Investigative Due Diligence: Challenges and Solutions
3 months ago by Lamia Massaad

Investigative Due Diligence: Challenges and Solutions

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Cedar Rose has been leading the way with Middle East, focused Investigative Due Diligence Investigations since 1997. International companies doing or aiming at doing business with companies or persons in the MENA region tend to face many challenges, the main one being corruption, therefore, enhancing the need for investigative due diligence to be undertaken.

This is defined as the misuse of public power by politicians or appointed civil servants for private gains. Corruption at Government level tarnishes the perception of the country`s stability and quality of investment potential thus hindering foreign direct investments. The entire population can be affected as a result of inefficient allocation of resources. It might manifest itself as a simple payment request by a low level governmental employee, commonly referred to as petty corruption. Large scale corruption schemes where decision makers are implicated at the very highest political, executive, judicial or legislative levels is commonly known as the Bystander` effect.

The Bystander effect - is a social psychological phenomenon in which individuals are less likely to offer help to a victim when other people are present. The greater the number of bystanders, the less likely it is that one of them will help.

Corruption at corporate level may manifest itself in many ways but it always leads to the same results: Bad reputation and a loss of market share. Bad reputation and negative commercial standing mean less business due to the lack of trust.

In general - Corruption schemes mainly include:

  • Bribery schemes - the offering, giving, receiving, or soliciting of a thing of value to influence a business decision.
  • Kickback schemes - vendors make undisclosed payments to employees of purchasing companies in order to enlist the employees in overbilling schemes
  • Bid-rigging schemes - an employee fraudulently assists a vendor in winning a contract through the competitive bidding process
  • Economic extortion schemes - employee demands payment from a vendor for decisions made in the vendor`s favor. Refusal to pay the extorter results in harm to the vendor
  • Illegal gratuities schemes - giving or receiving something of value to reward a business decision

These schemes can be committed by the public sector and by private companies, equally. Their existence in both private and public sectors has devastating results. It is worth noting that in some MENA jurisdictions it is said that the police, the thief and the judge are the same person.

Lack of transparency in the MENA region, has its direct effect on understanding the reputation of a subject individual or a subject company. How do you know for instance that you are dealing with a company of good reputation and commercial standing? Open source searches and media scan may facilitate understanding the reputation of a company or a person. Yet, is it enough? Can you take these open sources as trusted sources? The answer is: Definitely not. With today`s access to social media and internet sources anyone and any company can create the profile that suits them more but this would not necessarily be the profile reflecting the reality. They use media and social media platforms to make you believe what they want you to believe. To these companies or persons, Perception is Reality.

It is worth noting companies operating in the MENA region are not obliged by law to publish their corporate and financial information. Some companies do not even care to have a detailed website or any social media presence describing their activities and line of business.

Many Politicians are businessmen and many businessmen are politicians. This may lead to nepotism, favoritism, and leveraging of the existing political system to obtain personal benefits.  The association of a politician with a company may sometimes be visible but this may not be the case most of the time. This is mainly because their exposure will trigger questions regarding any possible conflict of interest and the misuse of power among many other questions.

Understanding the business network such as Ultimate Beneficial Owners UBO Affiliates and business involvements is paramount. Access to corporate information in MENA jurisdictions does not necessarily mean direct access to the shareholders of the company, to its UBOs or even to its affiliates. Access to this information may require exhaustive investigative approaches to various types of sources and commercial authorities. In some jurisdiction, the corporate information is only available in the Arabic language which even adds to the complexity of the whole process especially for International companies willing to do business in the MENA region and which do not have dedicated and specialized Arabic speaking analysts and researchers to overlook the whole KYC process.

Corporate information is not essentially found in one place. This information may be rather decentralized and scattered across different departments of a commercial authority. The concept of one-stop shop is a foreign one to many jurisdictions. This of course only adds to the complexity of obtaining credible corporate information. While some jurisdictions have transformed into e-governments thus facilitating access to corporate information, others are rather complex ones. The investigative process of obtaining corporate information is a manual and complex one that takes days if not weeks.

See more articles on investigative due diligence here.


Lamia Massaad, Head of Research & Analysis

Wassim Antar, Senior Due Diligence Analyst

*** The sole purpose of the article above is to generate public discussion, it has no intention to constitute legal advice. ***

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