How Due Diligence Reveals Red Flags

How Due Diligence Reveals Red Flags

We help corporate finance firms and Nominated Advisors (Nomads) meet their financial regulatory requirements by undertaking due diligence on Company Directors who are appointed to the Board of an IPO and/or other listed companies on international exchanges. This brings to light any corporate red flags that may otherwise go unnoticed. 

The Clients’ judgement regarding the appropriateness of a Company Director has a crucial role to play in maintaining the quality of the Exchange and/or Market, as well as preventing reputational risk to the Client and the Company itself.  Accordingly, the quality of  due diligence on Directors and the judgements applied by Clients in assessing such information, is vital. 

Every year, we conduct an annual review on the background checks we have performed, and provide insight to demonstrate why due diligence is an essential risk and fraud prevention tool. 

From August 2022 to July 2023, the Team at TenIntelligence conducted background checks on 500 Company Directors on behalf of our Clients.  

We utilise a “Traffic Light” system as a way to rate the risk level of each background check in question – GREEN flags for Low Risk, AMBER flags for Moderate Risk, and RED flags for High Risk.  

As part of background checks, we interrogate the corporate history of individuals and companies, specifically looking for undisclosed red flags, adverse findings, false or exaggerated statements that might cause reputational risk to our Clients. 

Upon analysing the 500 due diligence reports, we discovered that 38% of the background checks were rated as “Moderate Risk” and 6% of the background checks were rated as “High Risk”.

Whilst 6% can be considered a relatively small number, some of the RED FLAGS that we identified were certainly not.  

 

Common Red Flags Observed by TenIntelligence

The most common RED FLAG identified amongst the High Risk reports was the identification of adverse media or articles of interest. The articles identified ranged from reports of undisclosed bankruptcies, accusations of corruption, reckless driving and to a relative being linked to various crimes.

Other High Risk and Moderate Risk examples identified, included:  

• Undisclosed litigation, insolvency or bankruptcy cases. 
• Discrepancies with Company Directorships – such as undisclosed company liquidations or undisclosed companies being dissolved via compulsory strike offs.  
• Undisclosed employment gaps or a dishonest employment history.  
• Adverse posts and images on social media accounts.  
• Faked or exaggerated education qualifications.  
• Undisclosed alias or name variations.  
• Identifying Politically Exposed Persons (PEPs) or ties to sanctioned individuals or companies. 

Red flags were also unearthed when conducting independent industry insight interviews (business intelligence) with the Company Directors’ former colleagues – such as the subject being involved in unethical business practices.  

According to the AIM Rules for Companies, the London Stock Exchange may refuse or delay the admission to the Alternative Investment Market if matters that affect the applicant’s appropriateness are brought to the attention of the London Stock Exchange or other financial regulator. Therefore, identifying red flags is a crucial part of the service we provide to our clients as it allows them to assess the fitness and appropriateness of potential new directors and stakeholders.  

As we present the information as we found it, and do not include our own interpretations, we are able to present our clients with impartial and transparent findings that they can review and consider all the potential issues that could arise.  

A client recently reached out to inform us that they decided that a company was not suitable for an Exchange due to the red flags identified whilst conducting due diligence, and that they would no longer work as this company’s corporate adviser.  Whilst this is unfortunate for the Company in question, it does highlight that background checks on Company Directors is imperative to the due diligence process. 

Working closely with our clients, we continue to provide investigative insight into the people, organisations and investments with whom they conduct business. 

TenIntelligence Thoughts 

TenIntelligence is dedicated to delivering excellence to our clients. We will continue to focus on identifying potential risks, so our clients can make assured decisions and mitigate any financial losses.  

For further information about our work with background checks and due diligence, contact us on  diligence@tenintel.com and visit www.tenintel.com/due-diligence/.