Red Flags and Red Herrings: A Decade of Due Diligence on Third Parties

Via Ethisphere.

What trends will we see over the next few years in the field of due diligence? Among other things, a greater understanding that due diligence is not a guarantee. Anti-bribery due diligence is both tedious and treacherous. Elaborate programs have evolved to “prove the negative”. That is, no serious red flags have been uncovered and so it’s safe to proceed with the sales agent, consultant, distributor or other commercial intermediary in question. Many third party intermediaries welcome the shift toward greater transparency and want to establish themselves as reliable, ethical partners to multinational companies. These intermediaries will cooperate in the due diligence process, advise their principals of material changes to their files, participate in anti-bribery training in a meaningful way and help companies avoid risk areas in-country.

Of course, this sort of due diligence may be reasonable, but it’s never wholly safe. Intermediaries with no past problems may set out to pay a bribe. Problems that weren’t uncovered in spite of extraordinary effort, interviews, references, embassy checks and all of the other tools available to companies operating through third parties may eventually come to light. But there is a third possibility and the risk of this possibility occurring grows alongside increased investment in and reliance on due diligence: red herrings.

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