Due Diligence: What You Don't Know Can Hurt You

With the increasing volume of mergers and acquisitions and hiring of key personnel, a former FBI agent said it is critically important for those making decisions to know who they are bringing into their business.

Robert Huff, managing director, corporate investigative and security services with Aon said that incidents in the past, where firms have hired people who were hiding a criminal past or lied about their educational background, have cost companies financially and damaged their reputation. These discoveries, after a deal or hiring, could prove to be devastating if due diligence is not practiced on the front end, the former investigator asserted.

His discussion on this issue is part of a continuing series of seminars sponsored by Chicago-based insurance broker Aon at www.aon.com/webseminars.

One primary concern, from an acquisition standpoint, Mr. Huff pointed out, is violations of the Foreign Corrupt Practices Act (FCPA) and the Patriot Act. Both prohibit activity with foreign governments ranging from acts of bribery to dealing with terrorist groups.

If a company looking to acquire another company has not investigated for these violations, the acquirer could pay some substantial fines for these violations, Mr. Huff explained.

"It's real money and real sanctions being applied in increasing amounts," he noted, especially for violations of the FCPA act.

When it comes to mergers and acquisitions, performing due diligence allows an individual to understand the true price of a deal and whether it's worth the investment.

On the hiring front, Mr. Huff said due diligence is not limited to hiring within a company, but extends to vendors, sub-contractors and others. "It is critical to understand who you are dealing with," he said.

Due diligence also is critical in what he terms litigation areas, that can include dealing with expert witnesses in deposition or finding background material in a proxy fight to better understand an opponent. It can also strengthen one's position and help avoid "damaging, embarrassing and costly revelations."

While there are many public sources to utilize in performing due diligence, he said it is important to hire people with expertise in investigation because not all material is public. Experts include professional services firms, investigative reporters, library services and former law enforcement officers.

Ultimately, a firm may find it needs to prioritize its due diligence needs because of budgets or time constraints. The best approach is to prioritize the approach and watch for any red flags that raise concern and require further inquiry, he said.