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Due Diligence – 5 Frequently Asked Questions

Due diligence is a term we’re all familiar with. However, not everyone knows the meaning of due diligence, when it applies and how it should be carried out, and what the implications are if due diligence is ignored. This article looks at five frequently asked questions about due diligence, in an effort to help you navigate this potentially tricky minefield.

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1. What is the meaning of due diligence?

In the simplest terms, due diligence is an investigation of a business or an individual prior to agreeing terms with them or signing a contract. In some cases, due diligence is a legal obligation, or a way of avoiding committing criminal offences such as money laundering. But commonly due diligence applies to voluntary investigations, too.

A person who conducts a background check on their future husband or wife to ascertain whether any skeletons are lurking in their closet is carrying out due diligence. Schools seeking criminal records checks of potential new employees are also carrying out due diligence. A common example in business is the process a company goes through to investigate a company it intends to purchase, checking and investigating the company’s assets prior to the acquisition. It is a way for the acquiring company to avoid making a bad investment, because an informed, safe decision can be made.

Other examples of due diligence are ‘Know Your Customer’ processes; these are the means by which a company verifies the identity of its customers and clients before entering into transactions with them or accepting monies. For example, before opening a client account for holding and using a client’s money throughout the life of a case, a law firm will verify the client’s identity by checking their identification documents.

2. What happens if you don’t carry out due diligence?

If a company acquiring a major asset or another company neglects to carry out due diligence, it risks making a bad investment and all kinds of financial problems could ensue. If proper Know Your Customer due diligence checks are not carried out, you could end up dealing with an identity thief, or worse, become a victim of financial fraud or end up with a criminal conviction for money laundering.

Money laundering regulations are extremely harsh; if you end up handling or distributing money from criminal sources because you haven’t properly investigated your client, you could be guilty. You don’t need to know it is criminal money. If you haven’t done the proper legal checks, ignorance is enough to be convicted.

3. What do I have to do to carry out due diligence?

Typical Know Your Customer due diligence processes involve:

  • checking passports, driving licences and utility bills
  • checking your customer’s name against lists of known parties, e.g. a ‘politically exposed person’
  • monitoring of risks based on the customer’s previous and expected behaviour, and
  • constant monitoring of the transaction with that customer.

Other due diligence process include applying for criminal records checks, i.e. standard and enhanced disclosures from the Disclosure and Barring Service, formerly the Criminal Records Bureau (CRB). Due diligence also covers any kind of background check aimed at investigating the history of a company or individual to know whether they are a good investment, whether as a partner, a supplier or an employee.

4. What is enhanced due diligence?

Enhanced due diligence is required when simple due diligence isn’t satisfactory, which might be the case for several reasons. For example, the transaction is particularly large, the customer, partner or supplier being dealt with is a large organisation, or transactions are conducted at arm’s length without any face-to-face meetings between the key parties. Essentially the stakes are higher, so companies do further investigation. Examples include assessing additional ID documents, measures to make sure these documents are certified, company checks and other kinds of background checks.

5. Can a private investigator help?

Private investigators are by definition specialists in due diligence. If you want to make sure your impending transaction is clean, private investigators have the skills, experience, contacts and technological support to give you complete peace of mind. The private investigators at Global Investigations have years of experience doing background checks, criminal records checks and identity investigations in an effort to help their clients avoid fraud and money laundering, using a variety of sources and techniques.

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