How Due Diligence works: opening an account or registering a company?

In light of global Anti-Money Laundering (AML) legislation, counter-terrorist financing, and anti-tax evasion standards, not only each transaction or corporate structure is subject to scrutiny — but also the individual who carries out these transactions or incorporates a company for conducting business activity. In today’s regulatory environment, the Due Diligence procedure has become a mandatory step before commencing cooperation with banks, registrars, agents, or other financial and service institutions.

In this article, we will explain what Due Diligence entails and what information registration agents and financial institutions typically review when a non-resident seeks to register a company or open a business account.

What Is Due Diligence?

Due Diligence is the process of verifying information about an individual and/or company and/or transaction, conducted prior to entering into an agreement, opening a bank account, or forming a business structure. This procedure is designed to ensure that the individual’s funds come from a legitimate source, that the business activities are lawful, and that the company being established has a clear and legal purpose — not one aimed at money laundering or tax avoidance.

What Are the Main Reasons for Conducting Due Diligence?

Below are some common scenarios where Due Diligence is either mandatory or strongly recommended in order to mitigate legal and financial risks:

• Company Registration Abroad

Establishing a new business structure in a foreign jurisdiction almost always requires passing a Due Diligence check conducted by the registration agent. Without completing this procedure, it is not possible to incorporate a company.

• Opening a Bank Account with a Foreign Bank

Opening a bank account — especially in a foreign financial institution — is impossible without undergoing a Due Diligence process, which includes mandatory KYC (Know Your Customer) and AML (Anti-Money Laundering) checks. This is a standard global practice to prevent money laundering and the financing of illicit activities.

• Buying or Selling Corporate Rights

Before acquiring a company or a stake in one, it is important to conduct a Due Diligence review of its financial condition, legal liabilities, tax debts, assets, and any ongoing or past litigation. This allows the buyer to identify hidden risks and make an informed decision.

• Mergers and Acquisitions (M&A)

In the course of a merger or acquisition, both parties undergo in-depth legal and financial Due Diligence. This process assesses the compatibility of the companies, uncovers any potential risks, and evaluates assets, intellectual property, and contractual obligations — all of which are crucial for a successful transaction.

What Are the Main Types of Due Diligence?

Depending on the purpose of the review, the Due Diligence procedure may cover different aspects of an individual’s or company’s activities.

• Financial Due Diligence

This type of review focuses on assessing and analyzing the company’s assets, liabilities, profits, expenses, and related financial matters. Financial Due Diligence is typically applied when acquiring corporate rights or a business, in order to ensure that the company is financially sound and free from hidden risks.

• Legal Due Diligence

Legal Due Diligence involves reviewing all corporate documents of the company, licenses, contracts, ongoing or past litigation, intellectual property registrations, and ownership rights over movable and immovable property. It is commonly used during mergers and acquisitions, or when entering a new market.

• Tax Due Diligence

Tax Due Diligence includes a review of the company’s tax history, any outstanding tax liabilities or claims by tax authorities, and the company’s overall compliance with tax legislation.

• Operational Due Diligence

This type of review focuses on evaluating the company’s management structure, supply chain, staffing, and related operational aspects. The aim is to identify weaknesses in the internal structure and daily functioning of the business.

• General Due Diligence

General Due Diligence is a comprehensive assessment of a company or an individual, covering key areas such as legal standing, ownership structure, financial status, and tax compliance.

What Due Diligence Is Required Before Company Incorporation?

Before registering a company, especially in a foreign jurisdiction, the registration agent will always require the applicant to undergo a Due Diligence procedure. This is a standard process designed to ensure the transparency of funds, the good standing of the founders and directors, and the legality of the company’s intended activities.

What Information Will the Registration Agent Verify?

• Identity of the ultimate beneficial owners (UBOs), founders, directors, and company secretaries. To verify this information, the registration agent will request identification documents and CVs for each person to confirm their professional background.
• Tax residency and residency country. As proof, utility bills or a bank reference letter showing the registered address will be required.
• Detailed description of the company’s planned activities. It is important that the activities comply with the laws of the country of incorporation and are not prohibited by local or international regulations.
• Whether any of the individuals involved is a politically exposed person (PEP) or appears on any sanctions lists.
• Ownership structure and the logic behind the corporate structure. If the structure includes other companies, the agent will typically request a corporate chart and statutory documents for each entity.

Without completing the Due Diligence procedure, company registration in most jurisdictions is simply not possible. Moreover, incomplete or incorrect information may lead to delays or even rejection of the application.

What Due Diligence Is Required Before Opening a Bank Account?

Before opening a bank account, both individuals and legal entities are required to undergo a mandatory KYC/AML Due Diligence procedure. The bank must verify the client’s identity, the legitimacy of the source of funds, and confirm the absence of any links to unlawful activity.

In addition to the aforementioned information concerning the identifying the company’s activities and the identities of ultimate beneficial owners (UBOs), founders, directors, and secretaries, banks also pay particular attention to the following:

• Source of Funds. The bank is obliged to ensure that the funds intended to be used in the account originate from a legitimate and transparent source.
  To verify this, the bank may request: bank statements showing the history of capital accumulation; contracts for the sale of property or business; income certificates, dividend or royalty statements, or other proof of income; documents confirming inheritance or gifts received.
• Reputation and Online Presence. Banks will research publicly available information about the client. Their focus includes: mentions in media or news sources, especially in relation to criminal cases or litigation; information in business registries; presence of an official website, social media pages, etc.
• Agreements with Counterparties. To verify real commercial activity, banks may request: scanned copies of contracts and agreements with customers or suppliers; issued invoices; details about key business partners, countries of operation, and length of business relationships.

The more verified information the client can provide about their business activity, partners, and financial background, the higher the chances of receiving a positive decision from the bank. Transparency is a key factor in a bank’s decision to open an account.

In light of the above, the Due Diligence procedure is an integral part of the company registration process and the opening of bank accounts. It helps institutions verify clients, reduce risks, and ensure compliance with international standards. It is important to prepare all necessary documents in advance, have a transparent company structure, and provide proof of the source of funds.

The Azola Legal Services team will be happy to provide full support in the preparation, collection, and submission of all required documents, as well as assist in selecting the most suitable structure in accordance with the requirements of the jurisdiction and the bank.