“Wait, they want three months of the CEO’s personal bank statements? Are they insane?” This was a real request to one of my clients via a due diligence questionnaire. When I called to inquire with the requesting company why they needed this, they said that they wanted to ensure that the CEO wasn’t receiving “unusual payments” that could be a bribe.
Due diligence questionnaires are a critical tool for understanding third-parties. But they can quickly get out of control, putting unreasonable burdens on the answering party, and at worst, invading the privacy of individuals in wholly unnecessary ways.
How do you balance the legitimate need for information with the reality that no questionnaire can fully protect the company from the possibility that the third-party will misbehave? Here are three do’s and don’ts when it comes to due diligence questionnaires.
1. Don’t Ask For Information That Won’t Stop The Third-Party From Being Approved
Most due diligence questionnaires are far too overreaching. The rule should be this: if you wouldn’t deny a third-party if the answer is negative, don’t ask the question.
Some questionnaires ask if any employee has ever been convicted of a misdemeanor. First of all, as many companies have thousands of employees, how could they possibly answer this in good faith? Secondly, if a key manager had a shoplifting offense or marijuana conviction from twenty years ago, would this stop the third-party from being engaged by your company? If the answer is yes, ask the question. If the answer is no, don’t.
2. Do Ask All Questions Your Require for Your Risk Ranking and Approval
You probably need to know information about the ultimate beneficial owner(s) of any higher-risk third-party working with your company. You also probably need to know the names and titles of key managers, as well as if the company has ever been convicted of bribery or other compliance-related offense. Ask all of the questions you need up front so you’re not going back to the third-party again and again. Have an “if yes” methodology that allows the third-party to explain itself if it answers important questions in the affirmative.