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Financial Due Diligence (or Werewolves in Northern Ireland?)

Under a headline derived from W. Zevon, the NYT of July 14, 2015 articulated the importance of financial due diligence, including a reference to one potential investor’s decision not to commit to the proposed transaction. Without opining on the accuracy or completeness of the NYT account (I do not have firsthand knowledge of the facts or evidence), I note below a few types of issues that recur in the context of financial due diligence within the private sector:

  1. Attorneys’ work on behalf of their clients, including their process and product, is often opaque and generally privileged. Confidentiality laws and contracts secure the substance of that which occurs between the signing of the engagement letter and the rendering of professional opinion. Whether the sandwich is filled with spam, filet minion, or something worse is not clear to outsiders. Primary source data are rare and not in the public domain. Secondary source research regarding the unfolding of fact-patterns and reliable red flags in these circumstances (e.g., whether political corruption affected the transaction) as expressed and implied in the NYT commentary is also generally inadequate. For example, criminal justice inquiries, which would aid in the formation of fact from evidence, are not common in these ‘invest or not’ issues. However, for an excellent (secondary source) introduction to the issue of lawyers and the facilitation of crime see: David Middleton and Michael Levi. Let Sleeping Lawyers Lie: Organized Crime, Lawyers and the Regulation of Legal ServicesBr. J. Criminol. 2015 55: 647-668.
  2. Persons that get compensated on the basis of fees (e.g., finder’s fee, commission) are useful conduits through which to facilitate wrongful activity. The purported value-added by the service provider is not countable by reference to billable hours and hourly rates, the output is often not evidenced by a detailed written report such as an expert opinion on the tax effects of the transaction but is based on the outcome (for example, consummation of the deal), leading to the creation of an opportunity structure that may be filled with spam or worse.
  3. The flows of financial funds are not sufficiently traceable absent total information awareness. The key information (for example, cash deposits and withdrawals from financial institutions) is more or less hidden inside computer-based technology. Dumpster-diving is usually not enough.
  4. Transparency may be indirectly related to competitive advantage; that is, as more material respects of the proposed transaction are disclosed and presented to more individuals, the lower the likely value of the proposing first-mover’s position as rivals compete to erode the economic advantage of being first on the scene through means and methods, for example, of offering a higher price for the loan portfolio. Secrecy is demanded.
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