Due Diligence and Compliance

Contents:

• Types of Due Diligence
• Fields of application of the due diligence procedure

Due diligence and compliance are procedures that are necessary for the implementation of any economic activity. Both concepts are interrelated, as they aim to avoid as much as possible any legal and financial risks for the owner of the organization or the investor.

Before building a relationship with a new counterparty or potential business partners, managers are strongly advised to conduct a thorough check so as not to encounter fraudsters or unscrupulous people.

In other words, before investing in certain relationships and protecting yourself from risk, it is necessary to find out full information about the activities of the future counterparty.

There are several types of due diligence:

Commercial

Commercial due diligence consists of market research, forecasting the position of the investment object in a particular sector. Such a check covers a complete analysis of: market volume; its segmentation; company positioning in the market; business efficiency and strategy sustainability; industry dynamics; business rivals behavior, etc.

Financial

Financial due diligence focuses on the study of accounting records and other financial documents for a certain period of time in order to trace the history of the financial condition of the company and make appropriate forecasts.

Legal

The essence of legal due diligence is to analyze the entire volume of legal documentation that takes place during the transaction to identify legal risks and develop alternative solutions.

Legal due diligence usually includes:

• Analysis of the company’s constituent documents
• Checking for the presence of legal disputes with third parties, property seizures and other interim measures
• Investigation of internal documents of the company
• Verification of the organization’s compliance with labor and migration legislation
• Checking the availability of necessary licenses and permits
• Analysis of the formation of the company’s authorized capital, the legality of the appointment of management bodies and their powers

Tax due diligence

Main goal of tax due diligence is to check if the company has overdue and doubtful tax debts in settlements with counterparties, buyers or suppliers.

Tax due diligence usually includes:

• Identification of tax risks and proposal of solutions to eliminate them
• Assessment of the correctness of the registration of primary documentation and the establishment of the fact of the availability of all necessary documents confirming the expenses incurred
• Checking the status of the company’s accounts with the budget for taxes and other mandatory payments
• Assessment of the tax burden on the business as a whole, or for individual transactions
• Analysis of the prospects for changes in the tax burden due to changes in tax legislation or changes in judicial practice.

Fields of application of the due diligence procedure:

• Mergers and acquisitions (M&A) transactions
• Acquisition of shares or shares of the company
• Targeted financing
• Establishment of new representative offices
• Purchase of real estate
• Debt collection in court
• Other major financial and commercial transactions

With the growth of fraudulent schemes in the field of business, owners need to verify counterparties in almost any transaction, the amount of which is significant for the company. Due diligence can be carried out either on a separate block (for example, only commercial due diligence), or in aggregate.

When conducting a full check, a specialist draws up a report that contains the following provisions:

• а brief history of the company;
• information about organizational structure and personnel;
• calculation of net assets and cash flow history;
• analysis of the state of accounting, tax, personnel and financial statements;
• investigation of other issues, depending on the customer’s request.

The compliance procedure consists of conducting an independent audit of the company’s activities for compliance with the current legislation. Such an audit is rather an internal control system that allows you to manage risks, in particular the risks of holding companies and managers accountable. The main focus of compliance is aimed at preliminary system monitoring of events that may lead to non-compliance with the established requirements of the law.

Currently, the compliance procedure is one of the most significant activities of organizations in connection with increased liability for non-compliance with legislation.

Due to the importance of the risks of bringing to responsibility, it is necessary to use a well-established methodology for building a compliance system, an internal control and risk management system.

The main goal of compliance is to minimize legal and reputational risks arising from violations of legislation or professional and ethical standards.

The consequence of non-compliance may be the application of sanctions by regulatory authorities, significant financial losses, or loss of reputation. For example, if an organization needs to be accredited, then in case of compliance problems, the accreditation may be revoked, or, a violation of fire safety rules at a manufacturing plant or in crowded places may lead to proceedings with state supervisory authorities.

Compliance does not include any specific measures, but a set of requirements. Thus, this concept is complex, which includes many widely used regulatory norms, such as labor protection, fire safety, personal data.

Compliance is applied in many areas:

• corporate ethics;
• countering the laundering of proceeds from crime;
• conflict of interest regulation;
• control over the purchase of securities;
• interaction with government agencies.

VALEN company will help to carry out the due diligence and compliance procedure in your organization efficiently and in the shortest possible time. Our specialists have many years of experience in these areas and are ready to provide due diligence and compliance services both comprehensively and in separate blocks. Also, you can contact VALEN for advice on any legal and tax issues.

You can contact VALEN’s lawyers by any of the available communication methods or visit our office by making an appointment by phone +7 (495) 7-888-096.