There have been a number of recent scandals at executive levels that often end in resignations and dismissals. Companies are increasingly more vigilant in examining the background of their top executives through Executive Due Diligence. The controversies vary in scope, from fraud and embezzlement involving government officials, often involving law firms of international and national scale as well as auditors, to over three dozen top managers being accused of sexual misconduct within one year (2018).

Several egregious corporate scandals, such as 1MDB involved $4.2bn fraud from a government-owned Malaysian investment fund. In the subsequent investigations, Malaysia’s Premier Najib Razak as well as three ex- Goldman Sachs Executives (Jho Low, Roger Ng, and Tim Leissner) as well as law firms Sherman & Stelling, Sullivan and Cromwell. The other case was called Operation Car Wash which resulted in the impeachment of the Brazilian President, and the money laundering convictions for the previous president. 

There was the Panama Papers, Paradise Papers as well as Operation Car Wash are additional cases that have led to the federal government and in certain cases worldwide prosecutions for corruption or money laundering as well as embezzlement of a huge amount, as well as various other criminal acts, many of which remain in progress. There are a number of examples of headline stories over the last few years.

In addition, there was the movement #MeToo, which concentrated on sexual misconduct or sexual harassment, as well as the rape. Numerous senior academics, executives, Hollywood producers, directors as well as comedians, actors, and photographers, including Harvey Weinstein, Al Franken, Kevin Spacey, Roy Moore, Bob Packwood, Junot Diaz as well as Matt Lauer were publically shamed and had their careers ruined, with many of them earning profitable endorsements and sponsorships, and their reputes. There are a myriad of examples that seem way too many to count in this article.

The consequences for an organization in the face of such scrutiny from a legal and public examination are evident: business reputation suffers, their clients lose trust (often globally) as well as loss of revenue and distractions for board members and executives, loss of efficiency and morale of employees as well as the dismissal of an executive as well as the need to replace their replacements, and the endless list of. Damage can be in the tens to millions of millions and often, even greater.

Many companies rely on routine background checks believing that very few background checks will uncover the problems that are causing concern. A basic background check will be unable to reveal all the problems in the executive level. The best practices for business due diligence must always incorporate thorough reviews of all executives.

According to Infortal’s data, 20% of executives fail a thorough due diligence exam.

The objective of investigating due diligence is to determine the extent to which executives who are appointed (or bought) have supplied the business with complete disclosure about their prior experience and background concerns.

This is required to secure the Board of Directors of a business as well as increase control of risks and ensure compliance with federal laws, and increase the profitability of the company. A thorough due diligence process can reveal the existence of corruption as well as financial laundering, or an inappropriate level of influence from politicians that could breach laws like the Foreign Corrupt Practices Act FCPA.

A lot of times, businesses depend on the information they have about a person who has “worked in their industry for many years” and is usually well-known as a business expert and knowledge. What they may not know is if that individual has a secret or not disclosed history, such as bankruptcy cases and sexual harassment accusations as well as civil litigation/ lawsuits, SEC violations, & even convictions for criminals might not be reported to peers working in the same field.

Infortal Worldwide strongly recommends a Best Practices approach when conducting executive due diligence. In the wake of numerous public accounting scandals and the introduction of legislation known as the Sarbanes Oxley Act in 2002. Today, all public corporations are legally required to present an annual review of the efficacy of their accounting and financial systems as well as internal auditing processes.

The Advantages of Screening Executives

  1. Guard the corporate interests.
  2. Insulate the Board of Directors from fiduciary responsibility Board of Directors. Board of Directors.
  3. Reduce the risk of liability to your company in the event of illegal activities, criminals and harmful actions.
  4. For corporate governance, FCPA & Sarbanes Oxley compliance.
  5. The rule of thumb is that if you’ve never personally met someone for a minimum of 10 years, you might not have a good understanding of the executive.

The data from Infortal over a period of 25 years reveal that 20 percent of CEOs (1 five out of ten) have issues that are serious enough to cause concern in their past. This could include a wide range of concerns, including that no degrees were earned fake degrees, crimes such as IP theft, fraud that is a felony and racketeering, money laundering trafficking, manslaughter, and even murder. There are also business conflicts of interest, the ownership of different companies, civil litigation which includes breach of contract, SEC violations, interstate bankruptcies, corporate spying, scam artists as well as a myriad of others that could cause concern.

