Due Diligence In Latin America: Prior To Debt Collection

The issues we deal with in international debt collection in Latin America often could have been flagged, avoided or dealt with before companies actually started to do business.

Having proper due diligence and compliance procedures in place for your international operations in general, and in our context of Latin American debt collection, in particular with respect to business transactions in Latin America is key to substantially reducing the financial risk and avoiding overdue accounts at a later stage.

Due Diligence in Latin America may seem challenging

For foreign businesses it might be challenging to perform due diligence and compliance procedures in Latin America. The reasons might be:

1. Lack of access to information and transparency in Latin America;
2. Resistance from local business partners in Latin America;
3. Cultural differences and other languages spoken between your company and your local business partner;
4. Limited in-house knowledge on Latin American business culture, languages, geography, socio-economic and political circumstances, amongst others;
5. The often informal nature of economy and business in Latin America;

What does Due Diligence in Latin America mean?

Before starting to do business in Latin America, and to mitigate financial risk, reduce overdue accounts later on and hence optimize positive economic results, it is important for foreign businesses to:

1. Understand the socio-economic reality of the Latin American country or countries you do business in;
2. Be aware of political circumstances and potential (in)stability in the Latin American country or countries your business partners are based in;
3. Understand local legal and administrative requirements and regulations your business sector is subject to, locally in Latin America;
4. Know your client: get familiar, inside-out, with the company you do business with – its officers and their backgrounds and connections, the financial side, assets, business activities and performance and local clients;

Due Diligence in Latin America: what the focus on

So what to focus on when you do your due diligence in Latin America?

Here is a check list you can follow:

1. How does your business and your local business partner comply with local regulations and which local regulations are applicable to your business and your local partner?
2. Financial due diligence: what is your local business partner’s financial situation and is it currently in a position to pay its financial obligations, and, based on future development, will it continue to be so?
3. Accounting due diligence: how does your business partner comply with local and international accounting standards?
4. Legal due diligence: what is your exposure as to contracts entered into with your local partner and other parties, and potential litigation?
5. Documentation assessment: in connection with the above, which documents are required locally and international to complete the business transaction, collect on (overdue) invoices and, in the worst case scenario, legally enforce payment of overdue invoices, locally? Documents that might be taken in consideration are contracts, order forms and confirmation, shipping bills, invoices, amongst others;
6. Judicial check: has your business partner had any warning letters, fines, civil penalties, audits or other enforcement actions, or is your business partner, or any of its officers, otherwise involved in legal actions or lawsuits?
7. Background check: get to know as much as possible about your business partner and its officers, and their backgrounds and connections, (business) activities, performance and local clients and partners;
8. Local partners and specialists: make sure you engage the right local partners and specialists who can help you with the due diligence and compliance, and otherwise any accounting, administrative or legal issues that might come up. Such partners and specialists could be business advisors, law firms or local representatives.

Reduce the need for Debt Collection in Latin America: do your Due Diligence!

In order to avoid debt collection issues later on, it is important for foreign business to do proper due diligence and compliance in Latin America before closing business transactions. The objective is to understand the socio-economic reality of the Latin American country you do business in, its political environment, local legal and administrative requirements and regulations, and to know your client inside-out.

This post does not provide a legal opinion nor a completely summary in any way. When you do business in Latin America, make sure you engage local advisors, partners and law firms to make sure that your due diligence and compliance procedures are in proper shape for your business operations and transactions in Latin America.

Cobroamericas is a provider of international debt collection services and focuses on collections in Latin America and the Caribbean. If you are interested in learning more or discussing issues in connection due diligence and compliance procedures in Latin America, potentially in connection with international debt collection in Latin America and the Caribbean, please connect with Cobroamericas on Linked-In or follow us on Twitter.

To participate in the conversation about debt collection in Latin America please join the Linked-In Group Debt Collection Latin America.