Identifying the Three Main Levels of Due Diligence

On May 9, 2022, Jorge Gomez joined Moderna, maker of the COVID-19 vaccine, as their new CFO. Gomez was fired just one day later when it was found out that he was the subject of an internal investigation by his prior employer Dentsply Sirona. Gomez’ brief stint at Moderna cost $700,000 in severance pay to Gomez, unless Gomez is found to have been involved in misconduct at Dentsply Sirona, as outlined in a claw back agreement. Gomez will forfeit his signing bonus, bonus eligibility and eligibility for new hire equity awards, Moderna said in a securities filing.

According to Endpoint News, the probe was initiated in March in 2022. Moderna told them “that it had been unaware of the Dentsply’s investigation involving Gomez until it was publicly disclosed on May 10th,” the day of Gomez’ resignation. Endpoint further reported that “despite the end result, Moderna defended its decision to hire Gomez and its swift action to let him go.” Moderna’s spokesperson said:

“The May 11, 2022 announcement and departure of Jorge Gomez from Moderna strongly reflects the seriousness with which Moderna takes corporate governance. We are confident that Moderna conducted all appropriate due diligence on this matter prior to the hiring of Mr. Gomez, based on available information.”

The spokesperson was not the only Moderna employee to defend their hiring. Financial Times reported that Noubar Afeyan, Moderna’s co-founder and board chairman told them legal constraints prevented the company from learning about Dentsply’s internal investigation earlier. Afeyan further said: “Both the process of recruiting and vetting, and the process with which we reacted to the new facts that came out, were completely appropriate. I can’t think of a different approach that we could have used under those circumstances.”

How Can Companies Protect Themselves?

The elephants in the room here are “How is the company confident that they “conducted all appropriate due diligence” prior to hiring Mr. Gomez?” and what exactly do they believe to be “appropriate due diligence?” Many C-suite executives, board members, and even investors, often “can’t think of a different approach” than the one’s Moderna most likely followed.

Many companies conduct a basic background check and conduct reference interviews on new executive hires and think this is a sufficient level of due diligence, however, this is insufficient due diligence for executive hires. Federal regulators know the difference if an issue occurs that requires demonstrating the levels of executive due diligence conducted. Thorough levels of executive due diligence can provide an extra layer of fiduciary protection for the board.

It is important for executives and board members to be able to understand and identify the three main levels of due diligence, especially in regard to corporate hires to mitigate risk and prevent a company from encountering a situation similar to Moderna’s hiring of Mr. Gomez.

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Understanding Background Checks Versus Due Diligence Investigations

Most companies default to standard background checks. These checks, sometimes called routine background checks, are initiated internally by the company’s human resources department or through an executive search firm that a business is relying on to not only locate potential executive hires, but to vet them for potential issues. These default standard background checks reveal less than 1% of serious issues compared to the 20% revealed through due diligence investigations. Why is there such a big difference in the results found?

When hiring executives and board members, executive background checks, a deep-dive executive due diligence investigation, should always be conducted.

Standard background checks typically look at only 5 components. They usually verify employment history, criminal records, degree or education verification, social security validation and address verification, and sometimes credit history. These are the same basic background checks performed on any level of employee. Companies mistakenly believe that if they have their executive recruiters conduct a routine background check plus reference interviews that they will find any negative information on executive hires.

Background checks only provide a small window into a potential hire’s public information and fail to capture substantial amounts of detail, particularly hidden or undisclosed information. Standard background checks are a starting point, but are entirely insufficient when assessing a new executive hire or board member. These backgrounds are unsuccessful at taking a comprehensive look into an individual’s reputation, litigious history, behavioral issues, fraudulent behavior, SEC violations, undisclosed work history, and conflicts of interest to name only a few issues of concern at this level.

Due diligence investigations are designed to detect hidden and undisclosed information that is not readily available in standard background checks. Open Source Intelligence (OSINT) investigations are an important source of information in addition to publicly available records as this part of the investigation examines deep, dark and historical information on the world wide web (far beyond simple Google searches). Due diligence investigations evaluate criminal history, financial and legal issues, civil litigation issues, relationships with other companies and entities, reputation issues, relationships of executives to foreign officials, shell company involvement, evidence of fraud, signs of money laundering, financial impropriety, conflicts of interest, drug, alcohol and human trafficking, anti-competitive behaviors and numerous other serious issues.

The information gathered in deep due diligence investigations is invaluable and can save a company monetarily, reputationally, regulatory fines and penalties, and even legally. Executive due diligence is very thorough and provides additional substantiation in fiduciary duty of care. A high-quality executive due diligence investigation can uncover essential information that a routine background check could never find.

