"Carrying out financial due diligence"
LIVERPOOL JOHN MOORES UNIVERSITY FINANCIAL DUE DILIGENCE PROCESS Document Author(s) Julie Bertolini & Laura Moss Relevant to all LJMU staff Approved by SMG on 24th April 2012 Responsibility for Process Finance Director Responsibility for document review Finance Director Date introduced 16th April 2012 Date (s) modified N/A Next review Date 24th April 2013 RELEVANT DOCUMENTS Proceeds of Crime Act (POCA) 2002 (as amended), Terrorism Act 2000 (as amended by Anti-terrorism, Crime and Security Act 2001 and the Terrorism Act 2006 Money Laundering Regulations 2007 RELATED POLICIES & DOCUMENTS Anti-Bribery policy Anti-Money Laundering and Terrorist Financing policy Staff Handbook Code of Conduct for Staff Disciplinary Procedure Financial Regulations Risk Assessment Policy and Procedure Document1 p 1of 22 10/04/2012 14:50 Financial Due Diligence Procedure for Liverpool John Moores University (LJMU) 1) What is due diligence? .................................................................................................... 3 2) What is the purpose of financial due diligence at LJMU? ................................................ 3 3) Compliance with Legislation ............................................................................................ 4 4) LJMU policy re HM Treasury International Sanctions list ................................................ 4 5) When must financial due diligence be carried out at LJMU? ........................................... 4 6) Responsibility for conducting financial due diligence at LJMU ........................................ 5 7) The financial due diligence process ................................................................................ 6 8) Carrying out financial due diligence................................................................................. 7 Step A) Obtain basic essential information ................................................................................. 7 Step B) Decide on level of due diligence required to prevent financial losses ...................... 7 Step C) Assess the risk associated with the potential relationship ......................................... 8 Step D) Carry out the appropriate due diligence associated with the identified level and extent of risk ..................................................................................................................................... 8 Appendix A - Basic financial due diligence information required............................................ 9 Appendix B - Assessment of Risk ........................................................................................ 12 Appendix C – Due diligence to be carried out for each level of risk ..................................... 17 Appendix D - Guidance regarding responses to the Assessment of Risk in Appendix B. .... 20 Appendix E – Due Diligence processes undertaken within Finance. ................................... 22 1) Document1 p 2of 22 10/04/2012 14:50 What is due diligence? Due diligence involves gathering a range of information and evidence about individuals and entities where either there is the intention to transact with them or transactions have been taking place for a period of time since any initial due diligence exercise was undertaken It involves the assessment of the level of risk of associated with entering into a transaction. The extent of due diligence work carried out should be appropriate to the level of risk. Similarly, the costs that an organisation should expect to incur, and the time that an organisation expects to spend, should be proportional to the degree of risk involved. A phased approach should be adopted in carrying out due diligence. Initial findings will dictate whether the review needs to be extended further. Data collected needs to be comprehensive and reliable, and should be aimed at finding areas of risk. In some circumstances, a lack of information in itself could be of significant concern. This paper sets out process by which financial due diligence assessment is carried out at LJMU. This financial assessment will typically comprise a significant part, possibly all, of the full due diligence assessment depending on the transaction proposed. However, due diligence can involve more than a just a financial assessment. The reputation of individuals and entities, their expertise, experience, performance, capability, capacity and prospects, among other things, may also need to be checked. Where a reputational risk to the University is identified, a decision to proceed with the activity can only be taken with the approval of the Vice Chancellor, the Director of Finance and the Dean of Faculty/PVC of the service area. 2) What is the purpose of financial due diligence at LJMU? The purpose of financial due diligence at LJMU is threefold: a. Safeguarding LJMU financial assets: i. Checking the financial fitness and resource position of a company, partner or sole trader and the person(s) connected with these ii. Assessing current and potential risk to LJMU iii. Seeking to prevent financial loss b. Ensuring compliance with Anti Money Laundering & Terrorism legislation1 c. Ensuring compliance with Bribery legislation 1 Money laundering is the process of turning illegitimately earned money into legitimate money, and can often involve large sums of money, e.g. using