“Due diligence” is a term used for a myriad of actions, usually in preparation for something. Parents of college-aged children analyzing school choices, executives reviewing financial information before a shareholder meeting, professional team owners looking into the backgrounds of potential new players… all of them perform some form of due diligence. For global organizations, however, the need for holistic due diligence has become even more important. The potential risks that employees, vendors and business partners bring can negatively impact an organization’s business and reputation.
“Our clients are asking us to go beyond standard checks and utilize our investigation services so that we can advise them about potential risks. News of a negative situation involving an organization can spread so quickly, resulting in a damaged reputation, decreased stock prices, and loss of business. A holistic approach to due diligence can help to mitigate those risks,” said Miguel Martinez, Vice President for Pinkerton Global Investigations Unit (PGIU).
Why holistic due diligence is more important now
The internet changed the playing field dramatically, keeping people and organizations more connected than ever. And while that is generally looked at as a good thing, it also means that news about security incidents, technology breaches, disgruntled employees and other reputation-damaging events can spread globally within minutes.
“The global nature of business today requires that companies stay constantly abreast of risks within their business and outside of it,” said Martinez. “It puts far more pressure on hiring practices, vendor choices and business partner arrangements to ensure that potential security incidents are mitigated from the start.”
He further explained, “It’s critically important that companies know who they are dealing with, whether it is individual job applicants or corporations that they will do business with. And a regular background check or review of publicly available records may not be enough.”
Background checks vs. holistic due diligence: how does due diligence work?
Martinez further explained, “It’s critically important that organizations know who they are dealing with, whether it’s partners, buyers, sellers, suppliers, vendors, intermediaries, or immigration applicants. And a regular background check or cursory review of publicly available records may not be enough.”
So, you might be asking, “When should I perform due diligence?”
Here are some targeted areas of interest for business due diligence programs:
- Mergers & Acquisitions (M&A)
- International joint ventures
- Know Your Customer (KYC)
- Know Your Supplier/Vendor (KYS)
- Business verification
- Immigration verification
- Subsidiaries/agents/brokers
- Clients
- Charitable donations
- Ownership interests
- State-owned companies
- Boards of Directors
- Credit standing
- Sanctions & debarred parties
- Politically exposed persons (PEP)
- Licensing & certification
Each of these areas is rife with risk to an organization’s reputation or bottom line.
“Organizations should understand the risks up front, but they can take considerable effort to discover. The magnitude of the potential relationship they will have with a partner, supplier, vendor, employee, or client can determine how much investigation is needed,” said Martinez.
How do you prepare for due diligence?
Like overall security programs, these programs are not the same for every organization. There is no “cookie cutter” approach that works. A few factors come into play when organizations decide what kind of due diligence effort they need.
“One of the first things to determine is the scope, which is based on how much risk an organization is willing to assume,” Martinez said. “For example, hiring an employee for a part-time counter position is vastly different from a risk perspective than hiring a new CEO. The former may only require a standard background check while the latter involves many elements of reputation management to determine more than just the person’s background, but also potentially their affiliations and other risk elements.”
The level of due diligence is based on risk and the organization’s business goals. If a partnership is critical to a organization’s success, then the program must take that into account so a more in-depth investigation can take place. But then, they also have to determine what they will do with information that’s uncovered.
“An organization needs to know its risk tolerance based on the situation,” said Martinez. “If partnering with a specific vendor is needed and an enhanced due diligence turns up negative information, how much of that is an organization willing to accept in order to move forward with its plans? This is an important part of the process and one that we discuss upfront as we counsel organization regarding a tailored SCOUT investigation.”
The importance of mitigating risks in the global marketplace
Risks are increasing and new ones continue to present themselves. As the saying goes, “Change is the only constant in life.” The global marketplace certainly fits that description. It is as important as ever to know who you are doing business with and what risks they present to your organization, its reputation, and its employees. A little, or a lot, of due diligence can go a long way towards mitigating those risks.
SCOUT by Pinkerton due diligence is designed to meet the needs of even the most complex situations and extends beyond business agreements and transaction to proactive investigations where there is a suspicion of wrongdoing or threats of potential violence by individuals. Trust SCOUT to provide your organization with the insights and intelligence you need to navigate critical decision-making processes with confidence.
This blog was originally published in March 2017 and updated August 2022. It has been updated again as of the publication date.
