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FOCUS 10


Senior Manager, Forensic by JOSH MANDEL


Choosing a partner is one thing – but how do you know if they really are who and what they say they are? Josh Mandell examines how to structure the due diligence process and establish an effective risk management framework.


DUE DILIGENCE


We’ve looked at the broad concepts involved around entering into a partnership or joint venture overseas.


But a fundamental aspect of this is the detailed work you need to do to assess whether a potential partner is right for your business – the due diligence process.


Due diligence needs to be done in order to manage risk in three broad areas:


Firstly, there is the risk to your reputation. Partnering with the wrong people can get you unwelcome headlines. So you need to make sure that their track record is clean.


Secondly there are regulatory risks, which will then damage your reputation. One of the biggest concerns here is the Bribery Act. Bribery and corruption can be major issues, especially in emerging markets, and some high profi le names have fallen foul of problems here.


YOU NEED TO HAVE YOUR OWN PEOPLE THERE, INVOLVED IN THE MANAGEMENT DECISIONS. THAT CAN BE DIFFICULT IN SOME COUNTRIES AND SOME RELATIONSHIPS, BUT THIS TOO IS NO LONGER A NICE TO HAVE.


Then there are commercial risks. If you partner with the wrong people, they may attempt to defraud you, to cream off revenues that are due to you. Often this may involve bribery and corruption as part of the chain. So these three risks are all in fact interlinked.


Risk management frameworks


In order to manage this, companies need to have an effective risk management framework in place so that high risks partners can be identifi ed and then assessed at a deeper level.


However, this can be a challenge for many companies, especially larger ones who are internationally active. Some of the biggest consumer goods companies may have as many as 500,000 third parties and partners that they deal with around the world: a staggering number.


In order to manage such a population, you need to establish a way of categorizing and fi ltering them into risk groups. So for example, what jurisdiction are they in? If they’re in Bangladesh they’re going to be higher risk than if they’re based in, say, Switzerland. Are they listed? Privately owned? State owned? That will affect their risk rating too.


Putting your partners through such fi lters will help you identify your high risk population, which can then be assessed in more detail. This will involve looking at them in terms of what information is out there in the public domain such as, press coverage, corporate fi lings, litigation records, etc. Depending on the outcome of that assessment, you may want to go a step further and make enquiries directly in the marketplace – talking to other partners in their portfolio, as Sean discussed above.


© 2014 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member fi rm of the KPMG network of independent member fi rms affi liated with KPMG International Cooperative, a Swiss entity. All rights reserved.


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