red coffee cup next to napkin reading “your culture is your brand”

The Objective of Due Diligence

There is immense benefit to thoroughly vetting third parties, and it goes far beyond avoiding enforcement actions from the likes of the SEC, DOJ and other regulatory agencies. When you do business with risky suppliers and vendors domestically or abroad, you put your organization’s reputation at risk – and that’s a costly gamble to make.

There has been so much attention paid to due diligence. We have reams and reams of articles highlighting the importance of due diligence. In addition, numerous vendors of due diligence services and technologies fill the marketplace with whitepapers, articles and information underscoring the importance of due diligence and advising on how to conduct effective due diligence.

There is nothing wrong with the attention paid to this important issue. Frankly, over the last 10 years, we have seen an explosion in due diligence issues. Given the Justice Department and the SEC’s focus on third-party risks in the FCPA context, such attention is justified. Years ago, companies conducted minimal (if any) due diligence of third parties, and procurement functions related to vendors and suppliers were focused on financial capabilities and quality issues.

The growth in due diligence systems has been marked over the last 10 years. More companies are implementing robust due diligence systems for third parties, vendors and suppliers, and many are purchasing automated due diligence systems.

There is no question that the motivation for improving due diligence systems has been a direct response to the government’s aggressive enforcement program. As everyone knows, a high percentage of FCPA enforcement actions involved third parties who engaged in or facilitated bribery schemes.

A robust due diligence program identifies potential risks in engaging a specific third-party. Based on due diligence, a company may decline to engage the third-party or design and implement a number of risk-mitigation strategies. In the end, the company’s due diligence system is focused on legal risks from engaging the third party. A risky third party in this context may be likely to engage in bribery to further the company’s business operations.

In the event that the company faces an FCPA investigation, the company will often rely on robust due diligence and mitigation strategies to counter any claim that it “knowingly” engaged the third party with the intent to promote a bribery scheme. Company lawyers will cite the due diligence, monitoring and auditing activities to show that its actions were contrary to an inference of a “knowing” violation.

While this scenario is an important reason for implementing a robust due diligence program, there is more to this issue. Legal risks are one type of serious risk. Another category of risks relates to reputational risks. A company does not want to “do business with” or “associate” with another person, entity or company that itself has a poor reputation or engages in other types of misconduct.

A company creates significant risks when it retains another company that relies on child labor, engages in slavery, violates environmental laws or engages in illegal anti-competitive practices. In other words, a company has to avoid engaging other companies that raise reputational risks.

A company’s reputation for ethical business practices can suffer real and substantial harm when it engages with companies that flagrantly skirt the law or social norms. Such business operations threaten a company’s most significant asset – its intangible goodwill.

A company’s reputation should be promoted as an important aspect of a company’s culture. Employees want to believe in the mission of the company, and adherence to ethical business practices is essential to protecting the company’s integrity.

An important means to protect the company’s reputation is to ensure that the entities with which the company interacts have comparable commitments to ethics and integrity. This is where due diligence comes in and provides an important check on company operations. Due diligence has a broader purpose than just managing legal risks – companies conduct due diligence to protect and promote their culture.

This article was republished with permission from Michael Volkov’s blog, Corruption, Crime & Compliance.

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Michael Volkov

Michael Volkov

Michael-Volkov-leclairryanMichael Volkov is the CEO of The Volkov Law Group LLC, where he provides compliance, internal investigation and white collar defense services.  He can be reached at  His practice focuses on white collar defense, corporate compliance, internal investigations, and regulatory enforcement matters. He is a former federal prosecutor with almost 30 years of experience in a variety of government positions and private practice.

Michael maintains a well-known blog: Corruption Crime & Compliance which is frequently cited by anti-corruption professionals and professionals in the compliance industry.Michael has extensive experience representing clients on matters involving the Foreign Corrupt Practices Act, the UK Bribery Act, money laundering, Office of Foreign Asset Control (OFAC), export controls, sanctions and International Traffic in Arms, False Claims Act, Congressional investigations, online gambling and regulatory enforcement issues.

Michael has assisted clients with design and implementation of compliance programs to reduce risk and respond to global and US enforcement programs.

Michael has built a strong reputation for his practical and comprehensive compliance strategies.Michael served for more than 17 years as a federal prosecutor in the U.S. Attorney’s Office in the District of Columbia; for 5 years as the Chief Crime and Terrorism Counsel for the Senate Judiciary Committee, and Chief Crime, Terrorism and Homeland Security Counsel for the Senate and House Judiciary Committees; and as a Trial Attorney in the Antitrust Division of the U.S. Department of Justice.

Michael also has extensive trial experience and has been lead attorney in more than 75 jury trials, including some lasting more than six months. His clients have included corporations, officers, directors and professionals in, internal investigations and criminal and civil trials. He has handled a number of high-profile criminal cases involving a wide‐range of issues, including the FCPA and compliance matters, environmental crimes, and antitrust cartel investigations in countries all around the world.

Representative Engagements

  • Successfully represented three officers of a multinational company in two separate criminal antitrust investigations involving a criminal antitrust investigation in the District of Columbia and the Southern District of New York.
  • Defended pharmaceutical company before the Food and Drug Administration and Senate Finance Committee relating to application for approval of generic drug.
  • Conducted internal investigation which exonerated company against allegations of false statements in submissions to the FDA and against improper conduct alleged by Senate Finance Committee.
  • Represented company before the US State Department on alleged violations of ITAR which lead to voluntary disclosure and imposition of no civil or criminal penalties.
  • Advised several multinational companies on compliance with anti‐corruption laws, and design and implementation of anti‐corruption and anti‐money laundering compliance programs.
  • Advised hospitals, pharmaceutical companies and medical device companies on compliance issues relating to Stark law and Anti‐Kickback law and regulations.
  • Conducted due diligence investigations for large multinational companies for anti‐corruption compliance of: potential third party agents, joint venture partners and acquisition targets in Europe, Africa, Asia and Latin America.
  • Represented individual in white collar fraud case in Alexandria, Virginia and secured dismissal of criminal charges and expungement of criminal record.
  • Represented company before Congress and Executive Branch in effort to modify Justice Department regulations concerning use of federal funds.
  • Advised and assisted World Bank in review of global corruption policies, enforcement programs and corruption investigations and prosecutions.

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