Doug Nairne, head of enhanced due diligence operations at World-Check

Fraud remains key due diligence driver

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By Doug Nairne - One of the most important changes in the global financial industry over the past three years, and indeed the business environment as a whole, is the increased importance placed upon due diligence. That means paying closer attention not just to counterparties in order to detect any evidence of fraud – although this is certainly a vital component – but also wider issues, especially legal ones, to see whether they could have any detrimental effect on a firm’s business.

For example, an important focus for business is the possible impact of the new UK Bribery Act, which will take effect next year and could prove as much a compliance issue as the US Foreign Corrupt Practices Act. Because the legislation doesn’t just cover bribery of foreign officials but all types of bribery, it could turn out to be an important concern for UK companies and those that do business with the UK, depending on how stringently it is applied and enforced.
 
The US law originally dates back to the 1970s and was designed to prevent US arms manufacturers paying bribes to foreign government officials as kickbacks to obtain contracts. However, there were few enforcement actions until the early 2000s, in the wake of 9/11 and also the collapse of Enron, when the US Department of Justice began to apply the act much more rigorously than over the previous couple of decades, as part of a general move toward stricter compliance and enforcement of existing laws.
 
It is widely expected that the UK law too will be applied strictly from the outset, confounding expectation that authorities in many countries might take a softer approach toward enforcement to avoid adding to the burdens of business in a more difficult economic environment. This means that more than ever, due diligence on counterparties is a vital business tool, not an optional luxury.
 
Despite the economic upturn in some parts of the world, especially Asia, conditions remain difficult elsewhere, especially in the US and across much of Europe. The possibility of fraud remains a key driver of growth for the enhanced due diligence business at World-Check, which in any given month provides due diligence reports in more than 100 countries and now accounts for around 225 of the group’s total workforce of more than 400.
 
Cases such as Madoff have kept fear of fraud in the front of mind for investors, although the environment is less propitious for wrongdoers than at the height of the boom a few years ago. The world is no longer awash in cheap money, and tighter international financial regulation has made it harder for fraudsters to shift money around undetected or to cover their tracks.
 
But there’s no decline in interest in due diligence – quite the contrary. Everyone understands that you need to do background checks on business counterparties, and are acutely aware of risks such as overseas corruption or the opportunities for misconduct by fund managers not subject to adequate scrutiny.
 
Today there is growing focus on emerging markets, including the BRIC countries but also frontier markets in Africa and central Asia, whose economic potential and rich commodity resources are attracting extensive investment. Since due diligence depends upon open flow of information and good public records, conducting research can be more difficult in these countries, but at the same time it is more vital than ever.
 
Doug Nairne is head of enhanced due diligence operations at World-Check
 
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