Questioning Due Diligence Questionnaires — Keeping It Simple

questLauren Connell from The Volkov Law Group rejoins us with a posting on third-party questionnaires and due diligence. Lauren’s profile is here and she be reached at [email protected]

Third Party questionnaires are a standard part of any due diligence process.  They are emailed to the potential third-party business partner, filled out and sent back, or the third-party enters the information through an Internet portal.  Compliance officers and outside counsel review the answers and squeeze as much information out as possible.  The questionnaire process depends on the honesty and integrity of the third-party filling out the form.

So why do we make them so difficult to answer completely and truthfully?

Many people use questionnaires that are so wordy or legally crafted that the point of each question is lost in commas, phrases and run on sentences.  Even more disturbing is that the questionnaires are frequently limited to English and the prospective third-party may speak English as a second, third or fourth language.

The compliance profession needs to focus on the key principle — KISS — Keeping It Simple Stupid.

Two basic requirements have to be met — questionnaires need to be accessible in foreign languages and designed using straightforward and concise questions.quest4

The instinct to make third-party questionnaires complex is understandable – they are intended to gather specific information.  But there is a careful balancing that must be done – between making questionnaires understandable and user-friendly vs. specific and thorough.  Thus far the compliance function has tipped the scales – too far in my opinion – toward the latter.

For example, it is standard to ask about a third-party’s connections to the government.  This is a relatively typical question:

Are any of the Company’s principals, shareholders, directors, officers, employees or related parties currently or formerly (within the last 10 years) an official, employee, agent or representative of a foreign government, state-owned enterprise or other instrumentality or political party official, political candidate for office or an official of a public international organization?

Say that again?  How long will it take a third-party, for whom English is a second language, to understand this question?  If ever?

To be fair, there is a lot of nuance in the question and it is difficult to communicate the entire concept of government connection.  But if the third-party cannot even understand the question, how can we expect accurate answers?  Instead, what about asking:

Has anyone at the Company worked (or currently works) for a government branch, a political party, or the military in the last ten years?”

Does anyone at the Company currently, or in the last ten years, work for the Government, including any division, the military or a political party?

Sure, we can include a footnote that explains: “This includes the Company’s principals, shareholders, directors, officers, employees or related parties (including Close Family Members).”  The “Government” includes any part of any government, any department, agency, state-owned enterprise (such as a state-owned oil company or airport), a political party official, a political candidate or an official of a public international organization.”  Just keep it out of the main question.

quest3A similar issue exists with contracts – we frequently use legalese and extremely complex language to address very specific topics – but contracts are designed to be examined in a courtroom.  They have to define rights and responsibilities of parties very precisely and therefore need to be complex by nature.  There is not a second chance to get it right once a dispute arises.

Not so for questionnaires.  If you did not get the answer you want, follow up and ask another question.  If you discover something later in the due diligence process that you want to follow-up about, ask more questions.

An effective third-party due diligence program will often require circling back with a third party to discuss concerns that have come up.  In-depth due diligence is a dynamic process, the more interactive the better.  Start simple and head towards complex and specific when, and if, you need to do so.

Third party questionnaires should not require days and days to decipher and complete.  Simple and direct questionnaires will begin a process that leads to more complete questions and answers.  Take a few minutes to review your own third-party questionnaire, and ask yourself whether you have fallen into the complexity trap.  If so, go back and revise the questionnaire to make it simple.

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