Best Practices in Executive Due Diligence

With so many recent scandals at senior executive levels, often resulting in dismissals and resignations, more companies are becoming proactive in checking the backgrounds of their executive ranks.

The issues range from fraud and embezzlement involving governments, sometimes implicating national and international law firms and auditors, to more than three dozen senior executives accused of sexual misconduct in one year alone (2018).

Egregious examples of recent corporate scandals such as 1MDB involving $4.2bn embezzlement from a state-owned Malaysian investment fund. The ensuing investigations implicated Malaysia’s Prime Minister Najib Razak, three former Goldman Sachs Executives (Jho Low, Roger Ng and Tim Leissner), and lawfirms Sherman & Stelling, Sullivan and Cromwell. Another case known as Operation Car Wash which resulted in the impeachment of the former Brazilian President and money laundering conviction of her predecessor. The Panama Papers, Paradise Papers and Operation Car Wash are additional cases that resulted in federal and in some cases global prosecutions for bribery, money laundering, and embezzlement on a massive scale, in addition to other crimes, some of which are ongoing. These are just a few of the headline news cases in recent years.

Then there was the #MeToo movement which focused on sexual misconduct, sexual harassment and rape.  Dozens of senior executives, university professors, Hollywood producers, directors, actors, comedians and photographers such as Harvey Weinstein, Al Franken, Kevin Spacey, Roy Moore, Bob Packwood, Junot Diaz, and Matt Lauer were publically shamed and lost their careers, including in many cases lucrative sponsorships and endorsements in addition to their reputations.  The examples seem endless and far too numerous to list here.

The impacts to an organization under such public and legal scrutiny are obvious: company reputation is damaged, loss of business and client confidence (often on a global stage), loss of revenue, distraction for the board and executive teams, loss of productivity and employee morale, dismissal of the executive plus the need to replace them, and the list goes on.  The damage is often in the millions to tens of millions of dollars and sometimes even higher.

Unfortunately many companies turn to routine background checks and believe that these very limited backgrounds will reveal the issues of concern. A simple background check will not reveal many of the issues of concern at the executive level. Best practices in business due diligence should always include a comprehensive review of all senior executives.

Infortal’s statistics show that 20% of executives do not pass a deep-level due diligence check.

The purpose of investigative due diligence is to ascertain whether executives being hired (or acquired) have provided the company with full disclosure of their background and prior substantive issues.

This is necessary to protect a company’s Board of Directors, improve risk management, comply with federal regulations, and optimize corporate profitability.   Effective due diligence will reveal issues such as corruption and money laundering or inappropriate political influence that may violate the Foreign Corrupt Practices Act FCPA.

All too often, companies rely on what they know about an Executive who has “worked in their industry for many years” and is generally well known for their business acumen and experience. However, what companies do not know is whether that person has an unknown or undisclosed history: bankruptcies, sexual harassment claims, civil litigation/ litigious history, SEC violations, & even criminal convictions may not be known to colleagues in the industry.

Infortal Worldwide strongly recommends a Best Practices approach when conducting Executive Due Diligence.   Following multiple public company accounting scandals, the federal government introduced the Sarbanes Oxley Act in 2002.  All public companies today are required to submit an annualized assessment of the effectiveness of their financial accounting & internal auditing systems.

The benefits of screening executives

  1. Protect the interests of the corporation
  2. Protect the fiduciary responsibilities of the Board of Directors
  3. Minimize liability exposures for the company from future inappropriate activities & crime
  4. For corporate governance, FCPA & Sarbanes Oxley compliance
  5. Rule Of Thumb: if you have not personally known executive for at least 10 years then you do not know the person well.

Infortal’s data collected over a 25 year period show that 20% of executives (1 in every 5) have serious issues of concern in their history. This may include a broad spectrum of issues for example: no degree earned, forged degrees, criminal convictions such as felony fraud, IP Theft, money laundering, racketeering, trafficking, manslaughter and even murder. We may also find business conflicts of interest, ownership in other companies, civil lawsuits, including breach of contracts, SEC violations, interstate bankruptcies, corporate espionage, con artists, and a host of other issues which may be of concern.

