Compliance and due diligence

Jan, 16 2020

Contents:

Due diligence and compliance are the procedures which are necessary for conducting any business activity. Both concepts are interrelated as they have a goal of avoiding as much as possible any legal and financial risks for the owner of organization or investor.

Before building relationships with a new counterparty or potential business partner, executives are strongly advised to conduct a detailed verification so as not to run into fraudsters or dishonest individuals. In other words, before investing in certain relationships and protecting yourself from risk, it is necessary to find out complete information regarding the activities of the potential counterparty.

There are several types of due diligence:

Commercial

It is confined in market research, predicting position of the invested object in a particular sector. Such verification covers a full analysis of market volumes; its segmentation; company positioning in the market; business performance and strategy sustainability; industry dynamics; competitors’ behavior, etc.

Financial

It is focused on research the accounting and other financial documents for the certain period of time with the purpose to trace the financial history of company and make the predictions accordingly.

It consists of the analysis of the entire volume of legal documentation that takes place during the transaction in order to identify legal risks and develop alternative solutions. Legal due diligence usually includes:

  • Analysis of the incorporation documents of the company
  • Check for any ongoing or previous litigations with third parties, property seizures and other security measures
  • Analysis of company internal documents
  • Verification of compliance with labor and migration laws b
  • Checking the existence of necessary licenses and permits
  • Analysis of the formation of the authorized capital of the company, the validity of the appointment of management bodies and their authorities
  • Tax

It consists of checking the company for the presence of past due and doubtful tax debts when settling with contractors, customers or suppliers. Tax due diligence usually includes:

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

Scopes of the due diligence procedure:

  • Mergers and acquisitions
  • Acquisition of shares or company shares
  • Special-purpose financing
  • Establishment of new partners
  • Purchase of real estate
  • Debt collection in court
  • Other major financial and commercial transactions

With the growth of fraudulent schemes in the business sector, owners need to check counterparties in any transaction, the amount of which is significant for the company. Due diligence can be carried out both in a separate block (for example, only commercial due diligence), or in total.

When conducting full verification, a specialist draws up a report that contains the following information:

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

The compliance procedure is to conduct an independent verification of the company for compliance with applicable law. Such a verification looks like an internal control system that allows you to manage risks, in particular the risks of holding companies and executives accountable. Compliance is focused on preliminary systematic monitoring of events that may result in non-compliance with the established requirements of law.

At present, the compliance procedure is one of the most important activities of organization in connection with increased responsibility for non-compliance with the law.

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

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

Non-compliance may lead to the sanctions by regulatory authorities, significant financial losses or loss of reputation. For example, if an organization must be accredited, then in case of problems in the field of compliance, accreditation can be revoked. Or, violation of fire safety rules at a manufacturing enterprise or in crowded places may result in 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 applicable regulatory standards, such as labor protection, fire safety, personal data.

Compliance is applied in many areas:

  • corporate ethics;
  • anti-money laundering and combating terrorism;
  • regulation of conflict of interest;
  • control over the purchase of securities;
  • interaction with government bodies.

VALEN will help you conduct due diligence and compliance procedures in your organization efficiently and high quality. Our specialists are very experienced 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 the lawyers of VALEN by any of the available methods of communication or visit our office by making an appointment by phone +7 (495) 7-888-096

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