Case Studies:

The background of the candidate’s “history” can be checked prior to the interview date in order to avoid humiliation and damage to your business to come up with a better solution. Numerous examples exist:

  • A General Manager who is also the Chief Executive Officer of a rival business with annual revenues in the range of $40 million.
  • A company in the field of healthcare whose CEO is being sued over prior sexual harassment, with a settlement that cost the company more than $3 million, plus legal costs
  • A CFO has been caught lying about their educational background; the stock price of the company drops by nearly 20 million dollars in a single day
  • Senior Financial Manager who has been in prison federally for manslaughter and cocaine convictions (with an earlier drug use history) The details were covered through “extended” employment dates.
  • A top executive team that has a history of racketeering and money laundering. the trafficking of drugs and murder.

The details of the histories weren’t revealed and all the information was purposefully hidden.

Impact To Your Company

The involvement of officers in businesses that haven’t been reported may cause problems for your business if the business involved is infected by litigation, FCPA, or SEC violations and is exposed to bad publicity due to your executive, or, even worse, is implicated in criminal acts that are of any sort.

Due Diligence Objectives:

  1. Find out if the person really is the person they claim to be.
  2. Examine the authenticity of the qualifications of their employees and their history.
  3. Review gaps, and information that is not disclosed.
  4. Examine how the information has been verified to public documents (factual confirmation)
  5. Find out discrepancies, as well as difficult business and judgment problems which may arise on the Executive Level.
  6. Find out the reason for any unreported, unclear legal or criminal behavior
  7. Find out if all the information you need is available to you in relation to the business transaction you are involved in.

Issues Of Concern:

An outline of the most common concerns that can be analyzed during an effective Executive Due Diligence probe includes:

  • The history of criminal activities includes all crimes at both the state and federal levels that range from money laundering racketeering, bribery, and racketeering to drug use and various infractions of misdemeanors.
  • Real Estate crimes (non-prosecuted), real estate high-cash transactions (incl. money-laundering activities)
  • Fraud, computer crimes, child pornography, tax crimes, counterfeiting, securities fraud,
  • Crimes committed in the international space (interstate bankruptcy, theft of intellectual property, etc.).
  • Civil litigation matters that are serious: SEC violations, etc.
  • The evidence of litigation-related behavior
  • Undeclared, unresolved, and resolved civil lawsuits
  • A history of prior sexual misconduct sexual harassment, rape, or harassment.
  • Engagement in other businesses at the level of director or officer (declared as well as undeclared): Department of Corporations search.
  • Financial management that is inconsistent or unstable and failure to pay the financial obligations
  • Outstanding state, county, or federal tax liens massive outstanding child support payments
  • Many types of reckless conduct in top management positions
  • List status for terrorists List Status
  • Status of a Denied Person
  • Federal sanctions against transactions in the financial sector, both in the United States and internationally (OFAC and SANCTNS).
  • International in-country investigation for citizens of other countries (did they perform their duties or behave legally prior to transferring to the USA) Additional costs might be required for an abroad-based investigation.
  • Information about negative professional references (more frequently shared with non-biased organizations like Infortal).
  • The professional and personal judgement of the individual concerning the disclosure of information on any of the preceding
  • Management problems such as micro or macro managing, building team capabilities Market penetration of innovative products or services
  • Checks for references if they are conducted for: the ability or inability to establish world-class businesses; the ability to attract new capital, vs. the burn rate; competitive intelligence concerns

Essential Due Diligence

Due diligence investigations by the executive are focused on public records, as well as other sources of information. A detailed report with Actionable Recommendations(tm)(tm) is provided when the investigation is concluded.

Due diligence investigations by the Executive must be considered to be essential at any time:

  • The hiring of a new executive
  • The process of promoting an executive to the C-suite at the executive level
  • Conducting Mergers & Acquisitions due diligence (M&A)
  • When you take on a new supplier distributor (FCPA-associated)
  • When a board member is hired
  • Continuous monitoring of the executives regularly or once a year

The expense of background checks is not that significant when compared with the costs of just one executive hire and is insignificant as compared to the negative impact on reputation, loss of stock markets, and the negative impact on client faith, employee morale, and profitability of the business.

The best practices for Executive Due Diligence include a thorough research and analysis of every data point that is related to the history of the executive. These could be county-level criminal records, civil records, federal criminal records civil records of the federal government, and national criminal records. verification of employment history, education verification, and credit history (where FCRA release forms are completed) lawsuits liens judgments and bankruptcy files Department of Corporation search, UCC filings, adverse Keywords/searches for negative keywords, and, in some instances interviews with references.

 To ensure the best practice of due diligence for executives, we recommend conducting deep web searches employing Open Source Intelligence (OSINT) methods that yield the vast majority of unpublicized and hidden details. To learn more about the best methods of executive due diligence,