funds from criminal activities to build new premises for a legitimate activity. Anti terrorism may involve legitimately obtained or smaller amounts of money – it doesn’t cost much to build a bomb! Document1 p 3of 22 10/04/2012 14:50 3) Compliance with Legislation In order to comply with the Bribery Act and Anti-Money Laundering and Terrorism legislation it is necessary for LJMU to be able to demonstrate that it has carried out appropriate financial due diligence on its partners and customers. The University has an Anti-Bribery policy which states that it will not tolerate any form of bribery or corruption. Members of staff, agents, consultants or business partners who work with, or on behalf of, the University must act with integrity and behave ethically. The University also has an Anti-Money Laundering and Terrorist Financing policy which ensures that it is compliant with relevant legislation. Failure to comply carries a penalty of up to 14 years imprisonment. Potentially members of staff could be committing an offence under money laundering legislation if they suspect money laundering, or if they become involved in some way, and do not disclose this. In order to ensure compliance with the legislation, LJMU must be able to demonstrate that it “knows” who potential partners and customers are PRIOR TO entering into relationships with them. Members of staff, therefore, must be able to assure themselves that in entering into (or deciding to maintain on-going) relationships, there no risk of compromising compliance with either the legislation or LJMU policy. To do this, appropriate due diligence must be carried out 4) LJMU policy re HM Treasury International Sanctions list LJMU will not enter into transactions or arrangements with organisations that are in countries that are on the HM Treasury international sanctions list (http://www.hm- treasury.gov.uk/fin_sanctions_index.htm). 5) When must financial due diligence be carried out at LJMU? Financial due diligence must be carried out for all procurement, collaborative, research or business, employee-sponsor and agent relationships. The expertise for financial due diligence resides in the LJMU Finance function and no decision to enter into a relationship or transaction can be made unless financial due diligence has been completed, is satisfactory, and is approved by the nominee of the Director of Finance, or the Director of Finance. Financial due diligence approval MUST be obtained prior to the commitment of any significant LJMU funds in exploring potential relationships. Financial due diligence should also be conducted periodically on established relationships. Document1 p 4of 22 10/04/2012 14:50 For level 4 and 5 type relationships, this should occur at least annually. The LJMU staff member with responsibility for the relationship should initiate this review. For level 1 to 3 type relationships this should ideally be annually. If this is not practicable, then adequate ‘spot checks’ should be initiated by the LJMU staff member with responsibility for the relationship. Facts that LJMU is un-aware of may lead to non-compliance with legislation or to financial losses. The process of due diligence should enable the University to establish sufficient relevant facts before entering into an agreement, not after. Under the Money Laundering Regulations 2007, if LJMU is unable to apply customer due diligence measures, it must not establish a business relationship. The LJMU Anti Money Laundering and Terrorist Financing policy can be found at: http://www.ljmu.ac.uk/fin/fin_docs/Anti_Money_Laundering_and_Terrorist_Financing_Policy_v1.0.pdf 6) Responsibility for conducting financial due diligence at LJMU The University Finance function is responsible for ensuring that financial due diligence is carried out correctly. Individuals to be contacted are the nominees of the Director of Finance: Commercial Accountant (Laura Moss) – primary contact / due diligence approval Deputy Finance Director (Belinda McGuiness) – secondary contact / due diligence approval Senior Debt Management Officer (Terry McLoughlin) – primary contact / credit checks Income & Expenditure Accountant (Tracy Barton) - secondary contact / credit checks Procurement Officer (Shaun McDonald) – procurement checks [Note: Procurement activities are treated separately from the process outlined in this paper. For further information please go to: http://www.ljmu.ac.uk/infrastructure/70595.htm ] Document1 p 5of 22 10/04/2012 14:50 7) The financial due diligence process This applies to all LJMU staff given responsibility for entering into a proposed business relationship or continuing an existing relationship. A register of all such staff will be maintained by the Commercial Accountant. Requests for staff to be added to the register will need to be submitted by the relevant line manager. Levels 1, 2 & 3 a) If you have been given responsibility for entering into a proposed business relationship, or continuing an existing business relationship, you must ensure that financial due diligence is carried out in accordance with Steps A to D as set out in Carrying out financial due diligence below. b) If a relationship is initially assessed as level 1, 2 or 3, you should obtain basic financial information (Appendix A), and advise the Senior Debt Management Officer that an application for credit needs to be sent to the potential