Case Studies:

The candidate’s “history” can be checked in advance to avoid the embarrassment and public damage to your company at a later date. Many examples of this exist:

  • A General Manager who is also the CEO of a competing company with annual revenue of $40 million
  • A healthcare company whose CEO has been sued for prior sexual harassment with a settlement costing the company over $3 million plus legal fees
  • A CFO who has lied about their education; company’s stock price drops nearly $20m in one day
  • Senior Financial Manager who had spent 9 years in federal prison for cocaine & manslaughter conviction (with prior history of cocaine possession); the information was covered up by “extended” employment dates.
  • Corruption of a senior executive team with history of money-laundering, racketeering, drug trafficking & murder.

None of these histories were disclosed and all details were deliberately covered up.

Impact To Your Company

Officer-level involvement in other businesses that have not been disclosed can cause many problems later for your company if the second business is encumbered with lawsuits, FCPA or SEC violations, encounters negative publicity linked to your Executive, or worse is involved in criminal actions of any kind.

Due Diligence Objectives:

  1. Determine whether the person is who they say they are
  2. Check the veracity of their qualifications and stated history
  3. Analyze gaps and undisclosed information
  4. Assess how this information is matched with public records (factual verification)
  5. Examine discrepancies, and complex business & judgment issues that may occur at the Executive Level
  6. Determine any undisclosed, unexplained, criminal or litigious behavior
  7. Determine whether all information has been disclosed to you during or prior to your business transactions

Issues Of Concern:

A brief summary of the typical issues of concern which are evaluated during an effective Executive Due Diligence investigation include:

  • History of criminal activity: all crimes at federal & state levels - ranging from money laundering, racketeering & bribery to drug abuse & various misdemeanor crimes.
  • Real Estate crimes (non-prosecuted), real estate high-cash transactions (incl. money-laundering activities)
  • Fraud, computer crimes, child pornography, tax crimes, counterfeiting, securities fraud,
  • Interstate crimes (interstate bankruptcies, Theft of intellectual property, etc).
  • Serious civil litigation issues: SEC violations, etc.
  • Evidence of litigious behavior
  • Undeclared, unresolved & resolved civil lawsuits
  • Prior history of sexual misconduct, harassment, or rape.
  • Involvement in other business entities at the officer/director level (declared & undeclared): Department of Corporations searches.
  • Inconsistent or unstable financial management and inability to meet financial obligations
  • Outstanding county, state or federal tax liens, large outstanding child support amounts
  • Various types of irresponsible behavior in senior management positions
  • Terrorist List status
  • Denied Persons status
  • Federal sanctions for inappropriate financial dealings; both domestic and international (OFAC & SANCTNS).
  • Foreign in-country investigations for foreign nationals (did they work/ behave legally before transferring to the USA); additional costs may be involved for overseas investigation.
  • Negative professional references & information (more often shared with neutral parties like Infortal).
  • Personal & professional judgment regarding disclosure of information in any or all of the above
  • Management issues: Macro or micro management, team building capability, market penetration of new products/services
  • Reference checks if conducted: Ability or inability to build world-class organizations; Ability to raise new capital vs. burn rate; Competitive intelligence issues

Essential Due Diligence

Executive due diligence investigations focuses on public records and other information sources.  A detailed report with Actionable Recommendations™™ are provided when the investigation is concluded.

Executive due diligence investigations should be considered essential today whenever:

  • Hiring a new executive
  • Promoting an executive to C-suite executive management
  • Conducting Mergers & Acquisitions due diligence (M&A)
  • Onboarding a third party supplier, vendor, or distributor (FCPA related)
  • Onboarding a new board member
  • Ongoing monitoring of executives periodically or annually

The cost of due diligence backgrounds are minor compared to the cost of a single executive hire and pale in significance compared to the damage to reputation, stock market losses, adverse impact to client confidence, employee morale and business profitability.

Best practices in Executive Due Diligence involve detailed investigative review and careful analysis of all the data points found related to the executive’s history. This may include county level criminal records, county civil records, federal criminal and federal civil records, national criminal records, employment history verification, educational verification, credit history (where FCRA release forms are signed), suits liens judgments and bankruptcy records, department of corporations searches, UCC filings, adverse keywords/ negative keyword searches, and in some cases reference interviews. For best practices due diligence on executives we also recommend deep web searches using Open Source Intelligence (OSINT) techniques which yield the majority of hidden and undisclosed information. For more information on best practices in executive due diligence contact us.


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