company official “made no effort, or virtually no effort, to verify the information provided by the consultant in the Consultant Profile, apart from using Dun & Bradstreet reports to confirm the consultant's existence and physical address.”  Also in a previously cited case,[5] the SEC noted that the company’s attorneys knew that shareholders of a Gibraltar shell company that had received payments were held by two other offshore entities, yet the attorneys “never learned the identity of the beneficial owner[s] of the shares.”

3. Failing to act on identified red flags.The DOJ has also opined on the need for companies to act on risk factors identified during the due diligence process. In a case cited above,[6] the DOJ faulted a company for failing to follow up on what were considered obvious red flags identified when hiring a consultant in Honduras for work in the telecommunications industry.  

Contributing Author

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John Leonard

John Leonard is a director in Deloitte Financial Advisory Services LLP’s Forensic & Dispute Services practice with more than 18 years of experience which includes...

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