This year AB Lawyers has performed due diligence of its 2,000th counterparty. In this brief manual we would like to share with you our life hacks that throughout the years have proved to be very helpful. Below you will find 5 signs that do not seem to be evident but are essential and should be considered when checking your counterparty.
1.FOUNDERS ≠ BENEFICIAL OWNERS
Why it is important: Most counterparties only inform their business partners about the formal chief executive of their business and its founders. In fact, business can be actually run by completely different people. This can appear to be crucial not only for the fate of your joint projects but also in terms of risks of dealing with a company. For example, if the real business owner is a person put on the lists of sanctions against Russia, cooperating with such business is risky a priori. If you find out that a company’s beneficial owner has been declared bankrupt, it’s highly probable that the same awaits the company itself.
What is to be done:
2.MAKE SURE THE INFORMATION IS JUSTIFIED
Why it is important: Sometimes companies publish on their websites information about licenses, accreditations, patents, membership in SROs, various business achievements, as well as their financial standing. Their business partners often rely on such information and are not too hasty to check it. But in real life it appears that a license has expired, or that not the company but a different legal entity has been accredited.
What is to be done:
3.MONITOR JUDICIAL ACTS
Why it is important: Not always all the data you look for can be found in informational and legal databases. One often has to ‘dig deeper’ to find out information that is vital. It may happen that you perform a counterparty due diligence based on your standard check list, sign a contract and only afterwards, already in the process, you get to know that 90% of your counterparty’s staff are illegal migrants who can be any time deported from the country and your project will be at risk of complete failure, or that your counterparty’s accounts and assets have been frozen under legal proceedings (it takes some time for such data to appear in all databases).
What is to be done:
4.ADEQUATE REGULAR STAFF
Why it is important: For the work to be done well and on time, your counterparty must have skilled staff. If the counterparty has no staff or only 1 or 2 employees, besides running the risk of project failure you may have additional problems with the tax office - it can hold it against you pleading your cooperation with a shell company / an unreliable counterparty.
What is to be done:
5.DON’T RELY TOO MUCH ON PROFESSIONAL LIABILITY INSURANCE
Why it is important: Counterparties often declare that they have their liability and customers’ risks insured. In practice it is sometimes just a marketing trick and you won’t be able to cover even the minimum losses. Quite often insurance rules are written in such a way that you will never get any payments.
What is to be done:
1.FOUNDERS ≠ BENEFICIAL OWNERS
Why it is important: Most counterparties only inform their business partners about the formal chief executive of their business and its founders. In fact, business can be actually run by completely different people. This can appear to be crucial not only for the fate of your joint projects but also in terms of risks of dealing with a company. For example, if the real business owner is a person put on the lists of sanctions against Russia, cooperating with such business is risky a priori. If you find out that a company’s beneficial owner has been declared bankrupt, it’s highly probable that the same awaits the company itself.
What is to be done:
- check the company’s ownership structure using any available informational and legal databases, e.g. SPARK, Integrum, Kontur.Focus, and other resources
- request from the counterparty information about ultimate owners (every company must keep track of these data and report them to public authorities)
- analyze the company data that can be found in the Internet
2.MAKE SURE THE INFORMATION IS JUSTIFIED
Why it is important: Sometimes companies publish on their websites information about licenses, accreditations, patents, membership in SROs, various business achievements, as well as their financial standing. Their business partners often rely on such information and are not too hasty to check it. But in real life it appears that a license has expired, or that not the company but a different legal entity has been accredited.
What is to be done:
- check the data using official resources and any available informational and legal databases. For example, licenses should be checked in the Unified State Register of Legal Entities (EGRUL) and on the website of the relevant agency in charge of licensing / accreditation (for example: https://roszdravnadzor.gov.ru/services/licenses, https://rostrud.gov.ru/rostrud/deyatelnost/?CAT_ID=6267)
- request from the counterparty documents confirming the counterparty’s declarations. For example, if a company declares to be an official brand dealer, in order to avoid counterfeiting request from the company an extract from the dealership contract
3.MONITOR JUDICIAL ACTS
Why it is important: Not always all the data you look for can be found in informational and legal databases. One often has to ‘dig deeper’ to find out information that is vital. It may happen that you perform a counterparty due diligence based on your standard check list, sign a contract and only afterwards, already in the process, you get to know that 90% of your counterparty’s staff are illegal migrants who can be any time deported from the country and your project will be at risk of complete failure, or that your counterparty’s accounts and assets have been frozen under legal proceedings (it takes some time for such data to appear in all databases).
What is to be done:
- analyze judicial acts related to cases involving your counterparty. Not infrequently, when studying the facts of the case, in their judgements courts refer to non-public data that can be found nowhere else but in judicial acts. In this way, one can discover that a company’s chief officer has been held criminally liable for violation of health & safety requirements, which resulted in an accident on a construction site. We advise to check judicial acts related to commercial disputes at https://kad.arbitr.ru/, and for information on other cases - to check data on the websites of respective general jurisdiction courts
- the findings of government audits can be found at https://proverki.gov.ru/portal. Penalties/fines for failure to pass an audit as well as warnings issued to a company are certainly a “red flag”
4.ADEQUATE REGULAR STAFF
Why it is important: For the work to be done well and on time, your counterparty must have skilled staff. If the counterparty has no staff or only 1 or 2 employees, besides running the risk of project failure you may have additional problems with the tax office - it can hold it against you pleading your cooperation with a shell company / an unreliable counterparty.
What is to be done:
- check the counterparty’s staff number using the tax office’s official service at https://pb.nalog.ru/index.html
- request from the counterparty its current staff list
5.DON’T RELY TOO MUCH ON PROFESSIONAL LIABILITY INSURANCE
Why it is important: Counterparties often declare that they have their liability and customers’ risks insured. In practice it is sometimes just a marketing trick and you won’t be able to cover even the minimum losses. Quite often insurance rules are written in such a way that you will never get any payments.
What is to be done:
- if you want to be sure that your counterparty’s liability is insured, request from the counterparty details of the certificate of insurance and insurance terms, and carefully read them
- if the counterparty refuses to provide you with insurance terms, you can check them on the insurance company’s website