International third-party due diligence

How much is enough?

Conducting due diligence on international third parties is now considered a leading practice for companies operating in international jurisdictions. While the need is clear, there is no regulatory guidance specifying a minimum level of due diligence to be conducted. This ambiguity can make it tempting for companies to take a cursory swipe at due diligence; review one database, check the "all-clear" box, and enter into a business agreement.

International due diligence

As evidenced by US Securities and Exchange Commission (SEC) and US Department of Justice (DOJ) judgments in which US companies have been faulted for not performing sufficient due diligence, a cursory approach will no longer suffice. Increasingly, companies are expected to conduct a deeper, more systematic assessment 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." This article reviews regulatory guidance on the sufficiency of background research, explores options for information-gathering, and provides factors to consider in the due diligence process.

  • Guidance on due diligence from the US Department of Justice
  • Comments on due diligence in SEC and DOJ FCPA enforcement actions
  • Failing to conduct timely and sufficient due diligence
  • Failing to adequately verify information provided by third parties
  • Failing to act on identified red flags
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Approaching due diligence

While there is no law or regulation specifically defining what is "sufficient" international due diligence, the guidance and examples of enforcement actions discussed above do provide some indication of leading practices. Generally, companies can consider several steps in their investigation of a potential int'l third party, including:

  • Require the third party to disclose information on a questionnaire.
  • Use a risk-based approach to verify the information provided and independently identify adverse information.
  • Take action on any identified "red flags" uncovered in the process.
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While the due diligence effort may lengthen the start-up time for a new third party relationship, recent SEC and DOJ judgments have demonstrated that failing to do so can have considerable negative financial and operational repercussions for companies seeking to conduct business internationally. It is far better to proceed slowly, carefully, and thoroughly with any new business relationship.

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