Due Diligence for the Experienced

He thought he was a good judge of character.  He’d been around and seen a lot of things.  When approached by a potential customer who wanted to make a large purchase, he was excited but hesitant.  Of course, due diligence was necessary.  Then, the “customer” began to disarm the seasoned business owner.  They often talked about their families.  Friendly negotiations took place.  The business owner even received some free tickets in the mail to a local sporting event.

She drove up to the building in a BMW.  An attractive appearance always accompanied her radiant smile.  The perfume didn’t hurt.  She was a new sales representative for construction equipment in a male-dominated industry.  The company she worked for had an impressive website.

Sadly, neither of the scenarios was legitimate.  Both the supposed customer and alluring salesperson were con artists.  Our experienced business owners lost tens of thousands of dollars.  It wasn’t just the financial loss.  Their reputation suffered.  Much of it self-induced by the embarrassment.

Before thinking it couldn’t happen to you, let’s pause.  Deceit evolves but has familiar patterns.  Due diligence is performed by smart pro’s but yet, even they can be taken in.  A compliance manager was good at his job but he was not privy to some of the latest fraud trends.  He knew something wasn’t right but it was only when an investigator pointed out problems, did the compliance manager fully understand.

Do you believe that an internet search is enough?  Too often the best rely on reviews and what data can be pulled from the web.  Most will stop if a red flag appears.  Most, but not all.  You see, humans tend to explain away the flags.  The possibility of making money can override any concerns.  Oh, then there is the fear of appearing insulting if you probe too much.  Perceived rudeness could kill the whole deal.  I’ll explain an option for that in a moment.

The internet is a wonderful data tool.  Certified Fraud Examiners and everyday consumers use them routinely.  Even the non-pro might know some key areas to assess.  But it’s not just the common, but the uncommon boxes to check off.  Do you consider what is not present?  Then, there are those evolving trends.  Also, if you’ve never been ripped off you may have a false sense of security.

The process of due diligence is a relative one.  Not all methods are created equally.  What one considers very thorough another sees as only surface work.  Huge vulnerabilities may be overlooked.  Or, a new scam involving an old method.  Sometimes, it’s just a subtle twist.  Normally, you’d be suspicious but her smile got to you.  Even a partial payment was made on all that inventory you shipped.

Let’s say you’re charged with checking out a prospective client.  You find real concerns but executives above you won’t listen.  Maybe it’s not that they won’t listen necessarily, but they try to gloss over your discoveries.  Or, advise you to look at the bigger picture.  The bigger picture can be a big-time fraud coming your way.  A number of reasons may exist for proceeding with a transaction but you’re the only bump in the road. Something says, it just doesn’t sound right.  Perhaps you can’t articulate your reasoning.  You’re the only one not being a team player. 

Exhausted, because you see a train wreck coming.  What can be done you ask?  Take a breath and recommend an outside party intervene.  An unbiased set of eyes that will be thorough.  Importantly, one who is keen on the current direction of fraud.  Finally, due diligence has no stake in the game.  Now, perhaps new objections arise.  What do we need to pay a consultant for?  What could they see that we don’t?  On and on it goes.  I suggest you respond with some big picture questions of your own.  Cliches if you will, but some that can be appropriate for the situation.  Ponder on asking if it was personal money vs corporate money would you still want to go forward.  How about if the executive would reimburse the company for any loss.  I know that’s not reasonable to ask, right?  Okay, ask this – How much can we afford to lose to a scam?  Hopefully, the answer is nothing.

Zane Kinney is a Certified Fraud Examiner and Private Investigator.  He is the principal consultant for Astinel Security & Forensics.  Astinel Security & Forensics serves the legal community, individuals, and business owners with private investigations, forensic reviews, and specialized investigations.