From time to time it's good to see a due diligence case that at face value looks completely innocuous but turns out to be something else. Like many, on its surface, it is simple. However deep down, it's not. In fact, it's anything but innocuous nor simple. If you simply did some basic research the subject entity would look totally above board, totally innocent, totally compliant and would pass the mark with pretty much anyone who reviewed the entity. It would pass every questionnaire and every media search ever done. It would also pass every watch list or sanctions check. It was, on its surface the perfect NGO set up for useful and valuable purposes. Until you scratch the surface.
The entity was a relatively new entity described as an NGO. It does business in an eastern European country, a CIS state, that is not well known for compliant practices. The entity was set up by a medical doctor and seemed to be an adjunct 'business' to their specialist medical practice. The business was described as an NGO and was specifically designed to train other medical professionals on treatments for a certain disease/disability. Their website prominently displayed several major global companies as 'sponsors'. Their 'business' was to provide events around the treatment of a specific disease and was provided to medical doctors.
When faced with a simple fact situation like this, there are a few key questions that should be asked when completing this due diligence process.
Status as an NGO. Just because an entity describes themselves (or are described as such by the media in a media article) as an NGO does not necessarily mean that that they are an NGO or could be classified as a charity. A Non-Government Organisation, means that they are not part of the Government. They may be partially funded by the Government or may not be. The reference to an NGO typically means that the entity is set up for some charitable purposes, however, this is not always the case. In fact, there is no global law that describes whether an entity is a NGO and it very much depends on the local country and their registration laws. In some countries, there is no registration option to be registered as an NGO. Other countries, while they have no such NGO-like registration option (e.g. a company limited by guarantee), the tax authorities may classify the entity as a ‘charity’ and therefore give it tax benefits.
Charities can pay large salaries. Even if classified as an NGO or a charity, there is generally no reason why the charity cannot pay all or a significant part of its ‘profits’ to the employees, founders or managers. It is obviously not the case that people work for free. In the situation described above, there is no doubt that the entity is paying fees back to the associated medical practice. It seems unlikely that an experienced medical doctor is going to give free training to other medical doctors for no charge, particularly when the entity is being all or partly subsidised by donations from large pharmaceutical and medical device companies. While many people give their time to causes, training other experts in your field is not always one of them. Accessing the financials and seeing the full payment history of the entity (and, perhaps the associated medical practice) would be a useful exercise to see whether large payments were made to the operators.
Challenge the structure. It is a growing challenge for large pharma and medical device companies to give anything of value to medical practitioners. The laws, rules, industry code and disclosure requirements clearly obfuscate both legal and illegal donations of time, training, resources, equipment and other services. The most common way to escape the red tape is to make a donation towards a third party and allow the third party to conduct the training or other services. These payments would be classified as a ‘donation’ and generally seek to avoid approvals and disclosures that might otherwise be required. This practice moves the obligations across to the NGO/charity and places the burden on that entity to do things on your behalf. Conducting an audit of the company financials and seeing where the money goes, validating the fact that events do happen and understanding the benefits given to those attending will be important. Assessing to what extent these events include government employees and whether these events are charged at arms-length prices, whether they are carried out at luxurious locations, whether they include gifts or other benefits (financed wholly or in part through the donations from the sponsors) would be important to determine the true picture of the entity and its activity.
Analyse what is really happening. There is no doubt that classifying a payment as a ‘donation’ to a ‘NGO’, when you are really trying to get around your own rules (or industry or local legal rules) will unlikely pass the mark with any compliance person. While this is not suggesting that all donations to charities are questionable, it is clear that there has to be some deeper analysis into the situation to challenge the structure and really analyse what is happening. It is clear that “going in with your eyes open” is a good piece of advice.
5 Tips on how to manage these situations and conduct adequate due diligence:
- Be on the lookout for the business doing ‘workarounds’ to strict compliance policies
- Conduct detailed due diligence that discovers the true identity of the entity and do not stop at simple watchlist or media checks that are unlikely to really uncover anything
- Always challenge the status of a so-called NGO, look at their financials and determine to whom they make payments, how they raise revenue, how costs are managed and how people and attendees engage with the entity financially
- Just because another big name has ‘donated’ to this entity doesn’t mean that it is somehow ‘pre-approved’ for your company and that due diligence should be minimalised
- Visit the NGO offices and see how many staff they have and whether they are a real charity and partaking in real charitable activities