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IMPORTANCE OF DUE DELIGENCE IN GLOBAL TRADE

Wednesday, 04 June, 2014

by: GSE, Publications

Due diligence entirely relies on prudence. Prudence is the best exercise in any business; it is the wisdom or best judgment that is acquired from one’s knowledge and experience in a given field. Prudence has no correlation with caution or wariness of maintaining a status quo since it’s expressed in an attitude that is frugal and realistic. On viewing due diligence, we do consider several states like business state, investing state, negotiation state and general state.

On a business state, due diligence is viewed as the prudent act of evaluating business risks that are associated with the business transactions carried out by a business entity. This prudent evaluation is carried out by the top management that includes the directors and officers. The investments state of due diligence on the other hand deals with the investors collecting proper information about possible or potential investment risks that might face investors. The negotiation state of due diligence will rather focus on an individual party, party’s expectation, understandings and the trustworthy in complying with the terms, condition and agreement between them; this is called reasonable diligence. The last state of due diligence is a general state whereby measures of prudence, diligence and responsibility are expected and exercised by individuals who are prudent under such circumstances.

Due diligence is the best and a compulsory exercise in any business or trade. It has a significant role majorly in global trade; business transactions beyond the borders of countries. The emergence and popularity of global business have been boosted by two major factors i.e. reduction in global trade barriers and ease of advertising on foreign markets through internet. The increase in global trade has resulted to several issues that affect business operation both negatively and positively. This has in turn attracted due diligence investigation by sellers, buyers and individual firms in global trade. Consequently, an organization itself cannot effectively carry out due diligence observation measures. It is in such scenario that the services of Global Screening examiners (Pvt.) Limited and other related organizations come in.

In view of Global Screening Examiners, GSE provides majorly three due diligent i.e. Know Your Customer (KYC) due diligent, pre-investment due diligent and financial due diligent. Global Screening Examiners KYC examines customers’ credentials that enhance screening process. The Global Screening Examiners pre-investment due diligent serves investors, brokers, bankers and legal business transactions in managing mergers and acquisition requirements. GSE financial due diligence helps entrepreneurs invest and acquire interested assets. This also reduces financial investment risks since GSE provides quality information.

Global Screening Examiner (GSE) plays a crucial role in terms of guaranteeing business safety of operation in global trade. This is enhanced due to the fact that GSE protects business transactions through due diligence carried out before such transactions. In pursuit for better due diligence, Global screening Examiners offer customers services that are tailored to achieving maximum prudence and safety in handling global trade transactions.

Global screening examiners offer variety of due diligence services without limitation; the services can be subscribed at individual level or organization level. Both at organizational and individual level, Global Screening Examiners offers the following due diligent services: Account and audit reports, corporate AGM reports, reputation checks, local media search, professional membership check, criminal membership check, political expose person check, conflict of interest, sanction list checking, liability and renewal statement, verification of property ownership, general financial information, litigation and dispute check, license and permit verification, merger and acquisition agreement, intellectual property record and tax return among other services.

It is through the efforts of Global Screening Examiners that leads to success and popularity of Global trade. Factors that make global trade popular may include; acquisition of goods and services that a business lacks, maximum utility of resources, it avails variety of goods to consumers via importation, large market will that reduces fluctuations in prices of goods, utilization of surplus produce via exportation to the large market. Global trade also fosters international understanding that creates peace, goodwill and mutual understanding amongst nations hence boosting the standards of trade. All these can only accrue if a business takes note of due diligence.

Organizations which do not conform to due diligence standards when dealing in global trade risk getting challenges during operation. Such organizations will encounter challenges like: Importation of harmful products, over exportation may exhaust business resources, a business may overspecialize in a given service/good which may cause a ruin to millions of people in case of emergence of substitute good/service. A business entity dealing agricultural product may pose a danger of starvation should it pursue further in global trade via massive exportation of agricultural products. It is known that global trade attracts stiff competitions; the competition may lead to winding up of infant business entities or prevent growth of local business firms due to over-exploitation from well established multi-billion firms. Competition may as well lead to increased rate in fraud and other business malpractices that may render global business insecure and dangerous to indulge in. a firm needs to hence make consideration of due diligence before entering global trade.

