Foreign Company Due Diligence

It goes without saying you should choose good business partners abroad. The kind of partner that doesn’t like getting sued … and hence doesn’t give you reason to sue them. Partners that won’t steal your IP.  But just how can you know a partner is reliable before you do business with them and put them to the acid test?

The first thing you should do is conduct an internet search of your potential counterparty in the languages used in its country. This sort of search will rarely be enough to make you feel good about going forward with the transaction, but for no or little cost it frequently can give you enough negative information to convince you not to go forward (e.g., if the entity in question was sued for IP infringement).

If the company checks out after the internet search (and it probably will), your next step should be to have a qualified firm further investigate it.

Our law firm’s company investigations typically consist of having one of our lawyers with experience in the market in question reviewing government databases to confirm the existence of the company and that it is authorized to engage in the business activity in question. These investigations also seek to determine if the company is well capitalized, in good standing with the authorities regarding fines and taxes, and not involved in lawsuits that would make us doubt its reliability/credibility. We also look at what trademarks and patents and other IP the it holds, because these can be valuable assets, and companies with valuable assets are far less likely to walk away with someone else’s money than companies with few (if any) assets. This is also why we look at their property holdings as well. We also look at the company’s ownership because that sometimes gives additional good insight about the company. After we search the government databases, we compile a 4-8 page report on our findings. And because our clients are invariably in a hurry, we strive to turn around these reports in 6-8 hours.

If more due diligence is required (and it usually is not), do your due diligence the old fashioned way. Ask your potential counter-party to provide you with its government registration documents and, if relevant to your deal, its accounting and tax records as well. Don’t be afraid to do this. Especially in emerging markets, they are probably used to having local counterparts ask.

What if your potential counter-party refuses to give you these documents? Walk away. In our experience, legitimate companies don’t balk at providing such documents.

What if your potential counter-party does turn over these documents? Have someone who understands such documents review them.

And remember, anything and everything can be faked. Some examples of falsehoods we have seen:

  • Multi-million-dollar account at a nonexistent bank.
  • Certificate of incorporation from “Marshal Island” (it is Marshall Islands!).
  • Relevant “government” documents for a branch office showing the wrong province.
  • Claim of shipment using a nonexistent ship.
  • Fake decision from the Supreme Court of a certain country.
  • Fake property deeds.

When conducting business due diligence, you should bear in mind the following:

  • Construct your own fraud scenario. Ask yourself how the company could have staged everything it has shown you. Did it switch the factory signs before you arrived, so it looks like it owns the factory, when it in fact does not? Did it paint the old machinery to look new? Is the person with whom you are speaking really a PwC accountant, or just someone paid $100 to pose as one? We have encountered fake factories, fake lawyers, fake banks, fake airline offices, fake documents, fake accountants, fake foreigners, fake owners, and all more than once.
  • Focus on the operations. Look carefully at the company’s operations. Why does the company have only 100 boxes in storage when it claims to be selling 5,000 widgets a week? How can the company make 5,000 widgets a week with only enough of X material to make 100 total? Why did the company have a completely different set of employees on the same day and time two weeks apart? It pays to visit two or three (or more) times — a good fraudster can put on a show, but they are unlikely to be able to do it the same way each time, just as it is harder to keep up with lies as time goes on. Look for subtle differences.
  • Get the official records yourself. Use your own people to get the company’s official corporate records from the official government sources. Though doing this is neither inexpensive nor easy, information gleaned from the official government records can often be helpful. Then compare the official records with the documents the company gave you.
  • Take company-provided introductions with a grain of salt. Speak with your target company’s vendors, neighbors, employees, and customers, especially those you find on your own. When talking with people to whom your target company has introduced you, take everything that is said with a grain of salt. It is not difficult for an unscrupulous company to buy someone’s loyalty for the duration of a meeting or a phone call and this sort of thing goes on all the time. And again, do you really know whether these people are as claimed?
  • Speak with the company’s competitors. Competitors with real businesses can and usually will tell you about their competitors, but, of course, any information gleaned this way should be taken with at least a bit of salt as well.
  • Do not delegate. Use your own trusted network to gather information on your potential counterparty. If you don’t have such a network, get one. If you can’t get one, don’t do the deal.

We could go on and on. . . .