What is it that drives people to plunge into costly projects without doing any preliminary basis research?  Is it intellectual arrogance?  Sheer stupidity?  Or just incompetence?

   In my previous article, I discussed the importance of having good intelligence prior to embarking on a potentially risky business venture that could be fraudulent.  In this issue I would like to expand on that topic and discuss how that information should be collected and evaluated.

   Remember the old American television series “Dragnet,” in which Sergeant Friday used to knock on a door, flash his badge, and interrogate the occupant?  “Just give me the facts, Ma’am,” he would say, “just the facts.”

   That’s how most police-trained investigators approach an investigation.  They are used to having the power of the badge and they tend to go directly for the jugular, often with less than subtle results.  This is diametrically opposed to the way intelligence officers are trained to approach an investigation.

   Intelligence officers rely more on guile than intimidation.  The techniques of elicitation and debriefing are stressed over interrogation, and the use of tailored cover stories to collect information serves to enhance the accuracy of the information obtained.  For example, an officer posing as a doctor would be much more likely to elicit sensitive medical information from a subject than one posing as a plumber, but if one needed the architectural plans to the subject’s house, plumber cover would be ideal.  Employing cover has two distinct advantages: It puts the interviewee at ease and therefore more willing to provide information—to reveal things one would not normally discuss with a stranger—and the subject does not ever know the true reason for the questioning.

   Thus, the careful selection of cover to extract information from knowledgeable sources results in more accurate and fulsome reporting while at the same time deflecting suspicion away from the real purpose of the investigation.

   Proper problem solving requires a precise analytical approach, and most investigations and intelligence collection missions involve problem solving.  The trick is first to evaluate the problem and ten to come up with a list of possible sources of the information desired (i.e. Who knows the answers to the questions? or What data bases, files, etc. contain that information).  The final step is to target those potential sources and to devise appropriate cover stories to extract accurate information from each of them. 

   There are many subtle techniques used by professional intelligence officers to acquire information; they fall under the category of “clandestine tradecraft.”  Intelligence collection is vital to every investigation, and the art is sufficiently arcane that it should be left to the experts.

   The Necessity of Due Diligence

   A due diligence investigation to the businessman is like that light switch—it illuminates the playing field.  It won’t eliminate any of the obstacles, but it will show where thy are so they can be avoided.  A person entering an unfamiliar dark room and choosing not to use the light switch.  Not a very smart idea unless one enjoys bumping into furniture!

   The following story is true.  I have changed names and blurred some facts to protect the actual participants, but the essence of the story is accurate.  It presents a vivid example of why a company should never enter into a business deal without first doing a thorough due diligence investigation on the prospective partners.

   Rose Cosmetics: A Case History

   For the first 10 years of its existence Rose Cosmetics enjoyed steady growth.  By 1991, under the leadership of its founder and CEO, a bright, energetic entrepreneur named Rosen, the privately held company was grossing almost $50 million a year in sales of low-end perfumes and cosmetics.  Then Mr. Rosen decided he wanted to expand abroad.

   He approached a British perfume supplier that he had dealt extensively with in the past.  The company was run by an Indian sect that had been trading cosmetics in Europe  and the Near-East for many years.

    It appeared to be a good choice for a partnership, so a deal was quickly struck.  As part of the deal the Indian family quietly acquired 65% of Rose’s stock.  This fact, perhaps inadvertently, was not reported to the SEC when Rose was later taken public.

    Following the Initial Public Offering, due in large part to Mr. Rosen’s excellent reputation, Rose stock began to take off.  Then, bolstered by their further success in marketing a designer alternative line the stock continued to rise astronomically until it reached a high of $28 a share by early 1993.  By this time, Mr. Rosen had stepped down as CEO and had taken a back seat to the Indians in the running of the company.  He contented himself with playing the options market with Rose stock until disaster struck.

   Disaster Strikes

   When a Forbes article announced that Rose Cosmetics was actually controlled by the Indian sect, and that the sect had a reputation of being involved in illegal black marketeering and money laundering activities, the stock began to plummet.

    In a matter of weeks the stock dove from $28 to $4 a share and Mr. Rosen lost over $20 million in the options market.  To make matters worse, the SEC launched an investigation which later resulted in Federal indictments for a host of wrongdoings against Mr. Rosen and the other officers of the company.

   Now, having lost his company, his fortune and facing prison, Mr. Rosen turned to CTC International Group for help.  He wanted to prove that the Indian owners were solely responsible for any illegal activities and the mismanagement of the company.

   Counterfeiting and More

   The investigation showed that the Indian sect had indeed long been heavily involved in the cosmetics black market and money laundering activities, and had also been convicted twice of counterfeiting brand name perfumes.  In short, the London-based company and the sect had horrible reputations within the industry.

   The due diligence report helped Mr. Rosen to convince the judge that most of the guilt rested with the Indians.  This kept him out of prison but he still received some serious fines.  The Indians fared much worse.

   Would Mr. Rosen have gone into business with the Indian sect had he known about their nefarious past?  Absolutely not.  He deeply regrets not checking them out in advance.  But that’s what happens when one fails to use the light switch.

    The recent upsurge in requests for domestic due diligence by our clients suggests that there is an increase in fraud at the domestic level, and that conducting business domestically is becoming almost as challenging as conducting business overseas.

