Online and Offline Fraud Due Diligence in the U.S. and Offshore
National Fraud Center
LexisNexis Risk Solutions
An effective due diligence program requires a combination of both online information research and offline “field” investigations. Performing one without the other will often result in a significant amount of background information that may still miss critical elements that would have been found through a more comprehensive approach.
The global need to know as much information as possible before making strategic decisions and entering business relationships has been driven by:
the rising cost impact of fraud on worldwide companies;
an increasingly global economic environment; and
the need to comply with federal and industry anti-fraud and money laundering guidelines.
This paper will discuss the growing acceptance of online information in due diligence investigations due to its speed and cost efficiencies and, increasingly, the sophisticated report or profile capabilities of commercial online services. The paper also will explore the relevance of offline research and investigation and how the two can work together to create a better due diligence process.
Online Due Diligence
The Internet has opened many avenues to research specialists seeking information to support and influence the making of strategic business decisions. Through acquisition of competitors and other related specialty information providers, and aggressive procurement of additional information, a number of U.S. information services and management companies have compiled vast quantities of public record information. In many cases the information is obtained from U.S. state agencies for a fee and merged with information from other sources to create a profile on an individual or company.
Many companies utilize online information sources because of the speed in which the information is received, the amount of information gathered in that short time and its relatively low cost. Newer report products can compile complete profiles on individuals and companies using a combination of public records and nonpublic directory information in less than ten minutes at reasonable costs, with varying degrees of relevance and accuracy of the data. The information contained in these profiles may include current and past addresses, phone numbers, partial Social Security numbers, other names by which the individual or company may be known (AKAs), names and current addresses and phone numbers of other people who live or have lived at the same address, subject’s date of birth (DOB), names and addresses and phone number of neighbors, driver’s license information; and bankruptcies, judgments, suits, liens, professional licenses, etc.
However, the quality, frequency and consistency of information from the individual U.S. states or other jurisdictions can vary widely. Each U.S. state or other information source determines what information they will release, how frequently their records will be updated, the frequency of the data releases and the fee for obtaining it. In a number of cases, information available from one state is not available from another. Also, there is no consistency in the discrete data elements each custodial agency chooses to include in any one type of record, such as a driver’s license or mortgage deed. This inconsistency tends to reduce the accuracy of online information databases unless the provider has developed sophisticated indexing technology to account for the variations.
Currency and completeness also can be an issue with online information, because updated files are only made available for purchase by commercial aggregators a few times each year.
Likewise the availability of online information on non-U.S. individuals and companies varies widely depending on the country. Company information is more prevalent than personal information, but it too is often far from comprehensive and may not be current enough to rely on for making strategic business decisions.
Selecting an online information services provider is as important as the data itself. The best services employ or consult with former investigators to design their information products so they conform to the tasks and activity cycle of the due diligence investigator. Leading information services also design their final report products so that they include only relevant, verifiable information on individuals and companies from authoritative and reputable sources. The final report product is organized and formatted for presentation to the customer with substantiating documents included or available by linking electronically to another source.
Offline Due Diligence
Offline due diligence refers to the gathering and analysis of information by an investigator without the use of the Internet or electronic information services. The accuracy and comprehensiveness of offline investigative due diligence depends on the experience, skill and contacts of the investigator. Identifying local sources of information and understanding how to analyze it in order to reach conclusions is the essence of the added value provided.
A good investigator also is skilled in conducting interviews, surveillance, audits, internal investigations, electronic sweeps of executive offices and other investigative services beneficial to clients operating both domestically and in foreign jurisdictions.
The investigator can retrieve public records and other non-publicly available information from the U.S. or foreign sources that is not collectible for inclusion in online databases. This is particularly important outside the U.S. where an onsite investigator, has, in many cases, the ability to obtain the required information on a local individual or company.
Advantages of offline investigations are that they are generally more focused. Because someone with investigative experience gathers the information, only relevant information is included. The investigator is uniquely able to provide information analysis, guidance and recommendations based on in-country experience.
The resulting reports from offline investigative due diligence are often given to the customer in final presentation format with the relevant information highlighted and analyzed.
Drawbacks typically associated with offline due diligence include a higher cost and a longer turn-around time for the information as compared to online research. Depending on the information required and the geographic area in which it is conducted, offline due diligence delivery times and costs vary widely.
The Growing Need for Due Diligence Consultancy
Due to global expansion of many markets, companies are moving into emerging markets in the Americas and overseas jurisdictions. The more unfamiliar the jurisdiction, the more the need for thorough, proactive due diligence and compliance components.
In many cases, the in-house security or compliance department may need supplemental investigative resources, expertise and contacts to effectively conduct inter-state or foreign inquiries to perform all or a portion of the investigation.
Regulators in foreign countries often hold accountable both the guest company and the individuals (consultants) with whom they conduct business and their associates. Therefore, it is of paramount importance to have the ability to conduct both domestic and foreign due diligence thoroughly and effectively before signing agreements and expending resources with a new business associate.
An effective due diligence process reduces the risk of negative publicity, decreased stockholder value due to criminal, civil or regulatory sanctions and raises the likelihood of beneficial and prosperous business associations. The scope of required due diligence today and the added complexities of complying with different jurisdictional regulations requires an approach that incorporates both online and offline investigative techniques. More National Fraud Center customers are finding that a combination of both techniques are prudent and cost effective because of advanced electronic tools being offered by industry leading information services and the highly skilled, efficient services of investigative personnel.
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