Due Diligence Investigations, Tier I

A Tier I due diligence investigations is the most basic level. It incorporates the elements of a standard background check, but expands on this. Tier 1 due diligence checks both federal and county level criminal records and civil litigation history, professional licenses, bankruptcy filings, along with other public records. It also looks at anti-terrorist lists, anti-money laundering (AML), politically exposed persons (PEPs), OFAC and sanctions on over 1,700 global watch lists, and similar government listings from law enforcement and government agencies around the world. This level is suitable for mid-level executives.

Due Diligence Investigations, Tier II

Tier II incorporates everything in a Tier I due diligence, but takes a deeper dive into every aspect of public records information plus a negative keyword search of 40 million online digital articles, news media and other publications. Typically, this includes a basic 20 to 30 keywords search among other relevant data. It sits squarely in the middle of due diligence investigations and is far more suitable for senior executives than a background check. Tier II provides more than basic executive due diligence results but is not comprehensive due diligence.

How Can Companies Protect Themselves?

Tier III due diligence investigation, or deep dive due diligence investigation, includes everything in the prior levels, but is more robust and takes a comprehensive search regarding executive’s activities, and business history. At this level, it not only helps to reveal bad individuals or find bad actors, but can identify behavioral patterns which may indicate an inclination for sidestepping internal controls, or skating to close to ethical lines that leave a company open to future legal or reputational issues, should the individual’s behavior continue after they come aboard. These issues can vary dramatically and include: conflicts of interest either business or personal, breach of contract matters, litigious behavior, sexual harassment, anger-related issues, such as bullying or violence, to even being a fraudster. Or for example serious financial pressures, numerous collection accounts, or high tax liens, may indicate a drug habit or a history of gambling, tax avoidance, or mismanagement of monies. An undisclosed history may yield information on SEC type violations (in the USA or another country), time served in prison, fraud committed at a prior undisclosed company, undisclosed board involvement, ongoing civil litigation, or even involvement in other companies where serious crimes were committed. Some situations may be rationalized; others are red flags. When compounded with other issues, serious financial pressures can occasion unusual behaviors, even at the executive level. Would you be concerned if you were not aware of something like this that may have later repercussions to your company, or that you inherited when acquiring a company?

Some surprising findings uncovered by deep dive due diligence investigations include: money laundering and bribery, hidden aliases, undisclosed board involvement, SEC violations, IP theft, interstate bankruptcies, signs of malfeasance, misconduct (with or without criminal conviction), concealed criminal activity, media negatives, social media negatives, sexual harassment, class action lawsuits, murder and manslaughter, historical issues, undisclosed business ownership, money-laundering, embezzlement, bribery and racketeering, signs of malfeasance and/or misconduct, identification of fraudsters, and con-artists, and litigious or negative behaviors.

This enhanced due diligence, includes a deep search of online media that includes periodicals, newspapers, digital media, and other publications can uncover a great deal in regards to past behaviors and affiliations. It also searches the accessible portion of the dark web. In the case of an individual who has an international footprint, there may be in-country information that can only be found through local language and in-country searches.

The majority of this information can be found through a combination of publicly available records and skilled investigative analysis. 20% of information not found in routine background checks can put a company at risk in terms of identifying serious issues, for corporate compliance, good governance, and in keeping compromised individuals or bad actors from being onboarded.

An expert investigative firm will customize a deep due diligence investigation to your company, industry, and needs, to provide not only the results of the investigation, but recommended actionable steps, especially when there are issues that warrant further consideration such as involvement in other companies and other potential conflicts of interest.

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Tier III Addition: Deep Dive Due Diligence-Enhanced Country-Specific

When conducting business in a foreign locality, having global subsidiaries, undergoing Mergers and Acquisitions (M&A) in another country, or hiring or acquiring through M&A an overseas executive, a Tier III investigation should be supplemented with a country specific deep dive due diligence. These investigations should be conducted by professional investigators who can provide site visits, speak local languages, have local contacts, are familiar with the culture, and have the experience and expertise to seek information in these locations.

On a more basic level, what is socially, and sometimes legally, acceptable in one location, may in fact, be a legal issue in another.

In-country due diligence may be needed in some situations to gain “on the ground” business intelligence. When operating in a foreign domain, a business is still accountable for adhering to the FCPA and other applicable laws if they have management or financial activity providing a business or banking nexus through the USA.

Conclusion

The different approach Moderna could have used would have been to conduct a Tier III due diligence investigation into Jorge Gomez before bringing him onboard. A Tier III due diligence investigation would have uncovered his prior employer Dentsply Sirona’s issues and recent change of management at the very least raising questions.

            

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