What is satisfactory due diligence under the Foreign Corrupt Practices Act (FCPA)? That question seems to be even more important after the corruption scandal involving Unaoil and the subsequent release of the Panama Papers. Both of these events, however, largely focused on the “who” part of due diligence and the need to know with whom you are doing business going forward. Another important question that doesn't often come up during due diligence is the “how?”

For instance, how does a particular third party perform its services with or for your company? If it is on the sales side, how can a third party help you make sales? If a third party comes through the supply chain, how does its products or services meet the needs of your company?

If the third party has a close business relationship, such as a joint venture, teaming agreement, or other similar arrangement, a company should have a deeper understanding of how the third party does business, because it could find itself intertwined. It may mean more than simply questioning whether its product works, but also asking how the third party conducts itself and its business.

One example of a company that did not investigate the “how” is Walgreens, which saw a seven-year relationship with Theranos come to an end after it was reported that Theranos founder and CEO Elizabeth Holmes and former President Ramesh “Sunny” Balwani had raised more than $700 million from investors “through an elaborate, years-long fraud in which they exaggerated or made false statements about the company’s technology, business, and financial performance.” 

The “how” issue at Theranos is that Walgreens was never allowed to fully validate Theranos’ technology or capabilities, and the clear message one should take from the scandal is that if you are going to partner with a technology company that is set to change the business model, you best make sure the technology works. Moreover, if a potential joint venture partner refuses to show you its technology, how it keeps its records, its financials relating to the products and services for which you are contracting, you should run, not walk, away from the deal.