Due Diligence Statement

Due Diligence: What you need to know

Do you need a summary of due diligence (DD)? We answer the most important questions.

• What is due diligence meaning?
• Due diligence law
• Who needs a due diligence check?
• Why do companies and organizations need a due diligence check?
• What is checked?
• Who helps companies with the check?
• Forms of due diligence check
• The due diligence process
• Due diligence report
• What you should note

We also recommend our Third Party due diligence checklist

What is Third-party due diligence?

Third party due diligence is the process of assessing and evaluating the risks associated with engaging or partnering with third-party entities such as suppliers, vendors, contractors, agents, or business partners. A comprehensive investigation and analysis of the third-party due diligence process are conducted to ensure that these third-party entities:

• comply with legal and regulatory requirements,
• adhere to ethical standards, and,
• pose no significant risks to the company

The reason to conduct third-party due diligence is to reduce potential risks and protect your organization's reputation, assets, and interests. The due diligence guidelines for third parties involve gathering information about the third party's background, financial stability, legal and compliance history, business practices, and overall reputation. The level of due diligence conducted may vary depending on the nature of the relationship, the industry, and the potential risks involved.

A complete third-party due diligence checklist is important to have an effective strategy for evaluating and monitoring risks. Conducting and maintaining a formal assessment i.e. third-party due diligence questionnaire is one of the steps in the vendor due diligence process to help companies assess the risks of third-party relationships. These questionnaires can be used during the onboarding due diligence process of new vendors or suppliers while some companies choose to send questionnaires to their existing suppliers or vendors as routine follow-up. Contact for LexisNexis compliance solutions to avoid financial and reputational harm due to third-party relationships.

Enhanced Due Diligence

Enhanced due diligence involves collecting detailed information about individuals and companies in order to provide insurance. To ensure that this background research is thorough, companies need access to a number of different databases:

• Company databases

Identification of possible links between companies and other involved persons

• Watch lists

Identification of individuals and companies, such as terrorism suspects, that are subject to state monitoring

• Sanctions lists

Identification of individuals and companies subject to economic or legal sanctions (embargos)

• PEP lists

Identification of politically exposed persons who are close to a member of government or a member of a government agency and hence particularly vulnerable to corruption or bribery

• Press reports

Cross-checks with news reports to ensure that business partners are not linked to forms of economic crime such as corruption, money laundering, fraud or bribery.

On the basis of the results of the checks on new and existing business partners using these and other databases, companies may need to adjust the risk approach or terminate the initiation of a business relationship.

Who needs a due diligence check?

A company mergers or acquire stakes, property, real estate, investment, investors or insurance transactions in other companies, or If they work with business partners, especially in an international context.

An ongoing due diligence is required for all your business partners, vendors, buyers & sellers to ensure compliance.

It is also a good idea to assess your target company, prospects before signing a sales contract to avoid issues in future.

Why do companies and organizations need a due diligence check?

Due diligence risk and compliance check tool helps companies protect their interests, for example in the context of M&A activities, to safeguard the value chain or comply with sanctions and with legislation on the prevention of money laundering, bribery and corruption. Due diligence and continuous market monitoring help companies in four ways:

• Taking legally required steps to prevent corruption and money laundering, to assess risk and to screen business partners and subcontractors involved in international cooperation:

  Legislation such as the UK Bribery Act and the US Foreign Corrupt Practices Act (FCPA) on the prevention of corruption and money laundering is binding on German companies if they are directly or indirectly represented in these countries. They must therefore protect themselves against being linked to bribery or other forms of corruption and money laundering via a business partner or a subcontractor within the supply chain.

  Companies and organizations that are not internationally active are also subject to legislation such as the GWG.

• Preventing financial consequences:

  Working with business partners who lack the necessary integrity can lead to heavy financial due or penalties and even prison sentences.

• Preventing reputational risks:

  Companies that are linked to economic crime risk severe damage to their reputation.Even if the company itself meets ethical and legal standards, inappropriate behaviour by business partners can still damage its reputation. In recent years there have been a number of examples of well-known companies whose suppliers have been found to be involved in practices such as dubious or illegal working conditions in China.

• For economic reasons when buying or merging with companies and organizations:

  Companies use a risk and compliance check tool for third party due diligence to verify the quality of a takeover candidate or an acquisition prospect. The due diligence check is performed on the basis of a systematic analysis that includes an assessment of strengths and weaknesses and serves to safeguard the purchase and assess the risks.

Who helps companies with the check?

Because of the complexity of the requirements it is advisable to call on trained staff (in-house employees, risk and compliance analyst) or external advisors (tax consultants, auditors, lawyers, technical experts, management consultants) to perform a due diligence check. There are also due diligence checklists that provide a good (initial) overview of the subject. However, they do not always cover the specific circumstances. The due diligence costs may be tax-deductible. For corporation tax purposes, the due diligence costs can be deductive if they are:

• charged to the profit and loss account and,
• are for good use of the trade or business.

As a general rule, the greater the potential risk, the greater the resources that should be invested in a check.

A manual due diligence process can quickly become problematic if a company has insufficient employee resources or cannot access relevant and up-to-date information. Companies should therefore make use of appropriate technology to automate checks, support due diligence investigations and ensure continuous risk monitoring.

Forms of Due Diligence Check

Due diligence software performs various forms of due diligence check covering various areas. The most common are:

• economic, technical and organizational due diligence checks
• checks of managers and staff
• legal and tax checks
• operational due diligence (ODD) to assess the risks and appreciation potential of the target object
• market due diligence to explore and analysis the current and future market position of the target company

Due Diligence Report

The due diligence report provides a detailed summary of the checks and also records the process involved. The scope of the report varies from case to case. Sample reports are available as templates. The report serves as evidence of compliance with due diligence requirements.