customer. c) When the application has been returned by the customer, if appropriate, a credit agency report will be obtained by the Senior Debt Management Officer. d) The application for credit and the credit report will then be shared with you. You should then assess this in the context of the advice given in the Assessment of Risk. e) If you are satisfied that the relationship is still validly level 1, 2 or 3, the information you obtained as a result of the due diligence must be passed back to the Senior Debt Management Officer for approval. f) Financial approval for levels 1, 2 or 3 should normally be provided or declined (with reasons) within 1 week. Levels 4 & 5 g) If a relationship is initially, or subsequently, assessed as level 4 or 5 you should contact the Commercial Accountant to determine what financial information is required. The Commercial Accountant will obtain a relevant credit agency report. h) The application for credit and the credit report will then be shared with you. You should then assess the results of the credit agency report in the context of the advice given in the Assessment of Risk. i) If you still believe that the relationship will benefit LJMU, you should pass information obtained as a result of your assessment, as well as the financial information requested, to the Commercial Accountant for additional level 4 & 5 information to be assessed. j) Financial approval for levels 4 & 5 should normally be provided or declined (with reasons) within a reasonable timeframe dependent on the nature of the risk associated Document1 p 6of 22 10/04/2012 14:50 with the business relationship. Ideally, an initial request should either be approved or declined, or further information should be requested within 2 weeks. k) The decision to enter into a new relationship or continue a new relationship must not be taken without formal approval by Finance. 8) Carrying out financial due diligence Step A) Obtain basic essential information You must compile basic information for all potential partners, customers and suppliers. The minimum requirements are set out in Appendix A Note 1: Appropriate due diligence information about our students is obtained as part of the enrolment process; therefore this document does not cover self-funded students. Note 2: It is vitally important that a unique identifier such as a company registration number, or a VAT number is always obtained and used consistently by both LJMU staff and the party about whom due diligence is being conducted. Step B) Decide on level of due diligence required to prevent financial losses The levels of financial due diligence required will increase as the level of potential financial risk to LJMU increases. Level 1 Level 2 Level 3 Level 4 Level 5 Cash value up Cash £5k - £20k Cash value £20k - to £5k p.a., not p.a., not a £100k p.a., not a A partnership We are taking a a partnership partnership partnership arrangement. shareholding. arrangement, arrangement, no arrangement, no no shareholding shareholding. shareholding. or or or UK public Cash value of over bodies including £100k per year, no Cash value of over government shareholding £100k, no departments, shareholding research and councils, NHS and bodies Established company with 3 or more years of NOT established EU government positive trading results company with 3 or bodies more years of trading results Document1 p 7of 22 10/04/2012 14:50 Step C) Assess the risk associated with the potential relationship Is a higher level of due diligence required due to specific risk factors? Appendix B sets out guidance for the Assessment of Risk. It is used to determine the level and extent of due diligence work that must be undertaken. This factors in Anti-Bribery and Anti-Money Laundering considerations in addition to the risk of financial loss. Examples of the extent of due diligence that might be required are as follows: If LJMU is undertaking research for a UK government agency, minimal due diligence will be required. If LJMU is undertaking consultancy for an EU-based company, due diligence should be focused on ‘knowing’ the customer and ensuring that involvement with the customer will not lead to bribery or anti-money laundering issues, or financial loss. If LJMU is entering into a long term partnership with a non-EU company or person, the due diligence should be focused on ‘knowing’ the customer and ensuring that involvement with the customer will not lead to bribery or anti-money laundering issues, or financial loss. It should also recognise that the scale of risk associated with such a venture is significantly greater and thus requires a higher level of due diligence. Staff will need to be aware of three of the world’s emerging economies that are expected to expand greatly in coming years, China, Brazil and India. They have a poor score on the corruption perceptions index. Carrying out appropriate due diligence should enable LJMU successfully to engage in activities in new territories with the minimum of risk to LJMU. This would require a high level of due diligence. Step D) Carry out the appropriate due diligence associated with the identified level and extent of risk The table contained in Appendix C sets out the due diligence to be carried out for each level of risk. This is a minimum standard. In the event that the Assessment of Risk indicates the need for more extensive due diligence, the level required to be applied may increase. Document1 p 8of 22 10/04/2012 14:50 Appendix A - Basic financial due diligence information required 1) Complete the ‘Application for credit’ . https://share.ljmu.ac.uk/dept/fin/LJMUFIN/Shared%20Documents/Application%20for%20credit.docx This form captures the information required to set up a new customer on the Finance System and is required before any invoices can be raised. It also serves as the starting point for financial due diligence. 