Had the exporter conducted due diligence, the company might have concluded that the buyer was not legitimate, which would have prevented the problem in the first place. (To be fair, this can happen anywhere; however, in my experience, China was the preeminent player). Due diligence is not a guarantee, but it can certainly mitigate risks.
Simply stated, due diligence refers to the steps taken by a company to learn about a potential partner’s financial health, business acumen, corporate structure, owners/officers, experience and reputation. Companies conduct due diligence to mitigate risk and increase their confidence as they contemplate working with a potential partner. Your company should perform due diligence as a standard practice. Moreover, when your potential business partner performs due diligence on your company, accept it as an indication of the former’s business acumen and attention to detail.
Further, note that the U.S. Securities and Exchange Commission and the U.S. Department of Justice have faulted companies for failure to maintain adequate compliance procedures regarding proper due diligence when working with international third parties.
The U.S. Commercial Service (CS) provides the International Company Profile (ICP) at a reasonable cost to help U.S. exporters learn about potential partners. An ICP typically takes about 20 business days to complete, with the clock starting after payment is received. Many years ago, the CS discontinued the highly regarded ICP out of concern that the agency was competing with the private sector. After businesses of all sizes across the country complained that they were deprived of an outstanding government product, the ICP returned and remains one of the CS’s most popular services.
Many companies offer due diligence services. One of the most well-known is Dun & Bradstreet. Another is Kroll, which focuses on corporate security. Large tax advisory companies such as PricewaterhouseCoopers, Deloitte, Ernst & Young, KPMG, Baker Tilly, and BDO Consulting also provide due diligence services; however, they focus more on mergers and acquisitions, and joint ventures. Finally, larger law firms with international practices often conduct due diligence on clients’ potential international partners.
I often advise my clients to buy, if they can, an ICP from the U.S. Commercial Service and a report from the private sector. Between the two reports, companies should have all they need to make an informed decision about the potential partner. At least buy one report.
During my career with the U.S. Commercial Service, I encountered a number of companies that were willing to take shortcuts in the due diligence process. For example, some only wanted to know if the potential partner was known to the commercial section of the U.S. Embassy or Consulate in the potential partner’s home country. If the answer was "yes," the client was often satisfied. If the answer was "no," sometimes the client would be reluctant to move ahead, but other times, a "no" response was not a negative factor. This is a troublesome strategy. Do not rely on whether a potential partner is known or not known to a commercial section, and don’t rely on promises, handshakes and impressive websites.
Due diligence is a vital component of your company’s international business strategy. It must be done consistently and thoroughly.
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