The Barchris case, heard before the United States District Court for the Southern District of New York in 1968, centered on claims that information filed with the Securities and Exchange Commission contained material false statements and material omissions (in relation to the issue of convertible debentures).

Cutting to the heart of the matter, the trial judge posed the following question:

“Is it sufficient to ask questions, to obtain answers which, if true, would be thought satisfactory, and to let it go at that, without seeking to ascertain from the records whether the answers in fact are true and complete?”

The answer was no – “it is clear that no effectual attempt at verification was made” – and the result was both expensive and embarrassing for the professional firms involved in the offering of the debentures.

The lessons from the Barchris case apply not just to the world of finance, but to almost any situation in which, logically, it would be sensible to base a decision on sound information. Your company may be about to sign a contract with a new supplier, or about to approve a new executive hire. While it may be quicker and cheaper – at first – to accept an in-house report, or a CV, at face value, independent verification of information provided can save a lot of headaches, and expense, at a later date.

Due diligence can be thought of as similar to the pre-flight checks a sensible pilot makes before flying a light aircraft. The fuel gages may read full, and the ground crew may say that the tanks have been filled, but a visual check is the only sure way to confirm this vital information.

As advances in communications technology put time at even more of a premium (perhaps a subsequent Chimo article can discuss “mobile email – blessing or curse”!), the case for using dedicated professionals whose business it is to conduct due diligence becomes ever stronger.

A dedicated corporate investigations and business intelligence provider (such as Spectrum OSO Asia) is well placed to undertake all of the basic ‘musts’. These include, but are certainly not limited to, searches of litigation and bankruptcy records, regulatory and licensing records, and media and internet searches.

These checks may be conducted by in-house compliance teams, but it can often provide an extra level of comfort to have an independent third-party backstop the in-house work.

In one recent case, a client was on the verge of making a sizeable investment in a privately owned manufacturing facility located in a Southeast Asian country. In-house due diligence on the managing director, who was also the major shareholder, had not raised any red flags. Unfortunately, these checks had failed to determine that the MD was recorded as an undischarged bankrupt in Singapore – a legacy of the 1997 Asian Financial Crisis. While in some jurisdictions a bankrupt may be automatically discharged after a certain number of years, this is not the case in Singapore. This discovery did not kill the deal, but it needed to be addressed: a bankrupt cannot be a director of a company in Singapore, where our client does considerable business, and had plans to vest directorship responsibilities with the MD.

CV ‘padding’ has also become more prevalent, with candidates for senior positions tempted to turn that junior job at an investment bank into something a little more substantive. While such embellishments can be quite easy to detect when they relate to a period spent in, say, New York in 2000, what about when they relate to a period spent in Beijing in 1995?

Again, a specialist firm with resources on the ground in China will be well placed to conduct the necessary checks. In another recent case, we were able to determine that a candidate for a senior management position in a WOFE (Wholly-Owned Foreign Enterprise) in Shanghai had fabricated important sections of his CV. People often think that they can make things up because information will not be checked properly, if at all – all too often, they may be right. Officials at Buckingham Palace made this mistake in 2003 when a new employee later turned out to be an undercover reporter for the Daily Mirror, a major tabloid newspaper, which subsequently printed photographs of the bedrooms of Queen Elizabeth and other members of the royal family.

With industrial espionage and theft of Intellectual Property Rights a very real and present danger for many foreign companies operating in countries such as China and Vietnam, isn’t it sensible to know who you’re dealing with?

To sum up, an effective and thorough approach to due diligence can avert very costly mistakes that can have profound operational consequences and cause significant damage to a corporate reputation.

Spectrum OSO Asia Ltd is a specialist provider of business intelligence and related services in Asia, with offices in Tokyo, Hong Kong, Macau and Bangkok and, through its recent acquisition of CDS Risk Management Asia, Inc., Manila and China. The company is a leading provider of business intelligence, corporate investigation and related services in the Asian region, and also offers dedicated casino gaming consultancy services through a strategic partnership with Spectrum Gaming Group of the United States. CDSRMA has been conducting due diligence and internal fraud investigations in Asia, and assisting clients with crisis management planning, for more than fifteen years. During this time the company has developed particular expertise in Intellectual Property Rights (IPR) investigations and enforcement work, both in China and elsewhere within the region. In 2006, Spectrum OSO Asia conducted due diligence investigations into more than 300 companies and individuals across Asia, in countries including Australia, Cambodia, China (including Hong Kong & Macau), India, Indonesia, Japan, Korea, Laos, Malaysia, The Philippines, Singapore, Thailand and Vietnam.