2) If appropriate, the Territorial Risk Register should be completed in accordance with CID procedures. 3) Complete the ‘Basic Financial Due Diligence Background Information’ below. A template is available at: https://share.ljmu.ac.uk/dept/fin/LJMUFIN/Shared%20Documents/Due%20diligence%20basic%20backgrou nd%20information.docx 4) Complete the “assessment of risk” document, taking into account appendix B below. https://share.ljmu.ac.uk/dept/fin/LJMUFIN/Shared%20Documents/Due%20diligence%20assessm ent%20of%20risk%20form.docx 5) Return the application for credit, basic financial due diligence and assessment of risk to finance. Basic Financial Due Diligence Background Information Whom are we conducting due diligence on? An individual, unincorporated partnership or association A registered charity A government body or agency A private company A publicly quoted company Where is it based? UK Overseas Identify individuals / shareholders/partners /directors Obtain passport details if appropriate Document1 p 9of 22 10/04/2012 14:50 Confirm address and phone details of organisation Cold call landline phone numbers and check area code is appropriate for the business address Is the phone answered with the business name? Check telephone directory to confirm the address. Look on search engine sites such as multi map or Google maps. Is the site of the address appropriate for our knowledge of the business activities? Is all correspondence on original company / organisation letter headed paper? Handwritten order forms or agreements will not be accepted Perform a basic web search Are there any news articles that give a cause for concern? Does the organisation have a web site? Does it support what LJMU knows about the organisation? How long has the organisation been in existence? Does the substance of what is known allow LJMU to place reliance on accounts, or are checks on individuals also required? Have the parties involved been informed that appropriate due diligence will be carried out which may include enquiries into the status of the organisation and / or the individuals behind it? Document1 p 10of 22 10/04/2012 14:50 Document1 p 11of 22 10/04/2012 14:50 Appendix B - Assessment of Risk Purpose Low High Risk Risk General risk Follow up any concerns raised from a basic web Issues or Issues have Issues or rd concerns been raised concerns search both directly with the partner, and with 3 parties. Verify the information received by carrying raised with and largely have not the partner resolved or been out further work. and/or 3rd verified resolved parties have satisfactorily been verified and resolved What is the cash value of the activity? c £10k per £10k to £50k £50k to Over £100k year per year £100k per per year year Will we have a shareholding in the venture? c No Yes Identity risk We need to be able to demonstrate that we know who our customers are. Do we have their unique a, Yes No identifiers? Company registration numbers Tax numbers Passport numbers Do we know who the ultimate beneficiaries are? a Yes No Names of shareholders Names of directors Are they known to us? Have we dealt with them a Yes No before? Are they a well known or public body? Do they have a trading and/or operating history? a, b, c Yes; more Yes; three or One or two No; been than 5 years four years of year operating accounts accounts accountsd for less than have been filed. filed at one year filed at Companies Companies House House Has a basic web search revealed any causes for a, b, c No, Some No Yes, 2 concern? E.g. reputational issues information information, information information found but not available contradicts supports extensive what we what we already already know, or know indicates links to high risk activities. Country risk a,b,c UK Overseas EU Non EU Where is the partner located? Will the contact be following English law a Yes No Has legal advice been taken regarding potential a Yes, no issues Yes, some No advice contracting issues in the country concerned? identified manageable taken or issues significant 2 This would not give reliable assurance, but should always be checked. The absence of information can also be a cause for concern. Document1 p 12of 22 10/04/2012 14:50 identified issues identified. What is the country score on the latest Corruption a, b Above 7 Between 6 Between 5 Below 5 Perceptions index? (state year of index) 3 and 7 and 6 http://cpi.transparency.org/cpi2011/results/ Does the organisation have significant dealings with a, b Above 7 Between 6 Between 5 Below 5 or activities in countries with perceived high levels and 7 and 6 of corruption? Has the country effectively implemented anti-bribery a, b Yes No and money laundering legislation Does the country have government procurement or b Yes No investment policies? What is our previous experience of dealings in that a,b,c Considerable, Moderate, or limited Little or country? (include knowledge of