Hopehead Explainer: When is it time to commission source enquiries?

Discrete referencing… source interviews… “HUMINT”… the Business Intelligence industry has numerous labels for it, but the exercise of speaking to people as part of conducting due diligence is a fundamental part of what we offer. Commissioning conversations with people who have particular knowledge about an individual or situation can, when used appropriately, add enormous value to your due diligence process and help to establish a fuller and more nuanced picture of your potential counterparty, transaction or situation.

But when employed poorly, source enquiries can lead to underwhelming results. This can deter some clients from using them. So this Hopehead Explainer delves into how and when it makes sense to use source enquiries in your due diligence process and how to avoid some of the major pitfalls.

1. When there’s no information

“The absence of evidence is not evidence of absence” – even in a world of seemingly endless publicly available information, it is not uncommon to undertake due diligence research on someone that delivers almost no verifiable facts. But this doesn’t mean the person doesn’t exist; in an era of “right to be forgotten”, where the ability to cleanse your digital profile is available to more and more people, reliance only on public records is becoming increasingly risky in due diligence.

In this situation, source enquiries provide a means to get beyond a carefully curated public persona by speaking to the people who know and have worked with an individual. This is particularly vital in more opaque markets and in parts of the world where less information is online; but it is also used to understand the activities of those who are wealthy and powerful enough to control what information is publicly available about them.

2. When there’s a “Red Flag”

This is almost certainly the most common impetus for clients commission source enquiries: an issue of concern has been identified and it requires further investigation. This will almost always be a situation where an allegation of wrongdoing has surfaced in the public domain but there is insufficient information to establish what has really happened. Speaking to people who have knowledge of a situation can help to fill in the gaps.

You might have expected me to put this most ubiquitous use of source enquiries at the top of this list; but it’s a point needs to come with some important caveats. Ethically conducted source enquiries are limited in the information they can gather. You cannot, for example, find out about the content of ongoing legal proceedings. Likewise, if someone has signed a non-disclosure agreement, they are unlikely to breach it in order to assist a due diligence process. In trying to understand “red flags”, source enquiries can play an important role in providing context about a situation, but in most cases they won’t give you “evidence” of wrongdoing if it isn’t already in the public domain.

3. When what you need isn’t “data”

Due diligence processes are often driven by a need to collect “data” about a subject or individual that can be built into a case for or against engagement. This is an understandable requirement, but it is also important to recognise the times when data can’t answer fully your most pressing questions: “Will Mr X’s behaviour tally with our business culture?”  “To what extent were market forces the real reason for the collapse of company Y?” In an imperfect information environment, the available answers to these questions are most likely going to be opinions not facts.

This is the strongest use case for source enquiries – building a picture of opinions and experiences that, while they won’t give you a black and white solution, will colour in the many shades of grey that exist in human interactions. Fundamentally, all business engagements are about the people involved and source enquiries can help give you a better understanding of how those people operate and, in turn, gain a better understanding of what the facts of a case tell you.