Due Diligence: Always Important, but Critical in Times of COVID

I am currently organizing a webinar on PPE transactions with my colleagues in the Florida Bar International Law Section, which will feature Dan Harris as a panelist. As we finalized the agenda, one of my co-organizers observed that fraud overshadowed every other agenda item. Not only do I agree, but this provides the best framework to approach PPE transactions these days. Massive fraud is a reality in the PPE space. If you can get to the point where you can have a substantive discussion of contractual terms, you’re part of a small group. Because of this, the importance of conducting proper due diligence is greater than ever.

Fraud is of course not a new phenomenon when it comes to international transactions, especially those involving emerging markets. What the pandemic and the heightened need for PPE have done is add certain aggravating factors. There are public health considerations, which potentially make procurement delays a life-and-death issue. The economic duress felt around the world increases temptations to cheat, even from hitherto honest folks. Travel restrictions make it harder to inspect goods and vet suppliers.

Yet even when conducted from a distance, proper due diligence can reveal a lot of valuable information. Even the most basic data points, such as a company name or address, can help assess a potential business partner’s reliability. Sometimes, due diligence will reveal smoking guns, but more often it raises questions, which a legitimate business partner should be able to answer satisfactorily.

Take the issue of company names. Say you are in conversations to purchase nitrile gloves from a Malaysian company called Tangan Bersih Sdn Bhd. The company claims they manufacture their own product, but the address that you have for them is in a swanky building on Jalan Ampang, which is clearly not an industrial facility.

A legit player should have no problem explaining this incongruency. Upon inquiry, they may clarify the address is that of their corporate headquarters, with manufacturing taking place at a plant in Kapar. They then provide you with an address in Kapar, which when you check it out on Google Street View shows a factory compound with Tangan Bersih’s name prominently featured on its front gate.

Less satisfactory and revealing a certain degree of dishonesty, but still logical, would be an explanation that the gloves are actually manufactured by a different company, owned by Tangan Bersih’s owner’s cousin. But if your contacts insist that Tangan Bersih is producing gloves above a Sephora store, run.

One important warning: Beware of your own desire to believe the transaction is square. Successful fraudsters are above all excellent manipulators. Though their mission is very different, their methods are very similar to those used by intelligence agents. They will anticipate your questions and concerns—and they will exploit your vulnerabilities.

In the context of the COVID-19 pandemic, fraudsters know there’s very good money to be made by those who can position themselves along the supply chain. They know just what a powerful driving force the prospect of juicy commissions or profits is for many of the persons entering the PPE marketplace. And they will do all they can to clear the psychological path that gets an individual to make that wire transfer.

Fortunately, there is a limit to what fraudsters can do. While it’s not that hard for them to superficially support their narratives, false premises usually fall apart rather quickly under careful analysis. A scammer can establish a company for fraudulent purposes—but they cannot backdate formation dates on corporate records. (Sure, they could purchase a shelf company, but good luck finding a 10-year-old company with a name that makes sense for a PPE maker.) Like any other counterfeiter, they might be able to get their hands on a sample that has a particular trademark, but they cannot conceal the identity of the trademark owner on government records.

What are some of the unpleasant discoveries you have made as a result of your due diligence?