Forensic due diligence


Legal due diligence, alongside with financial due diligence, is an important part of pre-M&A transaction review of a target.

Nonetheless, the practice of local business shows that the acquiring party often relies on a legal or a financial due diligence report as on the instrument that may influence the transaction price, but rarely as on risks’ mitigation or threats’ assessing report. Moreover, a business owner without appropriate background may not project possible legal threats in future when reading another due diligence report. This can be explained by the social mentality of locals to trust business partners, and as a result the decision on M&A is often taken before reviewing a target.

Forensic due diligence can be defined as a special and focused review, the aim of which is to uncover risks and threats.

In this paper we would like to review some of the key elements of forensic due diligence and why it is so important to have one when considering possible merger or acquisition.

Identifying key assets

Any entity is worth acquiring only because is has certain assets, irregardless whether tangible or not: cash, property, subsoil use right or intellectual property.

Thus, correct identification of key assets of a target is of paramount importance. Such assets may even include employees, clients, contracts, licenses and long standing relations with business partners. It is therefore vital to correctly identify the assets, so to exclude the risks of losing time and efforts of analysing other, less relevant for forensic due diligence, areas of a target.

Identification of risks related to key assets

Having identified key assets it is also important to prepare a map of risks related to such assets, including financial and operational risks.

The threats related to assets might be: threat of fraud, intentional or hostile actions of employees and partners, major unexpected change of business environment, lawsuits, mismanagement of assets, etc.

How to identify risks and threats?

Forensic due diligence include check of a target profile: company legal status, history of key assets, checking databases (government and commercial) on indicators of violations, media search on triggers, search on target owners to identify past transactions.


The subsoil users (companies that explore and produce minerals) in Kazakhstan not often comply with applicable regulations and contractual obligations due to sophisticated business environment. Unfortunately, there is no official database, apart from general media sources, in which non-compliances are registered. Nonetheless, the PPA team based on the media information and after some internal and external interviews was able to identify one of such non-compliances that could have lead to subsoil contract termination. Eventually the client was able to address the issue to the target and postpone the transactions before issue is clarified. The target finally had agreed to amalgamate on partnership basis.

Validation of representations and warranties is also crucial in a forensic review.


PPA team was asked to conduct a forensic due diligence before providing a loan facility to a target. One of the contractual warranties stated that the target has no substantial loans and in position to repay interest and loan timely. During analysis of past loan agreements of the target the PPA team identified a loan agreement with a long grace period. Repayment of a loan under such agreement had to start a year after provision of the loan facility by the client. PPA has analysed cash flow reports of the target and couldn’t confirm the ability of the target to timely repay interest and loan to PPA’s client.

Checking promoters: criminal records, PEP’s, web-check on background.


During a legal due diligence PPA team was able to identify the following political risk. The business of a target in material way depended on its shareholder who was identified as the local PEP. The client has duly noted the risk and decided to proceed with the transaction.

The following are also subject to check: shareholders (including minor), management, key suppliers/distributers/agents, and potential affiliation of the mentioned persons/entities to a transaction or a target.


During review of a target we identified another company with resembling name in the government entities database. The main business of the target related to tourism, so as the company’s we found in a database. We have further discovered that the managers of the target founded a resembling company earlier to the transaction’s closing date. Deeper analysis of backed-up emails and interviews revealed that the managers were informed about the upcoming acquisition and decided to establish new company with similar name and run the same activities. We have also warned the client that the current management of the target is in possession of its clients’ database and contacts of partners, and that such new company may potentially compete with the target’s business.

Finally, interviews may also reveal triggers to potential threats. Interviews should be done at the later point of review, when the team has already identified some triggers or potential threats. The most challenging is searching off-balance transactions and legal background of a target.


It is almost impossible to reveal off-balance transactions of a target. However, the traces of such transactions may be found in emails or triggered during interviews and during checking affiliated companies and persons. These are the instruments, which allow finding triggers to off-balance transactions and most of them are guarantees and performance bonds, unless certain financial transaction fraudulently omitted in target’s records.

The above-mentioned methods and sources of identification of risks and threats are important in any forensic due diligence. Nonetheless, the list is not comprehensive and in fact every possible source should be considered as contributable to the forensic review.