Research conducted by The Risk Advisory Group, Europe’s leading investigations and security consultancy, shows that over 28 per cent of deals collapse or are drastically altered after background checks on potential new business partners uncover problems. The problems include, for example, companies and individuals having broken anti-corruption laws and, in the most extreme cases, having links with terrorism and other illegal activity, such as money laundering, fraud and the backing of international criminal organisations.

In 2003/04 Ukraine had the highest level of deals terminated or significantly modified as a result of the information uncovered during due diligence, at 72 percent, followed by the Russian Federation (35 percent) and Kazakhstan (33 percent). The figure for the UK was 25 percent. The study covered nearly 300 deals during 2003 and 2004 and the organisations involved in the study include leading investment banks, private equity investors, multinational corporations and government bodies.

An investment bank planning to take on a new client in order to list the business on the local stock exchange pulled out when background checks revealed that the chairman had been criticised by government inspectors investigating the liquidation of a company he had co-owned in the 1980s.

A US-based securities brokerage planning a partnership with a European brokerage terminated the arrangement when checks revealed that one of the principals of the European firm had his licence to operate in the securities sector revoked by one European country’s regulators, and was under investigation by another.

A large corporation planning a joint venture with a company in western Africa pulled out of negotiations when checks identified that one of the co-owners of the joint venture partner was an individual alleged to have been involved both in funding international terrorism and in corruption relating to the UN’s Iraq oil-for-food programme.

A large private equity organisation considering a major package of investment in an industrial company in eastern Europe was not satisfied about the quality of information provided about the identity of one of its planned co-investors. Enquiries determined that the corporate entity concerned was controlled by an individual of unacceptable record and reputation. The buy-out was extended to remove this shareholder.

The survey also found instances where companies and individuals had links with terrorism and other illegal activity, such as money laundering, fraud and the backing of international criminal organisations.