Deloitte Report Highlights Pitfalls for CFOs in the Middle East

Conducting due diligence on international business partners has become a necessary and critical practice for companies, particularly for chief financial officers (CFOs), operating in global jurisdictions according to Deloitte.

The firm notes that there are multiple factors driving the need for better compliance in this area. The US Foreign Corrupt Practices Act (FCPA), UK Bribery Act, and multinational agreements, to name a few, oblige companies to ‘know’ their foreign counterparts.

A recent report from the Deloitte Forensic Centre, entitled ‘The Case for Getting Global Business Partners’, explores options for information-gathering and examines factors in the due diligence process for senior business leaders to consider in investigating international business partners.

Enforcement actions by the US Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) for insufficient due diligence on international business partners are underscoring the point that a cursory approach no longer suffices. What seems clear is that companies will be expected to conduct a deeper, more systematic investigation of potential international business partners.

CFOs and others overseeing risk management can lead that effort by establishing a due diligence process that involves collecting information from the business partner, verifying the data, and following up on identified red flags.

“Common due diligence pitfalls include failing to conduct timely and sufficient due diligence, failing to adequately verify information provided by business partners, and failing to act on identified red flags,” says James Babb, CFO programme leader at Deloitte Middle East.

While there is no law or regulation specifying the process for international due diligence, generally, companies should consider taking the following three steps:

1. Requiring the business partner to disclose information on a questionnaire: Companies can design an effective and thorough questionnaire for business partner that asks reasonable questions and puts the business partner ‘on the record’ regarding certain key issues. The questionnaire should include company background, ownership and management, disclosure of regulatory matters, and anti-corruption knowledge and compliance.
2. Using a risk-based approach to verify the information provided and independently identify adverse information: This will depend on the potential partner’s risk ranking. Business partners typically are divided into three categories: high-risk, medium-risk and low-risk.
3. Taking action on an identified red flag uncovered in the process: Resolving red-flag issues may involve more in-depth research or an inquiry to potential business partner for clarification.

“While the due diligence effort may lengthen the start-up time for a new business partner relationship, failing to do so can have considerable negative financial and operational repercussions for companies seeking to conduct business internationally,” adds Babb. “It is far better to proceed slowly, carefully, and thoroughly with any new business relationship”.

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