On this page, we publish some of our expert’s comments in on-line and off-line professional discussions related to due diligence, background screening and investigations. We do this because we believe that direct speech of our colleagues will help in understanding of our vision, practices and standards.
Sometimes it is more important to ask a good question than to find the correct answer and as such even unanswered questions are important for us and probably for our readers/client.
On check-list type of due diligence
Check-list type of due diligence was OK several years ago, when due diligence was only risk-oriented. Currently check-lists work good only in integrity due diligence assignments and compliance checks (so-called “formal due diligence”).
Real business life is much more flexible comparatively with the best check-list ever created and that’s why we should consider each and every due diligence case as a challenge to our understanding of how this exact business works, how it will work in the future and what in fact drives profit of the company.
In my opinion the core problem of due diligence nowadays are back-offices based on monkeys. Big players of the market as well as departments of huge corporations hire a couple of reputable experts and dozens/hundreds of yesterday’s students to do the job they are not ready to do. Experts present/sell services, technically guarantee highest quality, but they rare involved in all stages of due diligence process. It is good if they check final conclusions and review the report. Monkeys are not professional enough to work in a flexible environment, they demand check-lists, standards, prescribed procedures etc. It is obvious, that big players make the market and form clients’ expectations. That’s why we all do our best inventing new check-lists, developing new standards, clarifying clarifications and so far real solution doesn’t present itself.
On fake profiles in social media
Scammers are attacking social media for several years and nowadays, when the World is in crisis, we see that scam and fraud are “growing markets”.
People desperately searching for a new job are ready to accept almost every invitation from “headhunter” promising them a good job for a small payment in advance; girls from countries of the third world are searching for respectable foreigners, but the share of fakes in girls’ profiles are up to 80-85% – buy fake girl a ticket to the U.S. and you will never heard this girl back; oil and gas scammers don’t even try pretending that they are authentic, bad and stupid fakes, but they make hundreds of thousands dollars every day collecting money of nervous oil traders…
Can we really do something to protect our contact-lists from scammers and fakes?
What about authentic profiles controlled by fraudsters and hackers, they are even more dangerous because we never know for sure if the man who sends us the message is indeed the individual we used to see behind the profile. And the last – do you know that up to 40% of top-managers lie in their CV about their education, career, personal interests and technically they are also fakes (but reputable fakes, for sure).
I think that the only way to avoid scam is to behave ourselves responsibly:
1) adding new connection we share a part of our reputation with a new individual and it is our responsibility to conduct a kind of due diligence on the initial stage of the contact.
2) scammers are always on the dark side, they offer deals and relations we’d never share with public (gray financial schemes, sexual relations with a person of a younger generation, position that doesn’t match our qualification, inheritance of nonexistent relatives etc.) – don’t do anything you’d never tell your mam and scammers will never bite you.
3) If you’re a public person with 100500+ connections, scam and fake profiles is a part of your everyday life. No man can control such a huge network by himself – hire PR manager and let him/her do the job for you on a fee basis
Is anyone marketing investigative services to local small business? If so what type of services do you offer and which services seem to be the most popular?
We worked with local businesses years ago and in another country but our success story was not in the list of services but in customers’ relations management and specific type of budgeting.
1. Small business considers its problems as unique and extremely important – 1000 dollars theft is as important for them as multimillion fraud for international company, and that’s what should be taken into consideration first. You can’t say “ah, this problem is too small – you will spend more money paying the investigator, just forget it”.
2. Small business owners don’t like standard services and price-lists. Let them know that you are ready to help them in any matter (no doubt legal and within the boundaries of the really), build trust and do you job well.
3. Often the budget is a biggest problem – they can spend 200 USD every month, but can’t afford 2000 USD for full sized research/investigation. We offered a kind of monthly contract with unclear boundaries (remember item 2 – we’ve already built trust) and if one day bad thing happened we helped them with no charge within this long-termed contract and sometimes provided services with no charge just covering direct expenses.
4. Local companies knows everything about their small markets – beware of attempts to provide expertise on this market if you do competitive intelligence or a kind of marketing researches.
5. Love these small local companies and they will be grateful and loyal clients
Do you trust the accuracy of background checks conducted by 3rd party vendors? How reliable are they?
