by David Mustafaev, Ausserer & Consultants
There exists an expression in Russia, that stems from the negotiations between Ronald Reagan and Mikhail Gorbachev over disarmament issues, where Reagan turned with a smile to Gorbachev, and said «doveryay no proveryay», which means «trust but verify».
This phrase is the best description of due diligence process. Due diligence, at its core, is an audit of a company to evaluate possible risks of dealing with it. While due diligence may take many forms, be it more focused on accounting or legal aspects of the entity, it remains a highly rigorous endeavor. Its importance is also undeniable, hardly any businessman is ready to take a leap of faith and strike a deal with someone without prior research. A fruitful cooperation depends on trust, as renown American businessman Harvey S. Firestone put it: «I believe fundamental honesty is the keystone of business». However, it is only reasonable to put the honesty of potential partners to the test. First and foremost, legal due diligence must be carried out to find out as much as possible on the structure and activities of the company.
Special attention should be paid to the date of registration of the company, its address and authorized capital. Rule of thumb: if a company exists for more than 3 years, it will most likely be reliable but, surely, the older the entity is on the market the more trust it inspires. The address of the entity is extremely important, as it is required to register the company in the first place. Thus, some persons, acting in bad faith, use mass registration addresses only to set up their business. The Tax Service vigilantly flags those addresses and labels companies registered there as «untrustworthy»; however, it may be easy to miss without due diligence. Naturally, dealing with such companies is highly risky and may raise questions with the Tax Authorities.
Another issue of importance is the amount of authorized capital the entity possesses. Generally speaking, this amount usually corresponds to the reliability of the company. As the minimum sum is 10.000 rubles, plenty of businesses settle for it to limit their liability. Bigger players on the market prefer to set a sizable capital to attract partners and investors. Those aspects are one of the basic ones that must be taken into consideration when deciding on whether a company is worth dealing with. A proper due diligence commands meticulous research on all relevant issues, including information on shareholders, affiliated companies, involvement in court proceedings etc. Constituent documents are also worthy of consideration to determine their compliance with relevant Russian legislation. Results of the due diligence present a comprehensible and precise report on the status of the company alongside the possible risks. A timely conducted due diligence is a guarantee against malevolent or misleading partners and helps to preserve good reputation, time and money.