The value of Local Site Verification in Enhanced Due Diligence

Adrian Protogeros, Managing Partner, PSI Proactive Strategic Intelligence*

So you have entered your pre-contractual phase and are currently in negotiations with that new perspective foreign company collaborator. Maybe you are forming a new joint venture somewhere in the Middle East to participate in a large infrastructure state tender. Maybe you are expanding your local sales channels in one of the fast evolving countries in Africa. Or maybe you are getting more competitive prices for your manufacturing components from a new supplier in Eurasia. The company is good in their communication and has provided you with all necessary information. All is proceeding well.

Your trusted business intelligence provider, reflecting your own strict policy for high integrity and low risk collaborations, has also done their best effort due diligence to ensure all is proceeding smoothly. They have visited the local registry, the local chambers, they have obtained all the available formal documentation and you are aware of the company’s directors, the shareholders, and even their 2nd-tier shareholders and UBO. Your provider has done media and OSINΤ research in the local language and also came in contact with key local unofficial sources to provide you with a thorough reputational assessment of the company and its owners. Financials provided by the company itself have been studied and appear healthy and solid. So there is nothing to worry about. Or is it?. Wait. Didn’t they send you a picture of their headquarters somewhere in one of their emails?

Local Site verification is the process, whereby a local operatives team visits a perspective collaborator company’s local headquarters/plant/installation/offices and via legal and ethical procedures, collects hands-on intelligence regarding the subject’s local operations. This includes visiting the actual premises, taking pictures, evaluating installations and asking local associates and neighbors about the company’s activities and presence in the locale.

It is part of human nature to sometimes exaggerate. In today’s harsh competitive business environment, aggressive marketing and promotion can sometimes even lead to misdirection. The pure physical distance between you and a foreign company thousands of miles away, may also be a factor enhancing the levels of exaggeration which one can perceive as one they can get away with. No one expects to find you in their own back yard. But when you do get there, the results are quite interesting.

In the 14 years that we operate in the field of enhanced due diligence, we have performed over 1000 local site verifications for subjects in over 40 countries in the Middle East, Africa, Eastern Europe, CIS and Eurasia. The statistics speak for themselves:

  • In 1 out of 4 cases, visiting the local headquarters of a subject has revised expectations from the collaboration and/or increased related business safeguards.
  • In nearly 1 out of 10 cases, local headquarters indicated considerable exaggeration of the subject’s capabilities, and resulted in serious revision of the contractual terms.
  • In roughly 1 out of 25 cases, local headquarters were unacceptable for the form of the perspective collaboration being planned and in certain cases the collaboration was terminated as a result.

So does this mean we will only do business with companies with nice large shiny offices and modern spacious manufacturing plants? No, not at all. Many very successful businesses of today as we all know, have started from someone’s own garage. However you cannot have top notch manufacturing from a garage or someone’s own back yard, or a derelict warehouse. You cannot have optimal transportation logistics from a rural installation, only connected to the transport grid with dirt roads. You cannot have a supposedly 20-staff modern services provision company operating out of the ultimate beneficiary owner’s own living apartment. These are all real life cases as examples of the numerous ones we have come across.

In the era of analytics tools, combinational statistics and database reports, Local Site Verification remains a valuable tool in enforcing Integrity, Lowering Risk and ensuring Compliance. To date, still nothing can replace the penetrative visibility and value of the primary research and local, hands-on intelligence collection offered by Local Site Verifications of your perspective collaborator’s headquarters, premises or installations.

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*Acknowledgement: This article was first published on October 19, 2016 on LinkedIn Pulse by Adrian Protogeros, Managing Partner, PSI Proactive Strategic Intelligence, and is republished here with kind permission of the author.