The decision to make a $50 million investment in a company demands rigorous due diligence. The company’s press releases look polished. Its filings appear routine. The registered address is properly listed. But an unannounced visit tells a different story. The company’s “office” is a rusty mailbox bolted to a wall.
There are no employees. There is no signage. The listed phone number routes to an automated voice and an endless hold. This situation sounds theatrical, and watching it unfold demonstrates that this can be a real risk for investors.
Lessons From Sweetpea And Kwabena
In a recent episode of HBO’s Industry, Sweetpea Golightly and Kwabena Bannerman, hedge fund analysts, travel to Accra, Ghana, to conduct a site visit, which involves visiting the locations associated with a business to see whether it actually conducts business at its registered addresses.
In Accra, Sweetpea goes to the registered address of a Tender subsidiary (a payment processing company) and asks the security guard for the location of the company’s office. The guard points to a mailbox. When she asks the guard for a phone number, he eventually provides it, which connects to an automated voice and a never-ending hold.
Her colleague, Kwabena, luckily knows someone who was affiliated with Tender’s subsidiary, who, during a conversation, admitted that Tender paid less than the $50 million it claimed in a news article. This source also provided the subsidiary’s actual office address.
This human-source interview yielded two helpful leads. First, we learn that what Tender publicly reported about the acquisition of the subsidiary was untruthful, according to this source. Second, the interviewee provided a physical address to allow for a second site visit.
Sweetpea and Kwabena traveled to the address the source provided, arriving at a warehouse that appeared abandoned. They went to the subsidiary company’s floor and found a mostly abandoned office space. Two security guards sat behind a desk in the middle of one of the rooms, monitoring video feeds to ensure there were no squatters. Sweetpea again called the number the guard provided her from the first site visit. The phone on the guards’ desk rang; one guard picked it up, then hung up immediately, and the automated voice began speaking. Sweetpea and Kwabena called their superiors to inform them that this operation appeared to be a fraud.
Real-World Takeaways
When conducting an enhanced due diligence investigation, research is essential to uncover new findings for the client and verify previously reported information about the subject (a company or person). The value of having someone complete a background check questionnaire (also called a due diligence questionnaire) is that it allows the subject to be transparent with both its business partner (our client) and the investigator who verifies this information (us).
While it would be alarming to discover that EU entities sanctioned a potential business partner or that a potential investor has declared bankruptcy multiple times, it would be even more disturbing if this entity claimed to have never been sanctioned or involved in legal proceedings, including bankruptcies. Being sanctioned and filing for bankruptcy multiple times are significant red flags. Blatantly lying about these matters is another one.
While this was an extreme case suited for television, this site visit and the interview with the human source were instrumental in helping these analysts conduct their due diligence. Many investigations rely solely on open-source intelligence, often conducted behind a desk. Site visits and human-source interviews can provide information that desk research cannot. Even if Sweetpea and Kwabena had the addresses for both the mailbox and the warehouse, they could have used an online map service to view the locations from the outside. If they had only done this, they would not have discovered that no company was conducting business behind these doors.
Since the human source and the news article provided different answers regarding the price Tender paid for its subsidiary, analysts would conduct additional research, attempting to verify these claims. Some sources are more trustworthy than others. In this case, a human source close to the subsidiary’s owners would likely provide more reliable information than a company’s online claims.
Business intelligence analysts, along with their clients, define the scope of the investigation, but a client’s budget and appetite for risk carry more weight. Human-source interviews and site visits are more costly because they are more time and labor intensive. They can even require working with partner investigations firms, often when the subject is located on a different continent (Sweetpea and Kwabena reside in London). Having to pay for higher-fee due diligence investigations can be a deterrent for clients, as many businesses view them as box-checking exercises. Ultimately, the client determines the scope of an investigation. A smaller scope and budget, while economical, could leave crucial findings uncovered.
Due Diligence Is Cheaper Than Damage Control
Site visits and human sources cost more, take longer, and may involve uncomfortable questions. However, it would be even more uncomfortable to explain to your board that you authorized the transfer of $50 million to a mailbox or to security guards monitoring an abandoned building.
