Ibrahim Yeku (yekuduke@yahoo.com) is a Legal Counsel on secondment to Total E & P Nigeria Limited based in Port Harcourt, Nigeria.
The saying “busy doing nothing” is an apt description of due diligence professionals who rely on information available on the internet as the only basis for making an informed due diligence decision. The question is, how well informed are internet sources or Google when it comes to due diligence investigations? The art and science of due diligence is centered on the verification of information and the proper fact-finding that precedes decision-making. It is about knowing all that you need to know and considering all facts and factors that may influence your decision.
Google, like other internet sources, provides useful insights for due diligence professionals who do not have an idea of what to do or where to start a due diligence inquiry. It provides a lead through which due diligence questions or claims can be tested. However, the use of the internet as a tool for searching or sourcing publicly available information is often overemphasized. Although Google and other online resources are good, their accuracy cannot be guaranteed. Google as a tool is credible; however, the information it offers may not be credible enough to make an informed decision. This is because Google does not take responsibility for misleading information that may be found from its search engine.
As a precursor to any due diligence inquiry, a due diligence professional must carefully examine preliminary facts and information to identify how due diligence questions should be framed. The essence of this exercise is to examine all claims to determine which is true. If a due diligence professional doesn’t ask relevant questions, the due diligence inquiry will be misdirected. It is a vital error for due diligence to be misdirected; the basis of the due diligence will be defeated and so will the ability to identify risk and uncover misleading information. Sadly, most due diligence professionals are limited to routine checks on Google and other internet sources.
Many times, information on public records is falsified in anticipation of a crime or to gain undue commercial advantage. A good example of this is when means of identification are required during the commencement of a relationship with a vendor or in the course of opening an account at a bank. The customer or vendor may present an international passport or national identification that contains false information. A check on public records will confirm the identification has been issued to the person or entity, but it does not necessary confirm that the information contained within is true. The due diligence professional must first understand why the means of identification is required; what facts or information can be established through the identification; and to what extent the identification can be used to confirm information, such as age, address, occupation, and family ties. The unfortunate aspect of this process is that the due diligence professionals may fall prey to a falsified public record. If information on government public records can be false or misleading, so can information on Google. Due diligence professionals must leave the comfort of their desks and go out to verify information and examine claims and representation. It is not necessary for due diligence professionals to undertake this task themselves. There are third-party due diligence outfits that can be engaged for this purpose. Believing that all is well because Google says so is a fallacy. Here are some of the reasons due diligence professionals should not rely solely on internet sources to reach due diligence conclusions.
Stale information
Oftentimes, information posted on the internet is outdated or has been overtaken by events. Consequently, this information may not have any useful relevance to the due diligence inquiry and may further complicate the due diligence process. Nothing can be more frustrating and embarrassing than when a due diligence professional relies on stale information. An example of this is when an internet search identifies a vendor as a politically exposed person (PEP), but the vendor had ceased to occupy any public office for the past 18 years and ceased to be a PEP by every definition of the word. Prior to the search, the due diligence professional was not aware of this fact. Seeing that the vendor was a PEP, due diligence raises red flags and outlines mitigation measures that require a corresponding action from the vendor. The vendor responds by stating that he has ceased to hold the position for which he was classified as a PEP. It would have been better to ask the vendor and verify rather than reaching a conclusion on the basis of online sources.
Misleading information
Every prudent business will want to cross-check information received from a potential business associate. This expectation is known to prospective customers and clients as well. Hence, prospective business partners will try to meet the expectations of the due diligence inquiry. Some prospective clients may sponsor the publication of misleading information in the media or online to show their business in a positive light. A lot of paid reports and unfounded research published online are tailored to justify the position or representation of a given client. Using online sources requires the ability to read between the lines so a person or entity with a criminal mind can’t highjack the due diligence process. People with malicious intent have a way of refocusing due diligence inquiries to areas that will not expose them in any way. They will try to lead you to sources that will provide you the answers they want you to see. Due diligence professionals must be wary of this pitfall.
Loss of business opportunities
Internet sources can misdirect the path of due diligence by turning it into an endless voyage of search and discovery that will not bring any tangible results to your organization. Imagine the manhours spent conducting due diligence on a vendor that ceased to be a PEP more than 18 years ago. The time spent verifying information from the internet may lead to the loss of a business opportunity. This is because internet sources can broaden the scope of your due diligence more than necessary due to the avalanche of information made available in one search. This affects the response time of organizations. In fact, some business transactions can’t wait on due diligence where the scope is determined by publicly available information.
What should be the approach?
Internet sources should be complementary and be effectively used by skilled due diligence professionals. The saying that “Google never forgets” is a major setback for due diligence professionals. Google never forgets obsolete information, but it may not have the information you need for the purposes of a due diligence inquiry. Due diligence professionals should understand the limitations inherent in the use of internet sources and the potential danger. It is advised that due diligence professionals should always check and cross-check information sourced from the internet either by themselves, if time permits, or through the use of an independent third party. The objective of due diligence must be to clearly define the inquiry from the outset to avoid wasting time and resources.
Takeaways
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The art and science of due diligence is centered on the verification of information and the proper fact-finding that precedes decision-making.
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Although Google and other online resources are good, their accuracy cannot be guaranteed.
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The essence of this exercise is to examine all claims to determine which is true.
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If a due diligence professional doesn’t ask relevant questions, the due diligence inquiry will be misdirected.
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Online sources can misdirect the path of due diligence by turning it into an endless voyage of search and discovery.