Due

Diligence October 2018

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 Agenda

1. What is Due Diligence?

2. Why is it important?
3. Reputational risk management
4. Due Diligence and the law
5. Traditional Due Diligence Process
6. Case Study

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 What is Due Diligence

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 What is Due Diligence
• Due diligence is an investigation of a business or person prior to
entering into a relationship.
• It’s a legal and ethical duty to exercise care in any business transaction
or interaction
• It involves investigation into all relevant aspects of the business or
person with whom you would like to engage

• Traditional due diligence looks at the following aspects of the entity:

– Financial performance
– Products & operations
– Reputation
– Directors and Staff

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 What is Due Diligence
DD is the care a reasonable
person should take before
entering into an agreement or a
financial transaction with another
party.
Traditionally, due diligence is
conducted on:
• Clients
• Suppliers
• Directors
• Mergers and acquisitions
• Joint venture partners
• Agents and intermediaries
• Subsidiaries

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 Why is Due Diligence
important?

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 Why is Due Diligence important?
Without sufficient information on
contracting parties, your
organisation could be affected
This is why it is important to
know if the individuals or
entities:

• Engage in unethical practices

• If their reputation could damage
your own
• If they could hurt your
organisations financial standing

Background ( and predictable

future) enquiries will help
identify and mitigate any
potential risks for your
organisation.

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 Why is due diligence important
• Company is registered by the required country registration.
Compliance risk • B-BBEE act – fronting
• Tax laws

• Non-conformance with operational requirements arising from the supplier’s business functions.
Operational Risk • Adequate staff, qualified employees and geographical locations.
• Registered with the required professional bodies.

Financial Fitness • Financial health indicators (judgements, defaults and/or adverse credit)
Risk • Financial risk analysis (Indicators of financial health and soundness)

• External parties association with high-risk entities or individuals.

Reputational risk • Sanction/watch listings, adverse publications and commercial references.

• Risks associated to the shareholders/spouses and business partners associated to company and
Association risk directors.
• Conflict of interests

• When a supplier engages a third-party provider based in a foreign country, it might be exposed to
Country risk potential economic, social and political conditions related to the provider location.

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 Due diligence and
reputational risk

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 Reputational Risk Management
“It takes 20 years to build a reputation and five minutes to ruin it” – Warren Buffet

Reputation is largely about perception

Your Brand is your reputation and therefore your stakeholder and public view of your
organisation is of paramount importance

A good reputation helps to sell products and services and reflects positively on a
company’s share price

Association risk - What perception are you creating by conducting business with an
unethical entity? How will you know an entity is unethical if due diligence is not
conducted?

Due diligence is your means to identify and measure your risk and without it, you are
effectively blind to the dangers

General theme : the perception in the mind of the client becomes reality

This is extremely difficult to change

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 Reputational Risk Management

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 Due diligence and the law
• Due diligence can be a voluntary risk management decision – our moral obligation

• Statutory requirement – a legal obligation

Local legislation:

• Prevention and Combatting of Corrupt Activities Act No. 12 of 2004 (PRECCA);

• Companies Act No.71 of 2008

International legislation:
• United Kingdom: The Bribery Act of 2010; and
• United States of America: The Foreign Corrupt Practices Act of 1977.

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 Due Diligence process

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 Traditional Due Diligence Process

Categorise
3rd parties

Risk rate 3rd

parties

Conduct due
diligence

Engage/
Disengage

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 Traditional Due Diligence Process

• The beginning of the due diligence process requires

categorisation of third parties
• This is really important as it will determine what you do
next
• These are examples of third party classifications:
• Associated person
• Suppliers
• Clients
Directors

• There is a further layer which has become quite important

recently
• 4th parties - subcontractor

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 Traditional Due Diligence Process

Medium

Risk rate 3rd

parties

Low

High
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 Traditional Due Diligence Process

Generally, your risk rating will inform the level of

enquiries conducted

Risk Description of risk level Example of Levels of Due Diligence Conducted

Rating

Low • Legitimacy of company and basic reputational risks. • Company

• Due Diligence will be conducted only on the company • Director
directors. • Shareholder
• Spouses

Medium • Legitimacy of company and reputational risks. • Company

• Due Diligence will be conducted on the company directors • Director
and directors’ corporate interests • Shareholder
• Spouses

High • An in-depth investigation • Company

• Due Diligence will be conducted on company directors, • Director
directors’ corporate interests and associated parties. • Shareholder
• If required, the directors associated with the directors’ • Spouses
corporate interests. • Director’s active corporate interests.
• If required, the directors associated with the
directors’ corporate interests.

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 Traditional Due Diligence

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 Traditional Due Diligence Process

Understand
the
objective

Collect
Analyse,
available
review and
information
report
from entity

Perform Consult
discreet databases
industry and other
enquiries resources

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 Traditional Due Diligence Process

Business can make an informed decision Engage/

Disengage

Should the due diligence not indicate any serious issues

the entity will be engaged

Should the due diligence indicate any issues the entity

will be off boarded or disengaged

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 Case Study

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 Case Study

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 Case Study
• High risk high value client DD request

• Concerns :
• Who is this entity?

• Objectives of DD:
• Entity’s existence
• Reputational and ethical risks
• Confirm Shareholding
• Entities existence
• Exposure

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 Case Study

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 Case Study
• Three directors
– Two foreign directors
– One South African director
– All three directors are regarded as PEPs
– Listed on ICIJ
– One of the directors are founders of a Gupta owned entity

• Adverse Media
– Labour disputes
– Financial challenges and possible shut down
– Environmental practices contraventions

• Limitations
– Open sources – accessible via databases and media resources
– Shareholding not centrally available
– Foreign directorships cannot be confirmed

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 Case Study

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 Case Study
• Ultimate Shareholding is hidden beneath various layers of corporate
structures
• Shareholding placed in Trusts
• Three Oligarchs linked to the main entity
• Oligarchs became billionaires in their industry with development projects
across the African continents
• Attracted criticism and investigation by various authorities across the globe
• Linked to major Russian organised crime figure according to the FBI
• Suspicions of money laundering
• Allegations of corrupting police officers
• Allegations of fraud in Germany
• Alleged links to the KGB
• Corruption investigations by France, Belgium and UK
• Links to business owned by President Donald Trump
• Alleged human trafficking
• Business associates of Kazakhstan's President

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 Questions

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 THANK
YOU
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