As observed, the scope of due diligence investigation plays a pivotal role in global trade. This is because the investigation brings on board qualitative and quantitative information that a prudent entrepreneur may require so as to make a prudent decision. In pursuant to the scope, Global Screening Examiners (Pvt.) reviews numerous fields before conducting due diligence on behalf of a given business entity. These fields include:

Organization structure: Global Screening Examiners usually ascertains the legality of any given seller in global trade by obtaining copies of articles of incorporation. In addition, GSE confirms the identity of officers, corporation name and business address. All annual report filling are also be confirmed by GSE. More so, GSE reviews state laws where buyers carry business since this an essential due diligence measure at organizational level.

Contractual obligation: The due diligence measures that GSE observes here are obtaining contracts from suppliers and determining possible penalties and liabilities associated with failure to implement the contract at post-acquisition. GSE also obtains contracts from customers and customer compliance is determined post-acquisition. In addition, at this scope, all contracts of existing and potential sellers on the global market are reviewed.

Labor: In this scope, GSE reviews the organization’s employment contracts for both its temporarily and permanent employees in the foreign country of operation in order to determines obligations for salaries, benefits, bonuses and any other additional compensation should there be any. Review of union contracts and grievance logs is also important. Non-citizen employee statuses are also reviewed through scrutiny of Visa and any other immigration documents. GSE does criminal background check at this field.

Insurance: Reviews on insurance contracts are an essential due diligence scope. Global Screening Examiners do this so as to facilitate sufficient coverage of insured and eliminating conflicts between buyers and sellers. This also facilitates compliance in global trade among the parties involved.

Tax: Review of tax return of a global business is essential in due diligence investigation. This should be done for prior years. In addition, confirmation of tax payment e.g. payroll, excise, income and real estate tax should be done by the help of local taxing authorities. This will eliminate in dealing with entities that evade tax payment rendering the trade illegal.

Accounting: Due diligence should focus on financial records of a business firm/seller/buyer that must be in compliance Sarbanes-Oxley. The revenue recognition policies should be taken into account as dealing in global trade does not guarantee instant cash earning. Other scopes of due diligence GSE does to business firms involved in global trade includes: employees’ benefits, litigation, environmental hazards, antitrust, foreign regulation and intellectual property.

Due diligence is of great importance in global trade. Its measures need to be observed basing on the merit of global trade, demerits of global trade, scope and survivability of an individual business. This is essential because of it importance and purposes that it serves in the global trade. Global Screening Examiner (Pvt.) Limited due diligence has several perceived importance to global trade. The GSE due diligent importance includes:
Due diligence is a measure of ascertain the purchase price and method of payment: The price to be paid by a buyer is very essential in global trade; a buyer needs to pay for goods/services, related costs like transport, tax and commissions. In addition, while dealing in global trade, decision on modes of payment is crucial. The mode of payment should be economical, secure, easy, faster and acceptable globally.

Due diligence determines details necessary for drafting acquisition agreement. As observed in a negotiation state, parties will comply on terms and conditions in the agreement if they are aware of them. Due diligence assist in determining crucial details in an agreement like substance, extent and limitation representation of warranties which are used in global trade.

Due diligence is used to evaluate legal and financial risks. Legal risks may include non-compliance to tax related issues, illegal goods and services and unfair competition. The financial risks incurred in global trade may include fluctuation in prices, currency exchange rate fluctuation and inferior goods which may fetch low prices on the global market.

Due diligence is used to evaluate the condition of a plant and its equipment: Beside observation of a firm’s tangible and intangible asset that are included in a transaction, the real physical location of a firm should is determined via due diligence.

Due diligence serves as a tool for analyzing potential antitrust issues: The hart Scott Act requires if a seller or a buyer has a reasonable market share with few competitor, he/she is required to send a notification to Federal trade commission. This investigation is vital in exploring possible issues that may prohibit mergers and acquisition.

Due diligence determines compliance with laws: Global trade is governed by laws and restrictions as agreed by the individual trading nations or trading blocs or a state itself. It’s through due diligence that a business know the global trade regulatory restrictions on proposed transactions that it may wish to carry out.

Liabilities and risks are discovered through due diligence: Every business has got its challenges so do global trade. A keen observation of the market, demand, supply and changing cycles of economy exposes potential risks via due diligence.

The roles played by due diligence in global are immense. These roles are realized only if the due diligence is done via appointing appropriate due diligence examiners like Global Screening Examiners operate in more than 180 countries. This is crucial because it will enhance adequate and clear understanding of the information. In addition, a proper due diligence examiners ensures that there is an accurate evaluation of the impact. Less than diligent reviews are source of problems in global trade and should be avoided at all cost.

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