Company Compliance and Due Diligence Protocols

Operating across borders adds a wrinkle of complexity to any business venture. In particular, failing to vet employees, vendors, or Merger and Acquisition (”M&A”) prospects properly can expose your company to significant risk and legal liability. The fallout of which could be disastrous—think reputational harm, operational interruptions, crippling fines, and legal disputes.

To protect your company and position it for long-term success, rigorous global compliance and due diligence are your front-line defense. Overlooking these essentials is like walking a high wire without a safety net.

So, what does proper company compliance and due diligence entail?

Here’s how you can plan, prepare, and proactively manage these international risks.

Understanding Business Compliance 

At its core, business compliance involves adhering to laws, regulations, and guidelines relevant to your company and the countries in which it operates

Managing compliance is no small feat, especially when your business footprint crosses international borders. With varying labor laws, evolving data protection regulations, and a maze of remote worker tax obligations, every country presents its unique compliance challenges. And, to make matters worse, the rules and standards are constantly evolving. As Harvard Business Review notes: 

“Compliance may seem like a moving target. Even an organization’s full intent to follow laws may come up against regulatory authorities communicating changes inconsistently. That makes it critical for organizations to partner with regulatory experts who can build relationships with the relevant authorities and offer technology that gives a real-time understanding of how regulatory changes affect their business—and when and how to take action.”

Given the high stakes, it's critical to establish a robust compliance framework. This should encompass:

• Carrying out ongoing risk assessments.
• Staying updated on regulatory changes in every jurisdiction you operate in.
• Ensuring that employment contracts, benefits, and global payroll services meet local and international standards.
• Developing a risk-based monitoring system and staff training programs.

Legal and Financial Consequences of Non-Compliance 

Ignoring complex, country-specific compliance requirements is a game no business can afford to play. The ramifications of such non-compliance can have lasting effects on your business, particularly when it comes to remote onboarding, third-party partnerships, venture capital prospects, and M&A deals.

The Fallout from a Poor Hiring Process

A poor hiring process isn't just a solitary mistake. It can create cascading complications, each with its own set of risks and repercussions.

The most immediate consequence is, of course, that you will add someone to the team who doesn't contribute value, but instead increases your overhead costs and diminishes productivity and profitability. Your team will bear the burden of a member who may lack the skills or qualifications you sought, impairing your operational efficiency and detracting from team cohesion and morale.

But that’s just the tip of the iceberg.

What if this person, despite having the requisite skills, has a nefarious past you overlooked? They could pose a serious threat to your company's operational security, exposing your business to cybersecurity risks or even going as far as pilfering trade secrets or intellectual property.

Even still, you're not off the hook when your new hire is both competent and well-intentioned. If you do not have a streamlined onboarding process that is fully compliant with local labor laws and hiring practices, you could open another can of legal worms that expose the business to fines and scrutiny.

In any of these cases, the costs of terminating and subsequently replacing an employee could also dig deep into your HR budget, creating a ripple effect that may compromise other initiatives.

Hazards of Improper Third-Party Partnerships 

Failing to thoroughly vet third-party vendors is comparable to making a poor hire but with significantly broader repercussions.

Say that a vendor is a crucial element in your supply chain or an essential service provider and they are found to be non-compliant or operating illegally. The blowback doesn't simply stop with them. Their failures or illicit activities can have a direct impact on your business, exposing you to legal liabilities and damaging your reputation by association.

Not to mention, if they're a linchpin in your operations, their shortcomings could lead to supply chain disruptions, service outages, or even business continuity crises—putting you in a vulnerable position that might take years to recover from.

The Perils of Inadequate Due Diligence in M&A Deals

Neglecting thorough due diligence in M&As can escalate risks exponentially.

Imagine you've just acquired an international business that, unbeknownst to you, has pending legal issues or financial inconsistencies. Now, their problems are your problems, compounding your risk profile and potentially eroding the deal's anticipated value. Moreover, if the acquired company has a poor compliance record or undisclosed liabilities, you wouldn’t just inherit their assets but their vulnerabilities and legal pitfalls as well.

Such oversights could result in considerable fines, not to mention the immeasurable cost of reputational damage. All told, inadequate due diligence in M&A is a gamble you can't afford.

The Yin and Yang of Due Diligence

Due diligence serves a two-fold purpose: it's both a risk mitigator and an opportunity identifier.

