“It is now a time where business decisions are made based on old reports,” said Grant Thornton Baltic partner and Head of Audit Mart Nõmper. He mentioned the fact that the deadline for annual reports is the last day of June, and thus anyone checking a company’s background may have to content themselves with 2021 – fairly old – reports. “So it’s a golden time for fraud.”
Still, regular checks of one’s partner help stave off falling victim to fraud. “Vigilance is the norm in the phase where business relationships are established, but life shows that major credit losses are sustained from long-time clients, because as time passes, companies let their guard down about checking them,” said Nõmper.
CEO of Creditinfo Eesti Elari Tammenurm added that the changing world dictates the need for constant checks. “A company with whom cooperation was launched two years ago may have had strong financials at the start but they may have shed partners, developed problems paying invoices.”
Tammenurm adds that if red flags come up in the course of regular checks, they should be addressed even if the existing relationship with the client is , impeccable. “I know an example where a partner with a suspicious background rented a car five times from a company and always returned it in order but the sixth time the car was stolen and transported across a border."
Red flags that call for caution in regard to a partner are many and experts say they should be viewed in amalgamated form. ”You may have a wonderful, active and solvent client but if a management board member is never able to take part in a meeting, colleagues say he or she is constantly travelling on business and can’t be reached even by Teams…it’s not beyond the realm of possibility that the person might be in jail,” said the head of Grant Thornton Baltic’s support unit, Diana Varik.
Another red flag according to Varik is if the client does not want to share information about their structure or ultimate actual beneficial owners. It is also a danger sign if the changes to the management board are too frequent.
For example, after the Ukraine war, some companies started making changes to management board members to dodge sanctions. Some players on the market also offer company founding service to foreign nationals. Founding and selling a company is completely legal but the buyer may not always be as clean as the seller,” she said.
Tammenurm adds payment problems and tax debts to the list of red flags. “It’s also worth checking the media image of the partner, whether any court decisions are in force and whether they submit annual reports regularly.”
Varik said it is also important to ask about the partner’s cash or cryptocurrency transactions. The Financial Intelligence Unit and banks also keep an eye on this and ask about movement of invoices,” said the expert.
Nõmper said companies’ trustworthiness is higher if the financial reporting has been audited. “I don’t want to say that unaudited data are always flawed but the risk is just higher. It’s worth remembering that it’s possible to voluntarily order an audit to be trustworthy in the eyes of counterparties to a transaction.”
There was consensus among the experts that as time goes on, the higher the standards that one’s business partners are subjected to. “This holds true for property relationships in particular. In the past, it seemed OK when you got paid, but the origin and background of funds were not of that interest but since February 2022 the reputation damage from not being aware of who the ultimate beneficial owners are can be significant,” said Tammenurm regarding money laundering risks and the risk of doing business with partners subject to sanctions.
In addition to sanctions, more attention is being paid to whether the business partner follows ESG principles. “Many companies include in their ESG policy what persons they won’t work with and define who did not meet their values,” said Nõmper. “A transaction may look legal but it may not align with values.”
Nõmper added that once the rules the client must meet are in place, they must be followed and no exceptions granted. “As an auditor I can say that the ones who have sustained fewer credit losses are systematic and adhere to the established precautionary measures.”
He added that if things go south, a quick reaction time is important. “Whoever leaves the table has to pick up the tab for the party,” he warned. “The one who leaves first sustains less losses.”
From the perspective of Grant Thornton Baltic, the experts noted that the existence of a red flag does not always necessarily rule out a client but a higher risk means accepting a higher price. “We take all warning signs into consideration when setting prices. The more careful we have to be and the more resources we spend, the higher the price is,” said Nõmper.
To sum up, Tammenurm recommends relying on experts and websites that specialize in assessing business partner risk. They have gathered all the red flags together and have arrived at risk scores.
“Instead of taking a long list of databases and starting to assess influences, the score solutions devised on the market can be used, where all indicators are aggregated into a single value. Yes, Google is free, but time also costs something.”
If you have similar challenges and questions, please contact our specialists.