language and and with no with few, none issues arising manageable culture) issues Is the country on the HM Treasury international b, No Yes sanctions list? LJMU policy is that we will http://www.hm- not trade in treasury.gov.uk/fin_sanctions_index.htm countries which are on this list Are there any restrictions on the movement of cash a,b,c No Yes 4 to and from the country? What is the UK Government advice about dealings b, Encouraged, Encouraged Advice is to Not in that country? with a wide with some proceed with supported support support caution mechanism mechanism What is the current Foreign Office advice about travel to the country? c. No issues Restrictions Some Considerabl related to a restrictions e http://www.fco.gov.uk/en/travel-and-living- “natural” of a political restrictions abroad/travel-advice-by-country/ disaster nature What about advice from our insurance providers Or See link to the right of the screen, with logon advice details and password warnings https://www.ljmu.ac.uk/fin/secured/finance_allJMU/ 116477.htm Is business information freely available in a a,b,c Yes No5 regulated form? Eg Companies House Sectoral risk Are cash payments more common than banking b, No Yes transactions? A culture of dealing in cash would 6 indicate a high risk. 3 Three quarters of the 180 countries listed are classified as high risk. 4 We need to ensure that any revenue due to us can be received 5 Countries such as Russia, China and India are reputed to have incomplete public records. Therefore, in depth checks would be required for these countries. 6 The majority of criminal activities take place in cash. The criminal then needs to make this cash part of their banked wealth without a link to its source. Document1 p 13of 22 10/04/2012 14:50 Is there a perception of high risk because of the b. No Yes sector in which the partner operates? Transaction risk Will the project involve government licences or b. No Yes contracts that bring employees and others into contact with public officials? Does the activity involve political or charitable b. No Yes donations? Business opportunity risk Will the project involve engaging with government, a,b Yes or no, tie the response to this with the corruption or government linked companies? 7 perceptions index rating Does the activity involve tendering at below market b. No Yes prices? Business partnership risk Is an intermediary involved or required? b, No Yes Does the proposed business relationship involve a b, No Yes prominent public official? Will LJMU staff based in the UK be directly involved a,b,c Yes No in delivery/management? Is this an extension of the partners existing b, c Considerabl Some existing activity New activities or a new area of operation? e existing Does the partners’ operating history and area of b,c Yes No expertise confirm that they are able to deliver their elements of the arrangement? Partner’s internal structure risk Does the partner have any deficiencies in skills or b, c No Yes knowledge at a senior level? Does the organisation have clear financial controls? b, c Yes No Are staff salaries linked to bonuses which would b, c No Yes reward excessive risk taking? Does the organisation have policies and procedures b, Yes No around hospitality, promotional expenditure and political and charitable donations? Does the organisation have an anti bribery policy? b, No Yes 7 Government connections are not always positive. We need to be aware of anti-bribery legislation and exposure to dealings with corrupt individuals. Document1 p 14of 22 10/04/2012 14:50 Due diligence – assessment of risk Use the outcomes considered below, together with the information from the application for credit form and the basic background information collected, to arrive at an initial assessment of risk. Please indicate what level has been assessed. Level assessed low/medium/high Name Designation School/service team Date Using the financial due diligence process - go through the assessment of risk and determine what is required to undertake the required due diligence. Please overtype all the information in red Arrangement details Summarise the basic details of the arrangement, what the contract relates to, how payment will be made etc. Assessment of risk The bullet points here are for explanatory purposes and may not cover everything you need to think about. There is a more comprehensive list available at Appendix B to the published process document General Risk – low/medium/high What has the web search revealed What is the annual cash value of the contract Is there a shareholding? Identity risk – low/medium/high Have we got a trading history with the organisation? Have we obtained sufficient detail to verify the identity of our customer? Country risk – low/medium/high What is the score on the latest corruption perceptions index Document1 p 15of 22 10/04/2012 14:50 Is the country on the international sanctions list What risks are particular to this country Sectoral risk - low/medium/high Are there any risks indicated by the nature or culture of the sector we will be operating in Transaction risk – low/medium/high Are there any risks caused by the nature of the transaction or contract Business opportunity risk – low/medium/high Has the contract got government links? Is the contract below market prices Business partnership risk – low/medium/high The main focus here is to consider whether