How Can Due Diligence Prevent Fraud in International Contracts

Corporate Due Diligence

Whenever someone makes a contract with an organization, there are definite chances of frauds, either very less or very high. However, the organizations always claim to have utmost transparency. As an investor / consumer, you should be aware of the fact that there no thing as 100% transparency or 100% fraud proof contract in any domain. Even though cheating some other party intentionally is considered as criminal offense under law, still frauds are prevalent, if not more than definitely on the small scale.

Commercial frauds are something, which have even caught the attention of the UN that has termed it among the present era’s supreme coercions. They have acknowledged commercial frauds as an international level event that harms the stability of the economics of every country. And this is where the role of due diligence consulting services starts. There are many due diligence companies which you can take help of.

General Commercial Frauds: These are related to activities like Deceptive Advertising or Marketing, False Reporting, Falsifying Documents, Non-Delivery, Piracy, Overriding of Regulatory Breaches and Thefts.

Popular Scandals: Deutsche Morgan Grenfell in England and Enron in the U.S.

Be Cautious in International Contracts

If you plan to get into an agreement, then it is recommended to audit the other contracting party for the relevant matters such as financial records, past complaints / clients etc. This step is very crucial during the negotiations stage and should be continued even after the end of negotiations. This small step will help to minimize your financial loss and prevent from getting into any legal trouble.

Few relevant matters of investigation are:

1. Government rules and regulations of each nation
2. Indemnities, loans and other financial arrangements
3. Information technology such as security of system, upgrades etc.
4. Language or cultural obstructions
5. Potential in the market and prospects of future performance

Stay Safe from Frauds in International Contracts

With every passing year, new fraud surface either at large level or at small. It is only by being self-conscious that you can protect yourself / your company / your investment from fraud in the international contracts. Also, below are some pointers that will guide you in safeguarding yourself from the fraudsters:

Specialization is necessary. You can take assistance of lawyers or consultants, who specialize not just in the international contracts but also in the domain wherein you are dealing in. This is very beneficial if you are not an expert yourself. In addition, you can spend your money in acquiring marketing and accounting specialization.

Use Secure Payment Methods and Letter of Credit. Whether you are dealing with a known entity or not, you should still take all possible precautions to draft clear and secure terms. In the banking industry, there are strong terms for “Letters of Credit” that come with the bank’s guarantee for partial payment or seller’s payment on behalf of buyers. Although the risk is not entirely eliminated, but these can be instrumental for novice traders in mitigating the chances of fraud.

Mention Important Clauses in Contracts. In the international contracts, frauds can be avoided or their chances reduced by the inclusion of important points that can be called negotiating requirements, for instance certification, currency, product samples, insurance, and other regulatory documentation.

Authors of this post are Bill Trueman and Kevin Smith who are eminent payment, due diligence specialists, risk & fraud expert who provide their consultancy services to card issuers, banks, corporates and business organizations worldwide. They are chief executives of RiskSkill, UKFraud and member of AIRFA which is a worldwide known independent organization.

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