6.13. Checks on Business Partners

 

In order to start cooperation with a new business partner, business organisations must be very careful in assessing all related risks (e.g. proper and timely implementation of transactions, honest fulfilment of obligations on behalf of the partner, or if the partner is related to fraud, corruption, etc.), therefore, this requires a financial-economic and reputation-honesty assessment. Organisations should also apply a consistent system of evaluating and monitoring their current partners as well.

Checking the reputation and due diligence of business partners is one of the typical means of corruption-prevention, usually widely used by business organisations. This measure allows organisations to not only identify and properly manage potential risks of cooperation with a certain business partner, but also avoid cooperation with businesses of questionable reputation, the possibly illegal actions of which would put the organisation at risk of harm to its reputation or even criminal prosecution.

Business practice does not have a universal model for checking business partners, which could be applied to all. Therefore, each organisation should choose the means of assessment and monitoring that meet the needs of its organisational structure and activity best. Some of them are described below.

 

The system of checking and monitoring business partners could be divided into two main stages:

  • checks on new business partners;
  • monitoring of the current business relations.

 

Before starting cooperation with a certain business partner, business organisations usually evaluate the following major corruption risk factors of:

  • a country;
  • a business transaction;
  • a business partner.

 

For the corruption risk assessment of a country the results of  the one of the world's most famous survey, namely, the Corruption Perceptions Index of Transparency International, which shows how different countries of the world are doing in their attempts to bridle corruption. Information on the situation of corruption in each country of the world is also provided on the Business Anti-Corruption Portal[97].

 

When evaluating business transactions, it should be kept in mind that in international business practice certain types of transactions are classified as high-risk transactions and require a more comprehensive verification:

  • legal services;
  • financial consulting services;
  • purchases from the public sector bodies, enterprises, institutions);
  • agents and suppliers working with the public sector;
  •  construction and building supervision and maintenance;
  • issue of visas / work permits and related services;
  • purchase of equipment;
  • purchase and lease of real estate and land;
  • processing;
  • customs services / cargo transportation;
  • security services;
  • charity and sponsorship;
  • various consulting services (e.g. consultations on taxes, purchasing companies, relations with state institutions, performance regulation, lobbying, etc.);
  • relations with the public sector regarding the provision of administrative services (e.g. confirmation of a legal fact, issue of a licence or permit, etc.).

 

For the purpose of evaluation of a business partner, a check is carried out, which basically , is designed for  finding out the details of the company's incorporation, its ownership, property, structure, competence, solvency and business reputation issues. For such a check,  the State Tax Inspectorate (STI) provides its  recommendations which emphasize  the importance of asking the future partner to submit the following: a written commercial proposal, which would contain the future object of the agreement, commercial terms and conditions,  its registered office and business operating addresses, bank account details, authorised contact persons and their contact details, persons authorised to sign accounting documents issued (it is also recommended to request the specimen signatures of the aforementioned persons ). Moreover, it is advised  to ask the future business partner to provide copies of the registration certificate, VAT payer registration certificate (if it is a VAT payer), permit for establishment of a warehouse subject to excise taxation, registered consignee/consignor certificate, also available permits and certificates related to their operating activities as well as  licences for an appropriate activity(where  the activity is limited or licensed)[98].

In business practice, in order to reduce business risks,  during searching for business partners it is also taken into account whether their potential partner applies corruption prevention measures, if he/she/it is not  included into the black lists of persons who avoid paying taxes or the lists of enterprises  undergoing the process of bankruptcy or liquidation, etc. In Lithuania this might be checked on the website of the Authority of Audit, Accounting, Property Valuation and Insolvency Management[99], also on private systems providing business partner creditworthiness assessment services[100]. The data on companies registered with the VAT Payer Register in Lithuania is provided by the STI[101], while the data on companies registered in other EU countries may be checked on the website of the European Commission[102].

If the future partner is a foreign economic entity, alongside with the aforementioned  sources for checking the reliability of the business partner, the services of appropriate country embassies or consular offices,  trade promotion organisations (economic development agencies, chambers of industry and commerce, associations, etc.), which are also able to provide information on  economic entities of their own countries, may also be used.

 

In  evaluating a business partner, the fact that , in international anti-corruption practice business partners are assigned to the high-risk group should also be given notice if there is available credible evidence that the major  shareholders, owners and other persons of the partner, including their close family members, participate in politics or are employed  in the civil service (i.e. they are politically exposed persons (PEPs[103])), indicates that cooperation with such business partners poses a higher risk.

 

Moreover, in international business practice business organisations often focus special attention on the establishment and implementation verification of  corruption prevention measures for their suppliers. For instance, an appropriate business organisation purchasing services and goods, in order to reduce the risk of corruption, may take additional measures presented below:

  • to ask its business partners to sign a Supplier's Code of Ethics/Conduct (see Annex No. 1) (which may contain a detailed description of business partner's obligations related to protection of human rights, employees' health and safety, anti-corruption, environmental protection, including a list of appropriate prohibited chemical substances, etc.), including the right to terminate the contract in case of violation of appropriate provisions. The Supplier's Code of Conduct must be applicable not only to a particular business partner, but also their subcontractors invoked. In general, the Suppliers’ Codes of Conduct usually set higher requirements for the business partners than those prescribed by  legal acts and the latter  are obliged to implement a process for checking if they or their partners  meet the Code requirements;
  • in the contract with the business partner to stipulate  the partner’s obligations regarding the application of additional anti-corruption measures  both during the contract validity period and for an appropriate period after the expiry of the contract;
  • in order to ensure that the obligations of the suppliers and their subcontractors are not merely declarative, but also effectively implemented, contracts with contractors should provide for not only the provisions on transparency of activities, but also the opportunity to carry out independent performance and transparency audits in the entire supply chain and among suppliers, should there be any reasonable doubt over the possible violations of transparency obligations.

 

The results of the checks on  the business partner should be properly recorded in the checks report by specifying the major risk factors of cooperation with an appropriate business partner as well as the plan of actions to be taken with regard to an appropriate business partner in order to reduce the potential risks.

Business organisations should not limit themselves only to the  financial-economic and reputation-honesty assessments of new partners, but also implement the proper control mechanisms for  the current business relations which would enable regular  ensuring  that the business partner meets the  established obligations. This might include both periodic training for business partners on transparency and corruption prevention requirements applied in the organisation and periodic audits or checks on business partners.



[96] http://www.business-anti-corruption.org/ 
[97] Recommendations for checking the reliability of business partners are available here: https://www.vmi.lt/cms/documents/10174/8274962/BŪSIMŲ%20VERSLO+PARTNERIŲ%20PATIKIMUMO+PATIKRINIMO+REKOMENDACIJOS.pdf/d5984a11-4df0-4f5a-b550-99ac1cf532d6 
[98] www.bankrotodep.lt 
[99] For example: www.creditinfo.lt, www.cr.lt 
[100] http://www.vmi.lt/cms/informacija-apie-mokesciu-moketojus 
[101] http://ec.europa.eu/taxation_customs/vies/?locale=lt 
[102] https://en.wikipedia.org/wiki/Politically_exposed_person