there is anything in the contract which would heighten the risk of bribery. Partner’s internal structure risk – low/medium/high Again the main focus is around the anti bribery requirements, but also the risk of financial loss in the event that the partner is unable to deliver their part of the contract. For finance use only Level assessed Name Designation Referred to VC/FD/Dean or PVC Date Document1 p 16of 22 10/04/2012 14:50 Appendix C – Due diligence to be carried out for each level of risk Finance role Conducted by: Level Customer must complete the application for credit Senior debt 1 management officer Level Debt management will determine appropriate credit control procedures 2 for the level of perceived risk. Senior debt Measures taken may include; management officer Credit agency report with an annual update. If no report is available, for example it is an overseas organisation based in a country not covered by the credit agency, go to level 4 Payment being due in advance of any work or overseas visits being carried out Close monitoring and escalation by a named debt management officer Level Credit agency report with an annual update. 3 Perform a “reasonableness check” on both the size and nature of the Senior debt contract compared with the turnover and nature of the business of the management organisation. officer/commercial Accountant If no report is available, for example it is an overseas organisation based in a country not covered by the credit agency, go to level 4 Level Credit agency report with an annual update. 4 Perform a “reasonableness check” on both the size and nature of the Commercial Accountant contract compared with the turnover and nature of the business of the organisation. Review the latest set of annual financial statements o Identify the main sources of income o Identify main categories of expenditure o Confirm solvency What accounting standards have been followed in the preparation of the accounts o Are the standards comparable to UK? o Was the audit report qualified? If so, detail the issues raised. What are the basic balance sheet ratios? o Current ratio Current assets/current liabilities (must be greater than 1, up to 2 is efficient, over 2 suggests they are not using their cash!) o Quick ratio Current assets less stock/current liabilities o Debtor days Number of days sales outstanding (indicates how efficient we are at collecting debt, but also potential cash flow issues) o Creditor days Number of days payments outstanding (indicates cash flow issues) Document1 p 17of 22 10/04/2012 14:50 Level As level 3 plus; 5 Cash Commercial Accountant Review cash flow and consider sustainability o Does cash flow tie in with management forecasts? o Is the cash position sufficient to fund planned activity? o What are the future funding needs? o Where will future funding come from? Is LJMU investing into the proposed activity? o Shares or loan? o What are the terms? o Have shares been valued reasonably? o What is the cash being used for? o Who has the authority to commit expenditure to that cash? o Will cash balances be sufficient for the identified need? Assets Are the premises freehold or leasehold? o If leasehold what are the renewal terms? o Are there currently loans secured against the premises Are the premises sufficient for the proposed activity? Are there any intangible assets? o What is the basis of valuation? o Is the valuation material and/or reasonable? Who are the material debtors? Do students pay their debts as they arise? o What is the level of bad debt provision? Liabilities What is the level and ageing of creditors o Can the organisation afford to pay its creditors as they fall due? Are any of the creditors secured? o Obtain terms of security Do any of the liabilities relate to a pension scheme? o Does this raise any concerns/issues? o Is specialist advice needed? Tax What is the PAYE/NI creditor? o Does the creditor represent more than one month’s deductions? Is this indicating a cash flow issue? Will the activity result in a corporation tax liability? o Should it be routed through JMUS? Has vat been correctly identified and treated? Legal Does the signatory for the other party have authority to enter into it? Are any staff contracts of employment affected? Document1 p 18of 22 10/04/2012 14:50 Does LJMU need to see the contracts of employment for directors of the prospective party? Are there any property lease clauses that may affect the contract/agreement? o Break clauses on either side? o Dilapidations clause? Are there any intellectual property issues? o Is any relevant IP owned by the partner organisation? Are there any legal or contractual issues that are relevant? o Does LJMU need to review any existing contracts? Review any existing government contracts? o Are there any onerous clauses that would give us any issues? o Do these tie in with forecast activity? o Will these be affected by the current proposal? What insurance policies are in place? o Will this cover the proposed activity? Document1 p 19of 22 10/04/2012 14:50 Appendix D - Guidance regarding responses to the Assessment of Risk in Appendix B. Identity risk LJMU will not proceed with an activity if the identity of proposed partner / customer is unknown. If the organisation has no trading or operating history, due diligence work will be focused on the individuals behind the organisation. Unique identifiers