Before Loaning Money to Another Party, Check the Borrower’s Finances

A wise businessperson never enters into an agreement with a partner he or she doesn’t trust to be honest and settle his debts. But how do you know for sure whether the party has the means to keep up his end of the deal? You can at least seek reasonable assurance by conducting a thorough investigation of his finances. We review how to do that here.

Begin With These Basic Questions

Before agreeing to any kind of business deal or loan with another company, you must find the answers to some basic questions about them, including:

  • Does this party really exist?
  • Who will sign the agreement?
  • How long has the party been in existence?
  • What is the party’s reputation in its field?

To answer some of these questions, you can start by checking the party’s Taxpayer Identification Number (INN) on the Federal Tax Service’s website. There, you can review the extract of the firm from the Unified State Register of Legal Entities (EGRYuL). This check is a quick way to confirm the existence of the party, but you will need to look harder to find out if it is a respectable entity that can be trusted.

Conducting Counterparty Due Diligence

To protect your investment and your company, you will want to do all you can to confirm that you are working with a reputable party, known as the “counterparty.” While there is no federal or state legislation that requires a party to prove its financial stability, you will want to do everything you can to investigate the counterparty before signing an agreement. This is known as “due diligence.” Often, this is done by your legal or economic security department, but in smaller companies, it may be done by the employee who is negotiating the agreement.

In general, you are looking for evidence of any of the following:

  • A history of non-delivery of goods or non-payment of loans.
  • Delivery of poor-quality goods.
  • Untimely delivery of goods or late payment of loans.
  • Unpaid taxes.
  • Ongoing court proceedings.
  • Evidence of fraudulent schemes.

As mentioned above, obtaining the extract from EGRYuL is your first step, but you will also want to obtain the following documents at a minimum:

  • Copy of the company’s charter.
  • Copy of the company’s registration certificate.
  • Copy of the certificate on tax registration.
  • Letter from the statistics bodies with the statistics codes.
  • Documents confirming the powers of the person with whom the agreement is being signed.

Depending on the specific business activity you are considering entering into with the counterparty, you may also want to request the following additional documents:

  • Extract from the staffing chart to confirm the qualifications of a particular employee.
  • Licenses and permits, if the business activity requires such.
  • Confirmation from the tax bodies that the party is in good standing.
  • Copy of the accounting and tax reports for the past period.
  • Copy of the lease agreement for the company’s office, warehouse, etc.
  • Recommendation letters from business partners (usually requested by banks).
  • Independent audit report.
  • Copies of recent bank account statements.

The final three entries are rarely required, but if you are not getting clear evidence of the counterparty’s reputation with the other documentation, you may want to request these three pieces of information.

Resources for Researching a Potential Business Partner

There are many public sources of information that you can begin your investigation with. Before paying any fees for information or assistance in obtaining information, start with the following steps:

  • Request a fresh extract from the EGRYuL for your counterparty.
  • Check whether your counterparty has a website and read it thoroughly.
  • Verify whether your counterparty is registered at the address of “mass registration” on the website of the tax inspection.
  • Check the counterparty at using its free online service.
  • Check whether your counterparty is in the process of liquidation or reorganization at the State Registration Gazette (Vestnik Gosudarstvennoy Registratsii).
  • Check the passport of the CEO of your counterparty on the website of the Migration Department of the Russian Ministry for Interior Affairs in order to confirm that he is not using an invalid passport.
  • Verify any license details on the website of the licensing body.
  • Check whether the company took part or is currently participating in court proceedings on the website of the Supreme Arbitration Court of the Russian Federation and of other lower courts.
  • Conduct an Internet search of the name of the company and the name of its director and see all references to them.

There Are No Guarantees

Unfortunately, even if you have used all of these resources to investigate potential business partners, there is no guarantee that you will not have some kind of trouble with them. However, you can significantly reduce the chance of that happening through a due diligence search. As a company manager, you must determine the level of risk you are willing to take when entering an agreement with a party that is new to you.

If you run into a problem when conducting public searches, you may want to contact the corporate attorneys at Jus Privatum to assist you in your investigation of the counterparty. Feel free to contact us at any time through the link on this page.

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