Client Due Diligence

The below is not exhaustive.  Ultimately the degree and level of assessment is determined on a case by case basis by the banking department together with other departments such as the risk department, the legal department, the chief compliance office, the environmental and social department, the procurement department.

Integrity due diligence and beneficial ownership verification

This is the first step carried out when assessing new projects. Companies and shareholders are reviewed using available sources in the company’s or sponsor’s local language as well as commonly employed databases. In some instances, in coordination with the Bank’s compliance department, a more detailed assessment is carried out including, if necessary, with the help of external consultants. A thorough study is carried out of the ownership structure of relevant entities, as well as of beneficial ownership, in order to understand the motivation of owners for using different companies and jurisdictions as part of organising their business. Transparency and sound business reasons are vital. In addition, relevant entities and persons linked to the project, as well as any less formal associations – past or present - are explored in order to assess matters of integrity and reputational concern. Whilst it is impossible to discover every detail of interest, the Bank deploys a risk based approach: conducting more intrusive integrity due diligence where there is reason to do so. Similarly, for repeat projects, the Bank will place some reliance on past experience whilst, at the same time, also rechecking core features, as above.

Financial due diligence

Each project considered for investment by EBRD undergoes comprehensive and careful assessment of all their financial processes. This includes (but is not limited to) detailed assessment of their financial reports, off balance sheet obligations (including hedging), related party transactions, arm’s length dealing and transfer pricing, management information systems, cash and working capital management including sample testing of these. In addition, the company’s financial policy is reviewed and its implementation tested. Practically all deals are required to have IFRS or similar reporting standards, and be audited by an auditor acceptable to the Bank, by the time EBRD invests in the project. During the due diligence process a financial business plan needs to be presented where all key assumptions will undergo a process of verification by the Bank. The Bank builds its own financial models where base and stress cases are determined independently. In large, sophisticated or acquisition driven deals full external financials and tax due diligence may be required where assumptions will be sanity checked and tested for realism.

Market due diligence

In each project the Bank takes careful consideration of country and market (sector) implications which are closely reviewed. In cooperation with the Bank’s internal economist and treasury departments projections are used to mimic the effects of currency and interest rate fluctuations. Transfer, convertibility and market access – impacting refinancing are also modelled and stressed. Sector considerations– in particular market share positioning and performance vis-a-vie peers are also analysed and benchmarked as relevant.

Management due diligence

Management is seen as a critical element in the success of a project. Assessment of key and senior management capabilities forms an important part of the appraisal process. During the due diligence process, particular focus is put on assessing the proven, measurable and relevant track record management can demonstrate. Management’s background and experience is individually evaluated and current management methods analysed. External assessment of management capabilities and background is occasionally carried out. Deal structuring of joint ventures with multiple owners typically require some form of agreed voting rules and procedures for the appointment of top managers in the shareholders’ agreements. A practical dispute resolution is required.

Technical /operational due diligence

Technical and operational due diligence is carried out in all new EBRD projects. The use of experts (internal and external) is more commonly used when assessing technical and operational due diligence. The Bank has developed expert knowledge in several sectors and fields and has in-house expert in the fields of oil and gas, metal and mining, chemicals and pulp and paper to name a few. It will always endeavour to ensure specialists are carrying out rigorous technical due diligence in all projects and oftentimes strict technical project monitors are assigned for each deal disbursement. A detailed technical business plan should be presented and as part of the due diligence process all key assumptions will be reviewed, checked including engineering design and construction and equipment costs as well as supervising where relevant.

Legal due diligence

The Bank operates in a challenging legal environment. In many jurisdictions, the application and enforceability of laws are subject to uncertainties and court practises are not always well established. Legal due diligence is therefore an integral part of the preparation of an operation. At a minimum, it typically includes a review of a client's corporate documents and material contracts impacting the operation, as well as key licenses and permits. The Bank typically engages outside counsel in the client's jurisdiction to assist in the due diligence process and to advise on legal risks. The outcome of the legal due diligence, and any specific risks identified as a result, are shared with other Bank departments, and form part of the Bank's overall risk analysis underpinning its decision to proceed and on what terms.

Environmental and Social due diligence

All projects undergo environmental and social due diligence to assess the potential environmental and social impacts and risks. The due diligence will help EBRD decide whether the project can be structured to meet the EBRD requirements. It is the responsibility of the client to undertake, or commission an independent consultant to undertake an environmental and social assessment of the project to determine the way in which potential environmental and social impacts and associated financial, legal and reputational risks should be addressed in the project planning, implementation and operation.