In my opinion this question is complex and must be considered from all sides.
1. Can we rely on pre-employment background check results in general? – No, because it gives us only additional data which must be used as a part or appendix to applicant assessment made by the recruiter or HR professional. Pre-employment background check results are helpful, but they can’t make the decision for you.
2. Can we rely on references? – Partially, because even authorized employee of the company can give us unreliable data about the applicant if they had negative/positive personal relations. There are means of references validation, but these means are comparatively expensive and the employer rare agrees to pay for their implementing. Moreover, references depend on local culture of the applicant and his former employer. It is almost impossible to get negative response from the Japanese former employer unless you applicant was claimed as a fraudster, in Russia most references will be negative; in the States it is probable that you will have some data about applicant “sex relations at work” considered as extremely negative reference, but in Russia you’ll heard that “the guy is very successful, women love him” and the reference will be positive etc.
3. Can we rely on the pre-employment screening result of the 3-rd party vendor? – It depends on validity and legitimacy of resources this vendor uses in his work. It is extremely important if you are involved in international cooperation and need to “screen” foreign employees to understand HOW exactly your vendor will operate during the BG screening process, what kind of resources he will use.
Do you use a graphics program to chart some of your cases? If so, what applications do you use them for and what programs do you recommend?
James Cronin, MPA, CFE
Owner, Seattle Insurance and Legal Investigations
We use i2 Analyst for big projects, but regular cases can be managed and presented to the client in simpler programs like Mind Manager or Ms Visio. For time lines and project management I use Ms Project 2010. For social networks analysis and “connecting dots” we use Cytoscape and our own social network’s crawler for raw data extraction.
I love Mind Manager because it can export the chart and comments to Ms Word in a second. Half an hour and you have your report ready. Several times it saved my projects when I was asked to make urgent progress report.
Ms Visio helps me in analyzing and presenting corporate structures, business-processes and basic time lines. In a few Due Diligence projects we were forced to use BP Win to estimate operational expenses and risks of future merged enterprise.
Do you think Fraud and Coruption by government employees is on the rise?
Michael G Kessler
President at Kessler International
In my area (Russia & CIS) corruption is traditionally high.
During recession (since the mid of 2009) bribes level increased +7-10%.
On the other side, while business is in trouble, there are fewer opportunities for governmental employees to ask for bribes, so in general their income is the same as it was before the recession.
Do you turn away prospective clients or do you do work for anyone that comes in the door with CASH?
Michael G Kessler
President at Kessler International
With no doubt the markets are different, but while working with prospective client we use the following technology which is proved to be effective in our area. Abstract from my previous interview:
WOULD YOU LOWER YOUR PRICE DRAMATICALLY BECAUSE THE PROSPECTIVE CLIENT SAID THEY CAN GET THE SAME WORK CHEAPER?
– In most cases the client can’t compare the quality of the work before the work is done.
E.g. if the client asks us to quote representational due diligence project and my estimated budget is 25 000 USD while my competitor is stated that he can do this work for as low as 10 000 USD I prepare step by step description of the project and we discuss the need and importance of every step with the client. Often the competitor can’t prepare detailed description of his work and the only thing I can do in this case is advice my client to accept/mitigate the risk of poor quality. Sometimes the client is ready to exclude several steps to make my work cheaper and then (if it is not against my ethics) we can cut the price.
Sometimes when our competitor is “private security specialist” his work is certainly cheaper and I have to inform the client that the price includes our risks: if the competitor fails to make his work done he will lose only one client, but if we fail – we can lose our reputation and even market share. It is a strong argument during negotiations.
If the client has a small budget it is our responsibility to find the cheapest reasonable psolution.
If the client would like to check e.g. creditability of the subject, but he can spend only limited budget, we try to offer cheapest methods of data-mining and data analysis.
HOW DO YOU HANDLE THE CHEAP CLIENT – WOULD YOU DO LESS THAN QUALITY WORK?
As I mentioned before, if the budget is limited we can’t use some data-mining methods or informational sources. We fix these limits before the project and I see no reason to treat results of such project as “poor quality”. I think “limited to data-mining and analysis methodology” is a good substitute.
