Insights & Reports > Kroll Global Fraud Report

Whether a company is entering a new market, contemplating an international joint venture, investing in a foreign business, or acquiring a company abroad, an appropriate level of due diligence on the foreign entity, its agents, business partners, and intermediaries is universally acknowledged as necessary. The vast majority of firms, however, find this hard to do. What makes this so difficult and how are the challenges best addressed?

The first question facing domestic entities is the depth of due diligence to be undertaken. Various factors determine what is required within this due diligence to satisfy the FCPA, including: the reputation of the foreign entity and of the country in which it operates; how the domestic and foreign entities were introduced, especially if a foreign official was involved; the domestic entity’s own reputation for compliance and good standing with the relevant regulatory agencies; and whether the foreign entity is, or has ever been, on the radar screen of any regulatory bodies. The domestic entity should set the depth of its due diligence investigation consistent with the risk level indicated by these factors. The Department of Justice recently confirmed the appropriateness of such a risk-based approach in connection with proposed international acquisitions.

Next, the domestic entity should develop a plan for its due diligence investigation. At a minimum, it ought to include database research, industry inquiries, and contacts with American government agencies within the foreign entity’s country. Where deeper investigations are needed, these should include: document reviews, source inquiries, and more intensive, in-country interviews with current and former employees of the foreign entity, its business partners, and relevant government officials. The investigation should seek to: determine the expertise, competence and reputation of the foreign entity, as well as relationships with foreign officials and their family members; develop an understanding of the company’s business model and compliance culture; and develop background information regarding corporate management and its structure.

Another challenge is locating pertinent information in some countries. Unlike in the United States, detailed information may not be a matter of public record. Moreover, no two jurisdictions have identical publicly available resources or privacy laws. Part of the challenge of international due diligence investigations is that knowing what is available and where it is available can, unfortunately, dictate the thoroughness of the effort. This makes skilled interviewers all the more important.

Interviews should focus on obtaining information that might otherwise be unavailable, including: identifying any family relationship between officers of the foreign entity and officials, any unusual means of payment and, if applicable, the qualifications of individuals acting as agents to provide such services and the size of their commissions. They should also verify representations in connection with the proposed transaction; uncover incomplete or false information and documentation provided by the foreign entity; and develop an understanding of its financial situation and internal controls.

The Securities and Exchange Commission recently announced that it will be increasing the severity of the penalties it seeks for FCPA violations in the next six months. More than ever, any organization contemplating a foreign investment or business relationship must have an FCPA compliance approach that includes written policies and procedures, risk-based metrics for determining the depth of the due diligence investigation, and engagement of specialists to help obtain the information necessary to understand fully the business, operations, and relationships of the partner or investment.

International due diligence can be challenging, but it need not deter investments abroad or entry into new markets. In fact, even if compliance-driven, these investigations can provide crucial information on important investment decisions, thereby providing lasting business benefits.

David A. Holley is a senior managing director and the head of Kroll’s Boston office. Since joining Kroll in 2000, David has led investigations including environmental matters, contests for corporate control, internal investigations and white-collar crime investigations. Prior to joining Kroll, David worked for a mid-sized investigative firm and the Environmental Enforcement Section of the US Department of Justice.TD>