will be required for individuals and verification will be required that funding is from legitimate sources. If it is a new organisation, it will be necessary to check that any bank or trade references are impartial. It will also be necessary to verify that requisite skills / experience are in place, and that any forecasts provided are reasonable in the context of lack of history. LJMU will not proceed with the activity if information available suggests that involvement with the organisation would compromise the University’s reputation. Country risk If the activity is in a country with a perceived high level of corruption it will be necessary to establish that the relationship will not compromise LJMU’s compliance. As stated above, three of the countries that are widely acknowledged as having expanding economies and offering good growth potential for UK businesses have high scores on the Corruption Perceptions index. A low score on this should not be considered in isolation, but taken as a point of caution. There may be restrictions on the movement of cash and there will be a need to consider how funds will be sent out of the country. Bank advice may be required. This must be sought through the members of Finance listed in this document. We will not trade with organisations based in countries on the HM Treasury international sanctions list. If a country is not on the international sanctions list, it should be possible to set up payment arrangements with assistance from the University bankers. Payments should not be made to LJMU in cash. Sectoral risk Sectoral risk should be considered alongside country risk, it is generally the combination of the high risk sector in a high risk country which should lead us to mitigate against the risk of bribery. For LJMU, overseas activity which involves the use of agents, such as the recruitment of international students should be considered high risk. The following sectors, however, are generally believed to be at greater risk of bribery than others; Public works contracts and construction Utilities Real estate, property and business services Oil and gas Mining Power generation Document1 p 20of 22 10/04/2012 14:50 Pharmaceutical and healthcare Heavy manufacturing The banking and finance sector is also considered high risk because it is most likely to make private payments to public officials, meaning it is most likely to be able to exert influence on government regulators. Transaction risk and Business Opportunity risk This risk needs to be considered in conjunction with country risk. If the transaction involves a government contract, in a country with a low risk of corruption, the risk of bribery is much lower than in a country where there is a higher perceived level of corruption. If there is a high country risk, transaction risk and business opportunity risk members of staff need to be aware of the potential risk of bribery. Business partnership risk If intermediaries are involved, LJMU should be alert to the risk of them acting unlawfully. The intermediary needs to be aware of LJMU compliance requirements. Due diligence will be need to be extended to cover the general activities of the intermediary itself, and to ensure that there is no history of inappropriate activity. If a prominent public official is involved LJMU needs to be clear that his / her involvement is as a valid party to the business and the transaction. If there is no LJMU staff involvement in the delivery or management of the work the University needs to be satisfied that those who are responsible are capable of carrying it out. Partner’s internal structure risk If the partner has deficiencies at a senior level LJMU will be exposed to the financial risk in the event of non- delivery. This should also raise questions regarding how they have come to be in their current position. Document1 p 21of 22 10/04/2012 14:50 Appendix E – Due Diligence processes undertaken within Finance. Debt management role Send out the application for credit If this is for a new customer and is identified as level 1; confirm criteria applied correctly then set up debtor For level 2 or above identify appropriate debt management procedures such as o Consider the value of the invoice, and whether this is likely to be a one off or the first of many o If this relates to project code activity, appropriate due diligence should be carried out at the contracting/project set up stage, so the debtor can be set up. o Obtain a credit report for UK customers Share results with the person responsible for the business relationship if credit report is favourable, confirm the criteria is applied correctly, then set up debtor if credit report is unfavourable our terms must reflect that position. We may require payment in advance or apply strict payment terms which are closely monitored. Any non payment will be escalated Assessed as level 3 – pass to commercial accountant for the reasonableness check Annually review turnover with customers and identify those that have moved from one category to another, and to alert us that an existing debtor account has been used for a different purpose than it was originally set up. Commercial Accountant Assessed as level 3 – perform reasonableness check Request/or run the credit agency report Identify the basic financial information that is required Carry out level 4 and 5 work Document1 p 22of 22 10/04/2012 14:50