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Why Database Checks Alone Are Not Enough For Due Diligence

Database checks - Image from pixabay by geralt

Database checks entail an extensive investigation into a structured database. Consulting international and national databases assists in determining whether a candidate has ever been associated with any actions connected to fraud or crime. On the other hand, due diligence is the process of gathering and verifying relevant information about a company or person. This information is then used to enable the ordering party to make an informed decision.

Corporate compliance professionals increasingly agree that large firms must conduct due diligence on third parties. However, far too many businesses still employ a standardized approach to access their universe of third parties, checking each one against a set of databases and excluding any that score too poorly. Regulators urge businesses to apply a risk-based approach to due diligence because the process may result in mistakes.

Carrying out a database check or due diligence involves certain things. This may include verifying the educational credentials, work experience, address, and self-attestation of the key individuals associated with the investment partner. In addition, one may review any sanctions and their implications. Confirmation of the legal standing of the investment partner and assessing risks via regulatory filings may also be included. Moreover, identification of civil and criminal issues, including debarment, suspension, legal action, financial matters, or adverse publicity, is encompassed in a database check.

The compliance specialists involved in the vetting process find database checks and due diligence extremely instructive. However, their approaches and purview differ and split into two independent categories. Database checks are carried out by inserting search data into a database and assembling the automatic results. In contrast, quality assurance reports are written by experts called research specialists. Then, information about the person or object of interest is gathered from various sources.

While database checks and formal due diligence reports on third parties have advantages, they cannot be compared. Due to differences in their study backgrounds, methodology, scope, and linguistic risk, they cannot wholly account for all the consequences of the Foreign Corrupt Practices Act (FCPA) and the Anti-Bribery and Anti-Corrupt (ABAC). Their discrepancies start here because of the disparities in their compliance levels.

Your motivations for looking into the matter and your goals come first. That's a crucial distinction because your intents and purposes will guide your process and research. They'll assist you in determining the depth of your research, the best sources to employ, and the implications of your findings for you or your organization. 

Database checks and due diligence - Image from pixabay by geralt
Database checks and due diligence - Image from pixabay by geralt

What Distinguishes Database Checks?

1. Training

It is crucial to thoroughly evaluate the level of competence of the person generating the results from a database check or due diligence report before gathering information for the vetting procedure. Research analysts with formal training are utilized in due diligence reports. They are aware of the information that can be legally obtained for due diligence, which is why they can do so. Additionally, they know how to follow local and national data privacy laws.

2. Various Information Sources And Breadth

Database checks contain a massive volume of data, but may also not be a vast amount of information. In cases of absent or out-of-date databases, this can result in a flawed, disjointed evaluation of the third parties' risks. Due diligence, however, employs numerous, varied sources that will cross-reference any old documents and fill in any gaps in knowledge. This variety of sources includes court bulletins, online searches, and local language media.

Because of this, due diligence can identify hazards across a broader range and identify problems with the FCPA and ABAC that would not have been noted in the databases. The information is then gathered into a single file for the compliance specialists to review. Using this strategy, they can examine the risk profiles of their third parties comprehensively and contextually. This is crucial for high-risk, overseas third parties who are more likely to violate FCAP and ABAC requirements.

3. Limits

In cases of compliance checks, limits are often limited. Compliance checks in the cases of vendor approvals or licensing requirements often have limitations on how far you can check or how far you can go in the database. Meanwhile, in the case of due diligence, there is no such thing as limitations, and restrictions do not apply. The research analysts can look for any data without the limits of the past of the third party.

4. Tactical Vs. Strategic.

The final aim of database checks is short-term but frequent: do what has to be done in the allotted time. However, to exercise due diligence, you must assess the known and unknown information against the objectives of your business. You must take into account the risks involved and your comfort level, and then decide whether to adopt a course of action. Due diligence also considers the pros and cons of the decision to help you shift towards a judgment. Therefore, database checks are tactical, while due diligence is deemed strategic.

5. Reactive Vs. Proactive

Compliance is frequently a legal requirement imposed by a governing body or regulatory body. On the other hand, due diligence is proactive and isn't typically required, though some organizations do include it in their policies and procedures. In industries ranging from pharmaceuticals and healthcare to oil and gas and energy, it's often noted that due diligence is the best practice of the two verification methods, investigation of a potential deal or investment opportunity.

Database checks also take a checklist-oriented approach, looking for specific things and checking them off when they are found. Instead, due diligence creates a thorough profile to search for earlier events, contributory factors, and post-incident actions.

However, losing sight of the desired goals, failing to devise a workable strategy under control, and failing to set up the essential integration procedures can all contribute to failure. Due diligence and database checks may not be effectively carried out for several reasons:

Minimal Owner Involvement

For every mid- to large-size contract, hiring research analysts at a high cost for various services is practically required. Owners should be involved from the beginning and prefer to lead and arrange the deal themselves. Working hand in hand with the researchers guarantees retrieval of more information and guides them when making decisions.

Poor Integration Issues

Another difficulty in database inspections and verification is post-merger integration. A thorough evaluation can assist in identifying significant personnel, essential projects, and goods, delicate procedures and issues, etc. With the aid of consultancy, automation, or even a thorough investigation of outsourcing options, effective processes for precise integration should be established using these identified essential areas. Background checks are a crucial part of doing your homework, but they are only one source.

To evaluate how, a database check and due diligence are carried out. With the depth of coverage and verification, more research is expected to reduce the risks that may occur later. In addition, the quality of range and output are equally important. Delivering a clean historical production for large and complex managers is vital for the organization and ensures that the data submitted is more reliable.

Investigations for due diligence and database checks have their purposes. They are both necessary parts of doing business these days. However, be clear about your reasons and your goals for using either of them or both. Your basis for suing them makes the difference.


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