Guidelines for Conducting Anti-Fraud Due Diligence

Copyright 2002, 2009 STILAS - All International Rights Reserved.

Conducting “due diligence” is an important practice for avoiding fraudulent scams,

and confirming that you are dealing with legitimate companies or services firms.
However, this should not be confused, or abused, as a “witch hunt” or looking to only
“dig up dirt” on somebody. All legitimate firms are victimized by false illegal
defamation by competitors and criminals trying to defraud the same firm that is falsely
defamed. Only legitimate firms, however, can give you solid documentation of their
registrations, authorities and licenses, evidencing their capabilities to achieve desired
results in the proposed transaction. This correct purpose is the essence of real,
objective and professional due diligence.

The most effective approach, although perhaps counter-intuitive, is to directly engage

the subject company in the process, asking for “voluntary disclosure”. Tell them that
you need to do “due diligence” and want to verify or have a record of certain things
that are important to you as a potential customer or partner.

This approach has three primary benefits: First, it will automatically filter out most
fraudulent companies, who will quickly stop talking to you, while legitimate ones will
gladly mutually engage to facilitate the process. Second, you let the subject do most
of the work for you, minimizing both time and cost. Third, the subject is aware that
you will undertake verification of information provided, so they will be more careful to
avoid misrepresentations and give accurate information.

The following is a list of recommended information, materials and documents that

you should ask the company to provide. The absence of any of these items does not
constitute any “fraud flag” by itself, and some may not apply, but these are the most
effective things to ask for and verify.

1. Articles of Incorporation – If you are considering working with an individual

partner or hiring an individual professional, and the individual can reasonably be
expected to effectively perform the work alone, then the existence of a registered
corporate entity is not necessary. For all other businesses and transactions, a
corporate registration is the cornerstone and basis for legitimacy, as it requires
the business to rely upon its corporate name, image and reputation.

2. Certificate of Good Standing – This is useful to show that the company continues
to exist and operate as a legal entity, and has not been dissolved and/or
reincorporated under another name. It is not necessary to obtain the most recent
Certificate of Good Standing. Most companies that actively engage in business
with serious clients will have one that is relatively recent, and obtain a new one
from the State Corporation Commission every 1-2 years.

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3. Bank Account for Transferring Payments – The purpose of this information is to
verify that your payments will create a “paper trail” as evidence to ensure that the
corporate entity that owns the receiving account will have legal liability for proper
use of the funds. This should not be confused with an intrusive request to show
their primary assets bank account. You only want to know the bank account that
you can make wire transfer payments into, that they will have to disclose to you
anyway when it comes time to pay them. Ask for the beneficiary name, bank
name, account numbers and SWIFT code.

4. Licenses or Certifications – Ask for a copy of licenses, permits, registrations or

certifications if they are directly related to and required for the specific work the
company must perform for you. If copies are not available (often professional
licenses are too large to copy or scan), request the number and issuing authority
of each document, and the year and place of issuance.

5. Web Site Addresses – Beware of companies that tell you they do not have a web
site or “don’t need one”. Legitimate companies always make efforts to allow
clients or partners to keep in touch with them, receive notice of changes of office
address, e-mail addresses or phone numbers, reminders of services offered or
updates on new services.

6. Resumes of Managers or Key Employees – Ask for resumes (also called

“professional bio” or “curriculum vitae” (CV), as used for job applications) of
managers or key employees of the company who will be working on your project.
This will give you some additional leads and information to verify the company’s
ability to perform the work promised and general capabilities. (Note that financial
institutions cannot do this, to prevent security threats against executives.)

7. Corporate Brochure or Company Overview – Every company should have a

professional and well-developed presentation of their business concept or
services. This evidences the level of preparation of the company, and
demonstrates whether they have sufficiently developed the capabilities or
services they claim to offer.

8. Detailed Written Presentation of Services Offered – Ask for a detailed written

presentation of the proposed business, product or services offered. The key
indicator of legitimacy and reliability is the transparency and disclosure of
detailed mechanisms of the proposed transaction and methods of work to be
performed. The best evidence of a company’s experience and capabilities is its
willingness to disclose detailed verifiable information in writing, and the level of
preparation and quality of its presentation materials.

9. Reports or Articles Written by Principals or Managers – Ask for any other reports,
articles, publications or non-proprietary research memorandums written by
principals or managers of the company who are related to proposed work on your
project. While not required, such materials can be excellent evidence that the
company is actively engaged in the sphere of business that they claim to be, or is
an authority on the capabilities that you are considering it for.

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10. Sample or Standard Contracts – Ask them to provide copies of sample contracts
or standard agreements related to the proposed transaction. If they do not have
a standard contract, then that is an indication that they have not engaged in that
type of business before, and may lack experience. Beware of contracts that
misuse financial or legal terms, contain ambiguous colloquial wording, or have
apparently not been developed with the participation of any lawyers.
Unprofessional contractual documents are a risk factor in and of themselves. At
worst, they may be intentionally misleading to perpetrate a fraud. At best, they
suggest that the company is not properly prepared to engage in the transaction.

This article is a brief extract from one of a series of expert reports developed by
STILAS, in cooperation with certain federal law enforcement and national security
agencies of multiple countries, for protection of national critical infrastructure in the
private sector.