How can background checks and due diligence sustain reputation, stability and trust for the business?


How can background checks and due diligence sustain reputation, stability and trust for the business?

7 April 2023

Opinion article by Burcin Atakan, Partner, Deloitte Romania, and Leader of Forensic Services for Deloitte Central and Eastern Europe, and Alina Badea, Senior Associate, Financial Advisory, Deloitte Romania

While selecting a business partner, a vendor or targeting a company to acquire, business organizations risk being associated with third parties’ reputation. In most corruption prevention regulations, knowing the partner-to-be is key for being compliant.

Knowing the business partner-to-be via background checks and due diligence

As a business expands, and whether it is onboarding new clients or considering launching a partnership, its reputation will depend on how third-party risks are managed. Conducting background checks and due diligence on companies and individuals allows leaders to make more informed decisions about whom they do business with, in what capacity and margins.

Due diligence is a thorough examination of a company’s potential partner or acquisition target, including their financial records, market reputation and business history, in order to understand potential liability under anti-corruption laws or other relevant legislation once the association is materialized.

There are two important legislative acts regarding the prevention of economic crime, namely the UK Bribery Act (2010) and the US Foreign Corrupt Practices Act (FCPA). Although both are national regulations for the UK and the US respectively, their unicity has provided them in time with an international outreach. Furthermore, in June 2021, the German Parliament passed Germany's Supply Chain Due Diligence Act, a new law requiring large companies with 3,000 or more employees to conduct supply chain due diligence activities.

Why is it important to conduct background checks and due diligence?

Background checks and due diligence may be useful in several situations, such as obtaining wide, accurate and objective information regarding the history and current context of potential business partners during acquisitions or mergers, during investigations on companies or individuals which are suspected of wrongdoing, during clients’ and new vendors’ acceptance processes. Moreover, background checks also apply to strategic business decision making, and can be helpful before investment decisions, for example before the initial public offerings.

Due diligence checklists should go through milestone aspects, such as: identification of executive board members, shareholders, ultimate beneficial owners and additional corporate affiliations; head office checks, which includes verification of all registered addresses; sanctions lists, including identification of persons, organizations or countries which are subject to economic sanctions issued by a government or by an international organization; negative media reporting (also known as adverse media screening), including allegations found in reputable news outlets and other publications that link a person or entity to fraud, money laundering, corruption, terrorism and other unlawful activities; checks on politically exposed persons lists and state-owned entities lists; financial results and balance sheets, as well as assets and liabilities; qualification of employees, which includes verification of their academic background, career history and professional licenses and certifications; analysis of other available data, in accordance with the context of the due diligence.

Reducing the risk for criminal activities and their implications

While onboarding a new client or rescreening an existing one, companies are expected to protect their business, existing employees, and clients. In case an organization fails to conduct a proper background check for a vendor that has been involved in a fraud scheme and the deal goes public a few weeks later, the brand and business will be mentioned by association all over the media, under a negative focus, bringing potential damage to further deals and partnerships. The company’s reputation will basically be permanently scarred, and it might even face costly risks of litigation or investigation. Performing background checks on critical business partners would simply prevent the worst from happening.