On the risk side, due diligence helps you uncover potential legal issues, financial discrepancies, and operational weaknesses in your prospective hires, third-party vendors, or M&A targets. These insights enable you to make informed decisions, thereby safeguarding your business from unanticipated vulnerabilities. Risk-related due diligence typically includes four key aspects:

1. Background checks – Conduct checks on new hires to verify identity, employment history, criminal record, education, work authorization, references, and more. 

2. Compliance checks – Ensure that the candidate or company complies with the legal, regulatory, and ethical requirements that align with the hiring company’s standards. 

3. Risk assessment – Evaluate the risks associated with hiring a particular candidate or entering a business relationship with a company. 

4. Ongoing monitoring – Continuously monitor and analyze the candidate or third party via periodic compliance audits, background checks, and risk assessments. 

Conversely, due diligence can also reveal untapped opportunities, be it a highly-skilled prospective employee, a third-party vendor with unique capabilities, or an M&A target with a robust customer base or technology assets. Working with an employer of record when seeking new hires, for example, can help you navigate murky compliance waters while identifying experts in the field—without being constrained geographically.

By meticulously gathering and analyzing information, you gain a strategic advantage, positioning your business not just to avoid pitfalls but also to seize potential opportunities for growth and expansion.

The Need for High-Risk Protocols 

During the initial phase of screening a company or individual, green lights—meaning low levels of perceived risk—will receive the stamp of approval from the legal team, and onboarding can proceed.

But what about those cases that flash red and yellow lights on compliance dashboards?

In due diligence parlance, yellow (or amber) signifies caution, calling for deeper scrutiny, while reds are instant halts that demand immediate escalation to senior management and legal.

For such potential high-risk cases, the proper protocols follow a three-step path: 

1. Warning signs checklist – A range of warning signs can trigger the need for Enhanced Due Diligence (EDD). Depending on the sign, it may result in an amber or a red designation. Amber may include client company in an offshore or high-risk jurisdiction, cameras always off for calls, no job description, no experience relevant to the role, no LinkedIn profile. Red may include a client company having evident connections with sanctioned countries, companies or individuals (such as terrorist organizations), or client’s offering potential hires very high salaries without justification.

2. Investigate – Should HR or business development teams encounter two or more "Amber" flags or any "Red" flags it’s recommended that they immediately pause the process and conduct further investigations with additional documentation. The onboarding delay allows time to thoroughly address any warning signs, focusing on aspects like job roles and salary plans, before deciding whether to escalate the issue to their legal team for further review.

3. Escalate – Once escalated, legal and upper management can perform advanced due diligence, following a specific checklist. Required documents may include a Certificate of Incorporation, evidence of directors and shareholders, and passport and address proofs for client employees.

Advanced Compliance and Due Diligence Protocols 

If enough concerns have been raised, legal and senior management must carry out enhanced due diligence. This specialized process dives much deeper than standard background checks. It involves a robust legal review in accordance with high-risk protocols.

Enhanced Due Diligence Checklist: Individual Diligence

For individual compliance, due diligence should include the following advanced screening mechanisms:

• Sanctions screening – Candidate names are cross-referenced against sanctions lists from the UK, US, and EU. In cases involving other jurisdictions, local sanctions lists can also be consulted.

• Deep web search – More than just Googling a name, EDD involves using various permutations to ensure accurate identification. Politically Exposed Persons (PEP) indicators, court cases, or affiliations with illegal activities are common red flags that will escalate the case.

• LinkedIn check – An employee's LinkedIn page can offer a wealth of information, including job history, endorsements, and more.

• Physical address verification – A Google Street View check helps to ensure that given residential addresses appear to be genuine.

Enhanced Due Diligence Checklist: Company Diligence

For companies, the screening process should include the following EDD procedures: 

• Sanctions screening – As with individuals, any company or doing business as names should be run through multiple sanctions lists, with high-risk entities being flagged for additional scrutiny.

• Legal documentation – You'll want the full suite of registration information—registration details, full legal name, company number, names of directors, registered addresses, and so on.

• Digital footprint audit – A thorough search of the company name online may reveal significant details, including pending legal cases, allegations of corruption or misbehavior, or negative media spots.

• Corporate structure – A complete structure chart provides clarity about the ownership and control of the business entity. This may even extend to affiliated organizations if warranted.

• Crypto due diligence – If you're dealing with a crypto company, it's essential to request and review their White Paper and Pitch Deck. These documents offer a deep dive into the crypto asset's purpose, technology, team, and tokenomics, helping you evaluate its legitimacy and risk factors.