THE INDUSTRY IS MORE COMPETITIVE THAN EVER-HOW DO YOU STAND OUT FROM THE CROWD?
During the crisis while some companies decided to cut their expenses and targeted on partially-legal activity we made the decision to go in the opposite direction: we hire new employees with strong expertise and high rates. As a result we win a market share which is free because of the crisis (as I’ve said many companies decided to cut their expenses and now the quality of their services is below clients’ expectations). It is obvious that the crowd will compete underbidding the market and I see no reason why we should play this game.
Can we quantify reputational risk? Where does it belong?
Staff Writer, Operational Risk & Regulation, Risk.net
I think it is simpler to talk about brand value risk, because the methodology of its measuring is more standardized and comparatively well-known. I don’t expect banks to be interested in adding reputational risk to their ICAAP.
I doubt that my opinion will be supported by the rest of the Group, but measuring risks of non-value assets is nothing more but client’s money spending. I prefer to talk about brand value because:
1. The brand can be sold separately and has a market price that can be measured by independent market experts; reputation can’t be sold: it can be built or lost only.
2. Talking about business point of view, brand is a nearest concept to reputation, because both concepts add value to the product and increase sales volume.
If I’d be asked to measure reputational risk I’ll direct my team on measuring of added value of the product and/or service structure, client’s ABC structure and dependencies. It is possible that some indicators can be developed after the appropriate research but they will also 95% correspond to brand value risks measuring.
Over the last few years there’s been increased interest in conducting competitive intelligence in developing countries, both from the “outside” (global companies selling in that marketplace) and from the “inside” (national companies expanding both locally and internationally).
How has this development affected the way your company approaches CI? What are the potential long-term effects on CI processes and procedures which have been primarily developed in ‘western’ countries?
Director Competitive Intelligence Research
Talking about Eastern Europe and especially former Soviet countries, there are many trends in CI these days.
1. Western practice adaptation and development – hi-tech companies, banks and insurers are trying to implement regular procedures of CI in their business practice. Operating in recession they face two alternatives: a) reinvent technologies of CI, cut expenses and implement “kid size” projects, b) hire western consultants and hope that business will go on better. In fact both alternatives lead to poor results. There still lacks of local professional CIs on the market, on the other hand, western experts are not familiar with Russian business practice.
2. CI based on security department – it is a “great” invention of Russian mid-sized businesses. Almost every company has so called “security department” – problem solving structure often headed by former police or FSB officer. It is very successful when company needs support when it is attacked by raiders or governmental authorities but not effective when the CEO needs actual business data or forecasting.
Do you use letters of recommendation?
Experienced ARM Consultant and Debt Buyer
In Russia (security & investigations industry) written references are very important during the process of preliminary negotiations with the potential client. Moreover it is a must to present references if you fight for governmental contract or plans to work with top-10 Russian companies.
The effectiveness and ability to get these references depends on type of services.
Guardian services, CCTV (small projects): it is easy to have a reference letter from the client even if there were problems during cooperation. Effectiveness of these letters is comparatively poor but we still ask for written feedback and use it as an appendix to governmental competitions’ documentation.
Big projects with technical equipment installation (CCTV, Intruder alarm of a factory etc.): Effectiveness of these reference letters is very good – potential client usually examines this document, gives a direct call to the company which recommends us to find our details of cooperation.
Collectors agency: we rare ask for written feedback because the potential client will make his decision if he’ll trust our expertise in his exact case and it doesn’t matter how much money we saved to our previous customers. Only if the potential client trusts our ability to solve his problem the project will go on.
Detective, Due Diligence & Background screening services: if we work with the “end-user” of the assignment he can give us written feedback. We use these letters of recommendations as a strong argument during negotiations with the potential client. On the contrary if the project was fulfilled through partnership (mainly international contracts) it is almost impossible to get feedback. “Dmitry, we know you are good and it was nice to work with you. We will mandatory continue our cooperation in future, but we prefer not to promote our partners and keep your contact details as our competitive advantage” 🙂 It is usual feedback from either strong international corporation or local market leader. I dream to have written references from my partners because 2-3 times I lost contact with my foreign contractor when his top-manager resigned from his job and simply forget to give new employee my contact details.