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How is this Due Diligence different from all others?

Due Diligence is something of a loaded term with varied definitions and possible points of focus. “Reasonable steps taken by a person in order to satisfy a legal requirement, especially in buying or selling something,” reads one definition, while another characterizes due diligence as, “a comprehensive appraisal of a business undertaken by a prospective buyer, especially to establish its assets and liabilities and evaluate its commercial potential.”

The Institute of Chartered Accountants of England and Wales (ICAEW) groups due diligence exercises in three main categories: legal, financial, and commercial.

In my corner of the investigative industry, due diligence is typically an exercise of the legal variety focused on identifying reputational and, often, legal risks related to anti-bribery/anti-corruption (“ABAC”) compliance. But if I’ve learned anything from my years of managing and conducting investigations in emerging and frontier markets, it’s that the typical tunnel vision of many diligence providers offers little in the way of added value for clients operating in those markets.

The current state of the Due Diligence Industry

The due diligence industry suffers from at least three significant problem areas or “blind spots.”

1. “Afterthought” Due Diligence and its consequences: Lamentably, at their own peril, many clients will treat due diligence as a mere compliance-related formality or afterthought. The risks they are assuming when they do this in regions like Latin America are massive and beyond the scope of this article. This dynamic has led to downward price pressure on the part of some clients who want to pay as little as possible for a “check-the-box” exercise. That pressure seems to me to have been combined with a very faulty assumption that, in the age of Google, a due diligence exercise in a frontier or emerging market should be “straightforward.”

As a result, new firms have arisen promising “cheaper results,” and they have sought to package their products as “diligence” for the above-described clients. I recently read about one such firm, which offers an online platform through which clients can communicate directly with anonymous “runners” who are retrieving records in the target jurisdiction. The dual problem inherent in this approach is that (i.) you are only as good as your field operatives and (ii.) due diligence exercises that over-rely on open source information in a region like Latin America can often be fatally flawed undertakings. More on those two points later.

2. You are only as good as your field operatives: Clients who seek due diligence services vary widely. A relatively common situation in my industry involves a client who hires, through an attorney, a larger investigative firm, in anticipation of a transaction in Latin America, for instance. The large firm will then, typically from offices in Europe or the US, seek out subcontractors who have local capabilities and expertise. Essentially, the large firm (or the intermediary firm, as it were) will then resell the local subcontractors’ work. Alternatively, the client’s attorney may work with local law firms in the target jurisdiction or directly with local investigators.

In either case, there is one fundamental truism, especially when it comes to Latin America: you are only as good as your field operators. For instance, much of the open source information, available in Latin America is not digitized or available online. It may even be spread out across several different offices in various jurisdictions. If your field operator is not aware of all the possible sources of information, or does not properly search them, that blindspot is transferred directly to you.

As an example, suppose that you ask an investigator in the US who offers Latin America-focused investigations to investigate a given subject in Panama. The US investigator hires someone in Panama to undertake the work, and that person believes that a certain court database will provide coverage of all available litigation, or that online searches in local newspapers will suffice for background information on a subject. Did that person search all variations of the subject’s name? Did they search all available resources? Are you aware of all the available resources and could you question or check their search strategy? Did they take the time to think of a strategy for identifying relevant information?

Indeed, I have personally handled cases in Panama where we identified and reviewed litigation filings in courts that should have been included in public, government databases but were not. That is, upon searching an official database, no result would be found, but if one took the time to check at each local court, there were, indeed, litigation filings.

I have found veritable treasure troves of information about subjects in libraries and government ministry archives that would not be included in a typical due diligence exercise. Despite any appearances to the contrary in the age of Google, open source research in this region is anything but straightforward and it requires creative thinking, not commoditization; if your field operators don’t know how or where to look (thoroughly) you will miss something important.

3. Legal Myopia: There are many lawyers and former law enforcement agents, particularly at management level, in international investigative firms. In many ways, they have skill sets that provide an excellent grounding in investigations.

Still, operating in Latin America is a different prospect. I find that many lawyers have an understandable tendency to view investigations through legal lenses and categories. They tend to think in terms of “evidence,” they may think evidentiary or licensing norms work in the same fashion in this region as they do in the US.

In fact, I often find myself reminding clients that the sorts of investigations we undertake can be very different from those undertaken by law enforcement agencies (whose powers we do not have); as such, different standards must apply. Lawyers, because of their penchant for seeking “hard evidence,” may also place an overemphasis on documentary, or open source information without proper consideration of its context/limitations and without a proper understanding of the benefits of human source intelligence.

The need for context in investigations.

I have previously written about the limitations of open source intelligence (OSINT) in the region and how a lack of adequate context can drastically affect the way in which one interprets investigative results. Among other factors, it’s important to keep in mind that public records, for instance, like press reports, can be manipulated. Records can also be “lost,” inadequately indexed, disorganized, etc.

Just as one cannot adequately understand the results of media analysis in Latin America without considering factors such as bias; media outlet ownership; political climate; lacking journalistic standards; and, the potential for media manipulation, one likewise cannot understand public records, or, indeed human source intelligence without the proper context.

