Third of deals scrapped because checks reveal murky backgrounds

2005

A third of corporate deals are either abandoned or have to be re-negotiated because background checks throw up significant problems with one of the parties involved, a study has found.

The research of some 400 potential deals between July last year and June this year was carried out by security consultancy The Risk Advisory Group.

About 15 per cent of all deals were not pursued after detailed checks during the year, the study found, up from 10 per cent that collapsed the previous year.

Transactions examined included ones between leading investment banks, corporates, private equity firms, multi-nationals and government bodies in countries such as the UK, U.S, Russia, Ukraine, Germany, Italy and Nigeria.

They included new joint ventures, mergers, acquisitions, new client relationships, private equity investments, IPOs and secondary listings.

Common problems revealed by the checks ranged from potential litigation and reputational concerns through to more serious issues relating to fraud, money laundering and corruption.

In extreme cases even potential links with terrorism and criminal activity were discovered.

Henry Pugh, head of business intelligence at The Risk Advisory Group, said: "New joint venture, takeovers and other business partnerships can be transforming events for companies and, if they go wrong, the impact is often far-reaching and long-lasting.

"During the past year, we have been asked to check out an increasing number of these projects, particularly in emerging markets," he added.

He continued: "Our sense is that companies are widening the net in terms of seeking new business partners and, as a result, are exposing themselves to far greater business and reputational risk.

"If things go wrong it can lead to personal liability for chief executives and chief finance officers and, for this reason, companies are paying much more attention to risk management.

"However, there is also increasing pressure to grow their businesses so they are obliged to check out a far wider range of partners and potential targets, which often prove to be unsuitable," he added.

Examples of deals that were either scrapped or significantly modified included one where a large European oil firm planned a joint venture in a west African country with an indigenous company that held an oil prospecting licence.

The oil major asked TRAG to identify the beneficial owners of the local company, and investigate their backgrounds and reputations.

But it soon became clear ownership details were being kept deliberately opaque and the true owners were associates of a former ruler of that country who had been granted the licence in return for political and financial favours.

In another deal, a City institution had planned to co-finance a property development project.

Background checks on the key promoter of the scheme and one of the other backers, apparently a Middle Eastern prince, highlighted involvement in a string of liquidated companies.

Former business partners were also alleged to have been involved in arms dealing and insider trading.

And neither the prince, nor the company through which he was said to be investing the money, were proved to exist at all.

Finally, a Western investment bank had planned to appoint a senior representative in an Asian country, but terminated the deal when an investigation discovered the proposed agent, a former government minister, had a poor reputation for integrity and competence, and had effectively been forced to retire from the government as a result.

This had been ignored by the deferential local media but was widely accepted in well-informed political and business circles in the country concerned.