Integrity Due Diligence
In today’s fast-evolving business environment and in a world in which commercial ideas and investable businesses, investors find themselves drowning in several layers of legal, technical, financial, and commercial due diligence to assess the viability of their investments. Yet, to a large pool of investors who put funds in startups, some critical assessments related to the integrity of the company’s stakeholders remain to be overlooked or treated with a light touch.
Early identification of integrity risks along with financial, legal, corporate governance, environmental and social, and compliance-related due diligence should be an essential component of any assessment of an investment opportunity.
What is IDD?
Integrity due diligence focuses on identifying risks regarding a business’s direct owners, ultimate owners, hidden beneficiaries, management, and clients, that are generally not revealed through other due diligence processes. As a result, it enables you to reduce risk, make informed decisions, pursue opportunities and manage difficult situations with greater confidence. This is similar to the “Know Your Customer” process that banks adopt while onboarding a new customer.
Integrity risk is the risk of engaging with external institutions or persons whose background or activities may have adverse reputational and, often, financial impact on the investor. Integrity risks include, but are not limited to, corruption, fraud, money laundering, tax evasion, lack of transparency, and undue political influence. To safeguard their investments, Investors should pay close attention to potential integrity risks as they may undermine the return on investment or adversely impact the business’ ability to carry out its business effectively.
Who is subject to IDD?
Entities and individuals whose role in a project could potentially adversely impact the investment are subject to the IDD process. This typically includes the key shareholders and their ultimate beneficiaries, board directors, and senior management. In addition, to be prudent, it is often necessary to conduct IDD on other parties, including co-investors, contractors, agents, advisors, consultants, suppliers, and other service providers.
How is IDD conducted?
Identification: As a first step, integrity risks related to the company need to be identified, including the entities and persons involved, utilizing open sources of information from the public domain, such as news and piece of relevant content in several pertinent languages as well as information from direct contacts through market intelligence and investigative methods. Information can also be sourced from governmental entities, security agencies, and private investigation firms. This stage tends to investigate key areas of integrity concerns; fraud, corruption, sanctions, political exposure, or misconduct of its various types.
Evaluation: The next step is to evaluate and assess integrity risks, including a thorough review by the investor’s internal risk/compliance department or through independent specialized risk consultants. The outcome of this process is to generate an IDD report that ranks integrity risks, scores them, and assesses their impact on the investment now and in the future.
Monitoring: As a final step, should the investor decide to move ahead with the investment, and as an ongoing exercise, the investor should keep monitoring integrity matters for new issues and changes in integrity risk over the life of the investment.