Due Diligence: Centralized or Local Review?

Due Diligence: Centralized or Local Review?

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April 28, 2009

In the important -- if not very glamorous -- world of due diligence, there are still some unsettled issues.   Although we often hear debates about "whether, when and what", we rarely hear anyone ask where.   Nancy Etzwiler of 3M's Office of General Counsel sums the issue up nicely.
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"A multinational company establishing its internal anti-bribery compliance program must consider whether to centralize its review and approval process of third party due diligence, permit localized review and approval, or establish a hybrid approval structure.   A number of factors should be considered in tailoring a program to best fit the business and risk profile of a company.


One advantage of a centralized review process, often at corporate headquarters, may be a greater concentration of anti-bribery compliance staff, typically with more extensive experience in the scrutiny of due diligence and assessment of red flags.   Centralized review may be more appropriate for a company whose non-U.S. subsidiaries review due diligence only sporadically and do not regularly follow compliance and enforcement developments to enable it to robustly scrutinize due diligence. 


A centralize model may also afford greater opportunity to include senior level executives in the review process.  Senior executive presence can elevate the awareness of anti-bribery risks in an organization generally; centralized review may also offer easier access to other senior executives for consultation in difficult decisions, as well as engender faster support (and at times a more elastic budget) for internal compliance staffing or the use of outside resources when needed.  


Finally, centralized review also permits a company to calibrate among its global organizations the nature and amount of risk it is willing to accept, and avoid the appearance of inconsistent review standards.


Pitfalls of centralized review can be a lack of in-depth cultural awareness, language limitations, and difficulty in completing a review in a timely manner to meet local needs.  Local reviewers are better positioned to assess cultural aspects of due diligence such as the interviewee’s demeanor, local market conditions and practices, and typical fee structures.  Document review as well as interviews of the third parties and their references in the local language can afford more accurate assessments.  Further, unless a centralized review system ensures efficient, electronic due diligence circulation to reviewers, local assessment may be less hamstrung by frequent executive travel and competing priorities that can significantly delay review and result in missed local opportunities.


At the same, responsibility for any local review and approvals must be placed where approvers will not succumb to supervisor pressure to deploy risky agents, or where the elevation of any issue to more senior approvers is not thwarted.  In a decentralized model, corporate country directors may be more immune from these pressures, and local in-house corporate counsel can provide a solid complement to this local review.  The requirement of additional reviews, often at the central office, in higher risk circumstances can also undergird a local review structure, such as when proposed commission exceed 10%, certain commission thresholds could be attained (e.g. $100,000 or more),  the total sales opportunity for the company is extraordinary, or if operating in the most risky countries.   This sort of hybrid model can tap the best of both models.


Against these considerations, no one model fits all organizations.  The most effective system for an organization will be that which places the review and approval process where the most reliable information can be timely and effectively assessed, and the review decisions supported."



"An Enforcement Rich Environment"
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Due Diligence: Centralized or Local Review?


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