Due Diligence: Knowledge is Power

This article appeared in the March 2011 issue of Res Gestae, the Lee County Florida Bar Association monthly magazine.

“Due Diligence” is an ambiguous term.  Some consider a simple background check synonymous with due diligence, while others see it as an all-encompassing information quest.  To clarify, let’s understand that real due diligence is like a well-tailored suit. It fits the wearer for whom it was designed. The nature of the due diligence inquiry, and focus of its attention, relates to its final application. That is, one must understand the purpose for due diligence in each case and design the search parameters to fit the need...always leaving room for the unexpected.  There is no one size fits all when it comes to due diligence. 

When we are assigned a due diligence matter, the case intake questioning begins.  As an investigator, I want to know what is on the table. What is at risk?  I want to be alert for flags that will direct the inquiry down the right avenues…not just throw out a net and hope I catch everything.  Sure, we pursue the usual suspects:  criminal history, civil recordings and bankruptcies.  But in some cases we might need to interview current or past personal or business associates.  If required, that type of inquiry can be accomplished discreetly without anyone the wiser. Contacting references provided by the subject of the inquiry is fine and should be done, but let’s admit that type of contact is self-serving, at best. 

Not only should the basic identifiers (Social Security Number or FEIN, date of birth and address) be confirmed, any aliases, subsequent or pre-marital names should be searched, as well.  One of the more over-looked sources is a DMV driver history.  Wouldn’t you like to know if there is a history of DUI’s?  Nowadays, we also have the social media resources that can shed unguarded light on individuals and businesses owners.

There are 3,412 County and Parish Courthouses, more than 88,000 Municipal Courts and 89 US District Courts in our 50 States and, sadly, they do a poor job of contributing to each other’s record system.  In fact, the system is so lacking that law enforcement doesn’t trust the completeness of their own national criminal index (What do you think of that $39.95 internet search now?).  When we research an individual or business that has lived or operated out-of-state (quite the norm in Florida), we also have to track down past history in those other jurisdictions to conduct proper due diligence. There is no one-stop shopping here.  That’s when national investigative contacts are invaluable.

The more obvious reasons for conducting due diligence are mergers and acquisitions, new partnerships, key employee hires, investments and vetting vendors.  Also common is the so-called Affidavit of Due Diligence used to show all efforts have been made to locate someone for legal purposes.  But in employment and financial circles, whenever there is the potential of weighing gain against risk, the range and depth of due diligence is warranted.

In a recent case, house counsel for our client, a Mid-Atlantic corporation, was vetting the hiring of an outside consultant. She was not impressed with the Internet-based $39.95 background check that returned a brief report with no negatives….so she hired us. The proposed consultant would have access to a company expense account, so more thorough due diligence research was called for.  Counsel explained that the higher-ups already loved the guy (…lunches, golf, cocktails, etc.) and, unfortunately, they viewed due diligence to be a pro-forma step toward his eventual engagement.  Counsel added that the subject was charming, intelligent and professed a willingness to adjust to company culture; yet something didn’t seem quite right to her. 

Research uncovered that the consultant was a divorced lawyer whose license was suspended in two states and in IRS Court for taking client funds from an escrow account.  He rationalized that the client owned him that money and had not paid his bill, so he paid himself….against the client’s wishes, by the way.  Further, we learned the subject filed for Chapter 13 Bankruptcy two years ago and another of his companies was also in bankrupt status.  No surprise … the subject’s personal credit report score was listed as “poor,” as well.  His profile matched the quintessential person likely to commit fraud in the future, according to the Association of Certified Fraud Examiners.  The “Fraud Triangle” consists of: Pressure, Opportunity and Rationalization…all of which were very evident with this subject.

In short, more than the background check, due diligence is a thoughtful examination of the subject’s past practices, general behavior and apparent belief system as they would impact upon the company’s welfare in the future.  Clearly, the more you know about the subject the better prepared you are to make the right decision.

As you know: Knowledge is Power! 

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Dave Watts is a Certified Legal Investigator (CLI), a Certified Fraud Examiner (CFE) and a Florida Certified Investigator (FCI). He has been a licensed SWFL investigator since 1989 and New Jersey Licensed Private Investigator since 1976. Mr. Watts has over 30 years experience and past licenses in NY & PA. He can be reached at (800) 950-4808 or islandinv@aol.com.

Getting the facts…that’s what we do!

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