An analysis of nearly 400 potential deals between July 2004 and June 2005 showed that nearly one third of the deals were abandoned or restructured after background checks revealed significant problems. Around 15 per cent of all deals were not pursued after detailed checks during the year, compared to 10 per cent which collapsed the previous year. The study by The Risk Advisory Group, the integrated risk management consultancy, was its largest to date.

Transactions examined were proposed by leading investment banks, corporates, private equity firms, multi-nationals and government bodies in a wide range of countries, the main ones being the UK, the US, Russia, Ukraine, Germany, Italy and Nigeria. They included new joint ventures, mergers, acquisitions, new client relationships, private equity investments, IPOs and secondary listings.

Common problems revealed by the checks ranged from potential litigation and reputational concerns, through to more serious issues relating to fraud, money laundering and corruption. Extreme cases have even discovered potential links with terrorism and criminal activity. Henry Pugh, Head of Business Intelligence at The Risk Advisory Group, said:

“New joint venture, takeovers and other business partnerships can be transforming events for companies and, if they go wrong, the impact is often far-reaching and long-lasting. During the past year, we have been asked to check out an increasing number of these projects, particularly in emerging markets.

“Our sense is that companies are widening the net in terms of seeking new business partners and, as a result, are exposing themselves to far greater business and reputational risk.

“If things go wrong it can lead to personal liability for Chief Executives and CFOs and, for this reason, companies are paying much more attention to risk management. However, there is also increasing pressure to grow their businesses so they are obliged to check out a far wider range of partners and potential targets, which often prove to be unsuitable.”

Some case studies of the deals that were either scrapped or significantly modified are as follows:

A large European oil firm planned a joint venture in a west African country with an indigenous company which held an oil prospecting licence. The oil major asked The Risk Advisory Group to identify the beneficial owners of the local company, and to investigate their backgrounds and reputations. Enquiries established that ownership details were kept deliberately opaque, but that it was widely understood that the true owners were associates of a former ruler of that country, who had been granted the licence in return for political and financial favours.
A City institution planned to co-finance a property development project. The Risk Advisory Group was asked to conduct background checks on the key promoter of the scheme, and one of the other backers, apparently a member of a middle eastern royal family. The promoter's background highlighted several causes for concern: involvement in a string of liquidated companies, and former business partners alleged to have been involved in arms dealing and insider trading. And neither the prince, nor the company through which he was said to be investing the money, were proved to exist at all.

A western investment bank planned to appoint a senior representative in an Asian country, but terminated the planned relationship when an investigation by The Risk Advisory Group discovered that the proposed agent, a former government minister, had a poor reputation for integrity and competence, and had effectively been forced to retire from the government as a result. This had been ignored by the deferential local media but was widely accepted in well-informed political and business circles in the country concerned.
A western investor planned a joint venture with a partner in the former Soviet Union. Investigations by The Risk Advisory Group discovered that some of the assets proposed by the local partner as its contribution were actually owned by a third party. This party was a company controlled personally by senior managers of the local partner’s state-owned lender bank.

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