By Colleen Telling Esq., Manager & Counsel, AIA Contract Documents
January 13, 2022
Before accepting an offer from a potential overseas client to build their new state-of-the-art facility, protect your company by conducting due diligence about the potential client to evaluate the business risks.
There are multiple ways to learn about a prospective client. One is by requesting that they complete a background questionnaire, which should include questions that identify:
· the foreign business (such as date and place of incorporation)
· the foreign business’ representative for contractual and construction matters (to ensure that the representative is not on a Politically Exposed Persons (PEP) list)
· information about parent companies, shareholders and other beneficial owners, and relationships to government officials (this is important in terms of anti-corruption requirements)
· disclosure of civil or criminal matters
· a history of bankruptcy or insolvency
While a questionnaire is a valuable approach, many clients may not agree to complete it – or may complete it but with selective or untrue answers. To verify accurate responses, information from the questionnaire can be supplied to a risk intelligence screening company, such as Refinitiv™ World-Check®, to further research the potential client.
Other options for conducting due diligence are to perform a lien search; public records and litigation search; insurance and liability review; supplier and customer review; and operations, organization, environmental, and real estate reviews. In various Middle Eastern countries, a client can be researched by its commercial registration number. This is a unique number assigned to a company when it is formed. Information, such as disputes and complaints to governmental authorities about the client, are tied to their commercial registration number.
Additionally, the contractor’s due diligence should include a review of the Foreign Corrupt Practices Act (FCPA) violations by the client along with individuals listed on PEP list or the Office of Foreign Assets Control (OFAC) sanctions list, which can be accessed at https://home.treasury.gov/policy-issues/financial-sanctions/specially-designated-nationals-and-blocked-persons-list-sdn-human-readable-lists. The contractor’s due diligence should be thorough enough to weigh the risks of undertaking business with the client, its related entities, and its bank from which payments will be made to the contractor, as well as the respective officers, directors, employees, and beneficial owners of any of them. The Department of State and the U.S. Embassy’s commercial service for a particular country are also sources of assistance and referrals; so, too, are professional societies in the U.S. and overseas.
It is valuable to understand a prospective client’s corporate organizational structure and their financial resources. Regarding the former, a client’s entity that is a shell will be impossible to collect from for nonpayment. The contractor should determine whether the potential client has assets or operations in the U.S. or Canada, which can be helpful if assets need to be frozen as the result of a lawsuit. Additionally, Dun and Bradstreet can provide data, analytics, and other information about a business.
A contractor can gauge the potential client’s ability to issue payments by conducting credit checks and speaking with firms who previously worked with the client. The Export-Import Bank, a U.S. agency, can provide foreign credit risk protection, including information about a client’s assets and credit rating. In particular, the Export-Import Bank can assure payment from a client in a developing nation to the contractor, which enables the contractor to provide generous payment terms (e.g., several months). To better understand the client’s financial means, the contractor should inquire whether private investors are funding the client’s project, as it is possible that the investors may stop their funding during construction.
AIA Contract Documents has provided this article for general informational purposes only. The information provided is not legal opinion or legal advice and does not create an attorney-client relationship of any kind. This article is also not intended to provide guidance as to how project parties should interpret their specific contracts or resolve contract disputes, as those decisions will need to be made in consultation with legal counsel, insurance counsel, and other professionals, and based upon a multitude of factors.