Doing Your Due Diligence on Due Diligence

In business today, one of the more neglected areas is counterparty due diligence. As we are keen of saying here at Olden Lane: Trust is earned in drops and can be lost in buckets.

Today, it is as important as ever to know just who you are doing business with. And, in the digital age, there is simply no excuse for failing to do your diligence on your counterparties. After all, Americans are used to screening connections on social media. And, screening potential suitors on dating apps. So, why do so many businesses still fail to do a deep dive on their business partners?

Due diligence on a counterparty is anything but standard. And, the science of thoughtful due diligence must be both qualitative and quantitative. Each relationship is different and the process of reviewing a business relationship should be flexible enough to respect that. You don’t want to be the next institution that faces unnecessary scrutiny during a regulatory exam because you failed to do your homework.

Here, we share some basic tips that we have found helpful.

1. Run a Google search on your potential counterparty and its principals.

· Does the company have a social media presence?

· Do any of its principals have a controversial history?

2. Evaluate the company’s website.

· Is it consistent with the message they are telling you?

· Does the website show you that the firm cares about its presentation to the outside world? Or, is it the bare minimum?

3. Evaluate the counterparty’s presence more broadly.

· Is the firm a meaningful contributor to the industry and does it seem to share your firm’s values more generally?

· Or, does the firm’s industry presence reek of opportunism (i.e. “being in it for a quick buck”)?

4. Ask for biographies / CVs of the principals.

· Are there periods of time in professional careers unaccounted for?

· Do the players jump from firm to firm?

· Were any of their past businesses problematic?

5. If the counterparty is a broker/dealer (as we are) ask for a BrokerCheck report on the firm and each of its registered representatives.

· Are they in good standing with the regulators?

· Are there regulatory findings or other disclosures?

· Are there past bankruptcies?

6. Ask for references. It is absolutely appropriate to speak with both existing clients and prospects.

7. Trust your instincts! If it doesn’t feel right, go elsewhere.

Remember, the onus of due diligence is on the potential counterparty, not you! If the potential partner is unwilling to be open and transparent, that is probably telling you all you need to know.

Word of mouth can also be a powerful tool in performing due diligence. Reach out to another executive you trust and know and ask whether he/she has heard of XYZ. Depending upon the nature of the relationship, it would also not hurt to call your regulator / examiner and have a conversation.

Remember, regulators don’t react well to surprises. They like stability and consistency, especially when it comes to due diligence.

Finally, be unapologetic when it comes to holding counterparties accountable. And, document everything that you do.

Good luck!


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