due dilligence investigation services

Due Diligence Investigations – Protecting the Integrity of Your Company

Bud Garrick

Introduction

If asked, many companies would say that they have “due diligence investigation” processes in place; however, these processes are often designed to review financial and operational affairs of a particular company and fail to closely inspect the background of the main principles or executives of the company. As well, many companies do nothing more than cursory  checks on individuals who they are considering hiring; increasingly this lack of a robust background investigation is causing legal and financial problems for companies. There are an abundance of legal findings across Canada, as well as internationally that clearly articulates the liability facing companies who do not carry out appropriate due diligence investigations. In order to inspect this issue closer one must first begin with a definition and understanding of what “due diligence investigation” consist of.

Due Diligence Investigations Discussion

Most legal definitions of “due diligence” use wordings similar to this following: “Reasonable verifications and precautions taken to identify or prevent foreseeable risks”.  What these actual “reasonable verifications and precautions” are may vary depending on the amount of “risk” involved in the decision that the company has to make. As it pertains to the issue of companies conducting background checks on new hires, one raise the point that the cost of conducting background checks is excessive. However, should the question not be: “What is the cost of not performing due diligence and the potential of negligent hiring?” In a 2008 report released by the U.S. Bureau of Labor Statistics, 13 percent of the 5,840 workplace fatalities that happened in
2006 were the result of assaults and violent acts. And a recent article released by Human Resources Management noted the average settlement of a negligent hiring lawsuit is nearly $1 million. In the event that employment background checks were not conducted, the employers in
those cases could be held liable for the incidents.

The case of conducting appropriate due diligence related background investigations on potential employees seems clear, this, in turn, would lead to the assumption that the same amount of vigor, if not more, should be put toward full and complete due diligence investigations on companies, including their executives when mergers or acquisitions are about to take place. In fact, when one considers the potential legal ramifications of doing business with companies who are not in compliance with the Corruption of Foreign Public Officials Act (CFPOA), and have in fact been the subject of previous investigation in this regard, then the risk increases exponentially. It is obviously extremely important for business to have proper “due diligence” policies and procedures in place, however it is just as important to ensure that these procedures are being followed through suitable supervision and compliance audits, as well as having a plan in place should extra or enhanced investigative activity be required.

Often companies do not have sufficient resources in house to conduct these enhanced investigative activities; as such outside firms will have to be sought to assistance. Presidia has experienced these types of requests for assistance and in general terms we have found a three-phase approach that works well, that being:

  • Phase One: Open source intelligence and database exploitation to confirm the
    information being provided by the subject business or individual. This phase often results in obtaining suitable information for well-informed decisions to be made.
  • Phase Two: A more comprehensive investigation of the companies and individuals in question, which may include the use of investigative resources “on the ground” either in jurisdictions within Canada or internationally.
  • Phase Three: Should the information uncovered in phases one or two require further investigative activity then a complete investigation can be initiated to uncover all possible details. This may include surveillance activity to verify information and intelligence gathered to date.

Conclusion

As noted previously many companies undertake due diligence prior to making key business decisions, such as corporate mergers or hiring of individuals into important or critical positions, the depth of these due diligence processes often depend upon the risk associated with the planned activity and the sufficiency of in-house resources. Based upon the multitude of legal rulings in Canada and internationally it is clear that often these due diligence process are undertaken with insufficient vigor. This may be as a result of the “corporate culture” viewing due diligence as an obligatory exercise to be conducted quickly, or if may be as a result of the personnel engaged in these activities not having a sufficient understanding of the true requirements. Whatever the reason, companies must be vigilant against these informal and
inconsistent approaches to such an important aspect of business. The company’s reputation and potentially its future are at stake, as such the question that needs to be asked is “Are my company’s due diligence sufficiently documented and robust?” If the answer is less than positive, then perhaps it is time to seek assistance.