Consider litigation filings, interpreting these in Latin America requires “flipping” many of the traditional conceptions of how the legal system works that are inculcated into US-based attorneys. Here are just a few examples.

  • The criminal system works rather differently. Setting aside reforms to the legal systems of several countries (Panama included) there is still a significant volume of cases in the region that are handled under the written trial, “inquisitorial” system that is a legacy of the Spanish colonial era.

  • Criminal complaints are often used as a means of exerting pressure on counterparties, even in an otherwise civil or commercial dispute. Why? Because your counterparties will be much more willing to negotiate if a prosecutor is after them.

  • As a corollary to the first point, it is not uncommon, in the inquisitorial trial system, to have a defendant placed in “preventive detention” as a case winds its way through the courts. We have seen cases of defendants who waited 6 years behind bars for a trial. That is precisely why criminal complaints are an effective means of pressure, and sometimes, even extortion. In other words, “lawfare” is often the norm in Latin America.

  • Offenses that are not criminal in the US can be criminal in the region. Defamation, for instance, is often a crime. Incidentally, defamation concerns may play a role in investigative strategy in certain cases.

How Strategic Due Diligence is different.

Our strategic due diligence approach seeks to mitigate the blind spots in a traditional due diligence approach and fill the gaps insofar as is possible. At the end of the day, providing clients with a laundry list of issues and problems identified with a potential partner does little to aid the decision-making process ahead of a significant transaction. This is particularly true if the end user of the report does not have an understanding of the region or the jurisdiction in question.

A strategic due diligence provides, first and foremost, findings with context that helps clients understand what those findings mean and how they might affect the client’s interests in the future. Part of providing such context involves marrying open source and/or human source intelligence with strategic analysis so that clients can understand, inter alia, the operating environment, what the issues with the subject mean, who the key players are, what drives their behavior, and how the situation might develop based on the jurisdiction’s geopolitical and operating environment.

By way of example, suppose you are considering an acquisition of Best Widget Factory (“BWF”) in Country X. A traditional diligence report might include a statement such as:

According to a report in The Post, BWF’s CEO, Mary Poppins, has reportedly been under investigation for the past six months by the Anti-Corruption Prosecutor for alleged bribery in relation to government contracts awarded to BWF. A search of Country X litigation records did not identify any filings for BWF suggesting it has not yet been filed.

In other words, it’s common to have a rather well-researched/sourced, detailed description of what was found, but often, there is little about what it might mean.

A strategic due diligence would seek to provide further context and depth (which would be adequately cited in a real report), such as, for example:

According to a report in The Post, BWF’s CEO, Mary Boppins (“Boppins”), has reportedly been under investigation for the past six months by the Anti-Corruption Prosecutor for alleged bribery in relation to government contracts awarded to BWF. A search of Country X litigation records did not identify any filings for BWF suggesting it has not yet been filed.

The Post, founded by John James in 2005, is perceived to have a left-wing bias, particularly where the Liberal Party is concerned and owing to the political roots of its founder. It has been criticized by opposition commentators as a mouthpiece of the current Country X government of President Minnie Blue (Liberal Party). BWF and its CEO Mary Boppins, however, were close to the government of President Blue’s successor, president Mickey Green (Conservative Party).

It is common in Country X for successive governments to persecute the allies of their political enemies. The enmity between President Blue and former President Green may be a motivating factor for the investigation of Boppins.

Domestically, President Blue is also under pressure given accusations of corruption against her own government by a Conservative Party-controlled Congress. Her government is also facing considerable international pressure from regional intergovernmental bodies and from the US who expect her to at least be seen to be doing something to curb corruption in her country. The newly created Anti-Corruption Prosecutor’s Office provides an adequate opportunity to do just that. This is not to say that the allegations against Boppins are without merit, rather, the political context in Country X has created pressure on President Blue.

Given the pace at which litigation moves through the court system in Country X, the case against Boppins could take years to come to trial. In the meantime, Country X is in the midst of preparing for presidential elections next year; President Blue is constitutionally prohibited from running for a second term.

Currently, the political mood and economic slowdown in Country X reflect poorly in polling for the Liberal Party and the Conservative Party seems poised to win. In the short term, the upcoming elections may create further pressure for Blue to “show results” in the fight against corruption in order to score political points. This may include pressure to “move forward” with the case against Boppins. However, Boppins has also strategically positioned herself over the last 15 years as a critical political ally among the political and business elites of Country X. It’s also worth noting that the Country X government obtains roughly 60% of its revenues from taxes on the sale and export of widgets and BWF produces 85% of export-quality widgets in Country X. Given Boppins’ position among the political elite, her family’s position as owners of BWF, the current political situation in Country X, and the critical nature of BWF to the Country X economy, our forecast for the case against Boppins includes the following likely scenarios of which the client should be cognizant….

This is, of course, merely an illustrative example, but the point is that strategic due diligence seeks to (i.) provide context, (ii.) explain issues through context, (iii.) analyze the findings to interpret what they mean, and (iv.) look forward to forecast what is likely to happen. That is the only recipe for mitigating the deficiencies in traditional due diligence and providing clients with real value.

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