One of the more substantial outcomes of the recent G8 leaders’ summit was the signing of the Open Data Charter. The establishment of the Charter is not only significant in terms of conveying the attitudes of G8 countries toward transparency, but also in terms of the foreseeable “trickle-down” effect of this approach into other countries, as well as into the private sector. We envisage that establishing the Charter will eventually spell greater openness from companies and facilitate more comprehensive information gathering for the purposes of performing due diligence.
The Charter sets out the principles and best practices G8 nations will follow to release more data, in standard formats, for the private sector to use in delivering digital services to the public. The Charter includes five principles aimed at ensuring that government data is made freely available as a means of boosting both transparency and innovation.
The five key principles of open data are:
1. Open data by default
2. Quality and quantity
3. Useable by all
4. Releasing data for improved governance
5. Releasing data for innovation
The types of data for which there is expected to be greater transparency includes crime statistics, weather data, health, housing, transport and education information. This approach has been widely attributed to a number of factors.
One of the expected outcomes of this step is a flow-on effect to the private sector, with companies being more transparent on corporate data. The basic premise of open data is that when governments publish data sets online, in digital formats that can be easily imported into other software tools and under legal terms that permit anyone to reuse them (including commercially), those outside government can use that data. It is also anticipated that citizens will be better positioned to better scrutinize government and hold authorities accountable. This, of course, is very much dependent on the types of data released.
What will this mean for due diligence?
Some of the key principles of the Charter will facilitate greater access to information on companies and individuals, which may have an impact on prospective business decisions. Many of the difficulties and concerns associated with conducting due diligence are likely to be negated by this open approach, particularly if other countries and private entities follow the lead of G8 countries. The impact on conducting due diligence in the near future can be exhibited in the implications of three of the key principles of the Charter:
1. Open data by default
Currently when conducting due diligence on a prospective business partner, it can be difficult to obtain certain information due to various privacy or security concerns; but with the introduction of the Charter, the range of information available on individuals and entities will grow considerably. As an example, it is likely to provide greater visibility of former government employees who are now in the private sector, or even demonstrating direct links between public and private entities. This, of course, is information of extreme value to entities seeking to comply with Foreign Corrupt Practices Act (FCPA) requirements through the form of due diligence. There are many countries that right now restrict access to corporate records. It is currently impossible in some countries to even obtain basic shareholder information on companies; it is not possible to find out the directors of the company or even its shared capital. If you are conducting due diligence on a proposed business partner, those pieces of information are essential to understanding who is behind the company and how big it is from a financial perspective.
Other examples where data is unavailable is university records. If you are trying to hire staff and you want to check their backgrounds, it is almost impossible to verify their degrees with education institutions. This information should not be confidential (the applicant has listed it in their CV, after all) and should be readily searchable. Perhaps their individual results should not be searchable, but the fact that they obtained a degree and in what year should be available.
It is also reasonable that the directors and officers of every government institution be available. If you are trying to identify an individual and work out whether or not they are a government official from the perspective of the FCPA or the UK Bribery Act, having a directory of government employees of sorts would be highly useful and aid in the due diligence efforts.
Another example, which comes up a great deal in Africa, is the payments that a company has made to “government.” If you are trying to ascertain whether a company secured, for example, a mining lease legally, it would be great to be able to search a record to see what they paid for it. This would open up the payment/charging system to see whether amounts paid were reasonable or whether they were too low, which might suggest a kickback to the local decision maker for the “difference.” Knowing precisely the amount paid and being able to validate that against market value would go a long way toward ensuring no kickbacks and commercial corruption occurred in the procurement of the tenement.
Large companies should be required to list all their corporate structures online and in their annual reports. This will ensure that any side companies that are set up for special purposes are accounted for and limit the use of these companies for “slush funds.” Right now, it is too simple for a company to set up in the British Virgin Islands, hide its directors and shareholders and be used as a shelf company to be an intermediary to move money for illicit means. Large companies should be required to list all their structures and investments for the interests of the public and all shareholders.
2. Quality and quantity
A common problem when conducting due diligence, particularly in developing countries, is the lack of depth of information provided from a government body. Establishing the trend of more detailed information in plain and clear language (rather than incomplete or unclear information) adds distinct value. One area where this will be of importance will be crime-related data, which can often be unclear and lack detail when it comes to information kept on individuals or entities. The lack of crime related data seems unusual for any American citizens who can access criminal history online in almost every state. The same is not the case for overseas, where the information is highly restricted and often cannot be accessed without a court order. In some countries (such as Hong Kong), it is available only if the person who is the subject of the investigation agrees to present themselves and their identification at a local police office. This is not very useful when you are interviewing people for a job and you want to conduct a background check on their criminal history. It might surprise many people that their criminal history screening outside the U.S. is effectively zero.
3. Useable by all
This principal will hopefully lower perhaps one of the most significant barriers to gaining information for the purposes of due diligence. Often, the decision to obtain registry or corporate information is dictated by the cost and usability of such data. With no charges applicable, and no limits to the reuse of such data by citizens, obtaining salient information when conducting due diligence will be considerably easier and make the exercise much more commercially viable.
In some countries, such as China, searching of the registry of government data is often unclear and very difficult. China has excellent data and it is well maintained; however, access is less clear and less controlled. It is common for the information to be in existence but not “publicly” searchable. In effect, this means that you need to pay a bribe to someone at the registry office to search the information and obtain a report. Somewhat ironically, the situation in China means that in order to conduct due diligence effectively, people need to resort to paying small amounts of “tea money” to get access to data. This is also consistent with other markets in Africa, although even the data itself is less clear.
Whilst the direct results of the Charter are yet to become explicitly clear, one aspect which most commentators agree on is that the initiative has triggered a transparency revolution. G8 nations are likely to have set the precedent for best practice, which other nations – and subsequently the private sector – will follow. This has immediate positive ramifications for the availability of quality, useful information that is essential in satisfying due diligence requirements.
Performing due diligence is an integral part of any organization’s association with another business. Any steps taken to allow access to information and facilitate greater knowledge of another party will be of considerable value to any enterprise.
Michael Woodward Head of Legal & Compliance, The Red Flag Group
Michael has a breadth of experience advising multi-national organizations on a range of legal, corporate governance and compliance related issues. A fully qualified lawyer, Michael practiced litigation and competition law in Australia prior to relocating to Hong Kong, and has been involved in a number of major investigations relating to suspected anti-competitive and corrupt behavior. He has also assisted with advising clients on legal issues surrounding directors duties, financial regulation and international trade.