   The US Domestic Side of Due Diligence

   In the last several months, we have seen a dramatic increase in the number of requests for domestic due diligence and background investigations.  Clients have told us they previously believed they were well-equipped to handle their own domestic dealings and rarely conducted more than cursory checks of potential US affiliates.  However, several clients have recently suffered expensive losses in their domestic dealings due primarily to fraud and misrepresentation.  Because of those losses, they are now commissioning domestic investigations as frequently as international investigations.

   Law enforcement statistics support client claims that the incidences and sophistication of domestic fraud are increasing.  Although there is no single reason for the increase, one significant contributing factor is technology.  Improved technology has made it easier to perpetrate fraud and more difficult to track that fraud.  For example, fake and forged documents can look extremely “real” thanks to advanced color printers and color copiers.  Individuals who are proficient with the Internet can falsify credentials by posting false web sites which laud their accomplishments and capabilities.

   Companies and individuals also can easily set up “backstopping”; this is when a company or individual gets someone else to verify their cover story.  One client blamed the increased fraud on “the erosion of traditional corporate values.”  Simply put, they are seeing a much greater willingness by individuals and companies to lie to obtain contracts.

   The International Side of Due Diligence

    US businesses have long recognized the need for due diligence and background investigations when conducting business internationally.  As several clients have told us, operating internationally is particularly difficult.  Unfortunately, most of them only recognize this reality after enduring significant losses.

   The reasons companies insist on professional investigations of international partners, vendors, employees, and other associates are multifaceted.  The distance between the US company and the international affiliate leaves open a large margin for error.

   It is difficult to get a “feel” for the company and to verify information they have provided.  The distance, language and cultural differences, lack of centralized records systems, and other unique situations make it difficult to verify the claims of individuals or companies overseas.  These same problems make fraud and corruption more difficult to detect.

   In addition to uncovering problems, highly targeted international assessments are critical for a successful operation.  These assessments ensure that the US company will be culturally sensitive in its international dealings.  It also explains the business culture and the method for getting things done in a country, state, city, town, village, or industry.

   Protect Yourself

   The best way to protect yourself and your company against fraud and misrepresentation is to conduct an investigation before there is a problem.

   Too often companies wait to do a full-scale due diligence until after they have signed a deal and some glitch arises.  If a company waits until that point, it can cost thousands of dollars to solve the problem.

   A professional investigation of a potential associate, either internationally or domestically, before signing a deal is well worth the initial investment.

   Do Your Research Before Embarking on a Venture

   Remember the Chevy “Nova” story?  General Motors couldn’t sell the car in Puerto Rico or Latin America because “no va” means “does not go” in Spanish.  The car was introduced back in the 60’s and the story was well known in automotive circles.

  However, that didn’t stop Ford from naming not one, but three successive models without researching how the names translated into foreign languages.  They were: the “Fiera” which means “ugly old woman” in Spanish; the “Caliente” (“Comet”) which is slang for “streetwalker” in Spanish; and the “Pinto” which means “small male appendage” in Portuguese.  Some people never learn!  Nobody ever bothered to translate the name back from the foreign language into English before spending millions on marketing and shipment of the vehicles to foreign markets.

   Muslims & Pork

   The list of similar gaffes is endless.  An American firm submitted a carefully detailed business proposal, expensively bound with a pigskin cover, to its Saudi Arabian  potential client.  Needless to say, that deal never came off.  And England’s East India Company lost control of India to the British Crown in 1857 partially because its Asian Indian soldiers refused to bite the tops off the bullets supplied to them.  In those days the tops of the bullets, which were encased in pig wax, had to be bitten off before the bullets could be fired.  The bullets were later modified, but too late to save the East India Company.

   Sushi the Wrong Way

   Recently, a large US supermarket chain tried to impress its Japanese clients by serving sushi and tea.  Unfortunately, the tea was Chinese, and the sushi was cooked!

   Confusion Over Coins in Hong Kong

   When I was stationed in Hong Kong during the mid70’s the Hong Kong government came out with a new fifty-cent coin.  The problem was it was about the same size, shape and color of the existing twenty-cent coin, so people kept confusing the two.

   They complained and ridiculed the government loudly for making such a dumb mistake.  People put dots of nail polish on the new coins to help distinguish them from the twenty-cent coins and raised such a stink that the coins were pulled out of circulation about a year later.

   Dumb, right?  A little basic research would have shown the Hong Kong government that other countries that experienced similar problems, and the mistake would have been avoided.  Then, only a few years later, the US government issued the Susan B. Anthony silver dollar!  Whoops!  Looks and feels just like a quarter!  Same mistake.  Same reason behind it—nobody bothered to research the subject.  Don’t we ever learn?

   Conclusion

   What is it that drives people to plunge into costly projects without doing any preliminary basis research?  Is it intellectual arrogance?  Sheer stupidity?  Or just incompetence?  Why anyone would enter an unfamiliar dark room and choose not to use the light switch is beyond me.  But some people do, and that’s why they fail so often.

   Successful people do their homework.  When I was teaching the craft of intelligence to new CIA officers down on “The Farm,” I discussed the concept of thorough preparation as the most important key to success in the intelligence business.  I told them: “Certainly all good operations officers have the ability to wing it when necessary, but the best officers never go into a situation with the intention to wing it.

   They try to prepare for every possible eventuality in advance, and then only have to wing it when a real unexpected curve is thrown at them.”  That’s good advice for any business.