Background checks led banks and other financial institutions to pull out of one in ten deals (10.1 per cent) as a result of information uncovered about the other party, a consultancy says.
In another one in eight cases (13.4 per cent), significant modifications to the deal are made as a result of the investigation. This emerged from a review of the 132 deals that The Risk Advisory Group made investigations for, in the first six months of 2002. Of the 119 deals decided on (13 are pending), two-thirds (65.5 percent) of the deals investigated went ahead with no modifications. In one in ten (10.9 percent) the bank pulled out for other reasons. Henry Pugh, Director of business intelligence at TRAG, said: ‘Only a few years ago, most banks would never have dreamed of commissioning background checks on new investments or new clients. But these checks are becoming far more common these days, as financial institutions consider the regulatory, reputation or financial damage that can happen if they don’t know fully who they are dealing with. Our survey shows that these checks are a sensible precaution.’
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The projects required Risk Advisory Group investigators to research companies and individuals across the world, predominantly in Europe, the Middle East and Africa. They covered a cross-section of industries. Deal sizes ranged from under £1 million to several hundreds of millions of pounds.<br>
Clients were from a range of financial institutions, with investment banks, private equity houses, private banks and multilateral lending institutions forming the core groups. On most occasions, The Risk Advisory Group was asked to carry out its research as the client came close to finalising an investment with the subject of an enquiry, but cases also covered acquisitions, IPOs, new client acceptance and correspondent banking relationships. Henry Pugh, Director of business intelligence at RAG, said: ‘One in every ten times, we are alerting clients to serious problems which might cause significant damage should the deal proceed. More frequently, our findings cause deals to be restructured in such a way as to protect our client from damage while permitting the deal to go ahead. And the rest of the time we are giving clients reassurance that they are doing good deals with good people. The findings which led clients to pull out of or modify deals included the discovery of undisclosed directorships of liquidated companies, poor references from former business partners, non-transparent sources of wealth and even suspected links with criminal or terrorist groups. In integrity due diligence assignments, research teams consult a range of public record and other data sources, nominated referees and a network of informal contacts, in order to provide clients with an independent assessment of the suitability of potential business partners. Investigations focus on the qualitative factors not covered by traditional financial and legal due diligence, such as managerial competence, verification of career histories, involvement in controversial episodes or undisclosed business interests.’
