Due Diligence vs. Compliance – or what instrument better provides business effectiveness and financial stability

The article is devoted to the analysis of such effective economic and legal instruments as due diligence and compliance used by business entities in the course of their business activities during such important periods as reorganization procedures or conclusion of contracts for the purchase and sale or lease of an unified property complex, etc. The purpose of this research is to determine the place and role of due diligence and compliance procedures, and its impact on the effectiveness of economic activity and ensuring financial stability of business entities. Based on the analysis of scientific economic and legal literature, current legislation, legislation of the EU and foreign countries, and the practice of implementing due diligence and compliance procedures, the author substantiates the importance of due diligence as an effective economic and legal instrument which should include the implementation of a set of information and analytical measures aimed at conducting a comprehensive and in-depth analysis, proper verification and assessment of all aspects of the business entity’s financial and economic activities (organizational, legal, financial, marketing, tax, market, technological) and the economic feasibility of planned legal actions (e.g., conclusion of a contract for the purchase and sale or lease of an unified property complex, reorganization procedure, etc.). It identifies general and distinctive features of due diligence and compliance procedures. The common features are the scope and purpose of application; the distinctive feature is the content of the procedure (due diligence builds a strategy for the business entity and provides a comprehensive audit of companies in the course of assessing the business entity’s business activities; compliance provides an opportunity to build business tactics and a system for monitoring compliance with the legislation and avoiding corruption risks). It is substantiated that due diligence and compliance should be introduced as a best practice for international companies to comprehensively carry out these procedures on a mandatory basis when providing a preliminary assessment and identifying risks in the course of economic activity of a business entity, in particular, in the reorganization procedure or in the case of concluding economic and legal contracts, such as the purchase and sale or lease of an unified property complex. In addition, it is proposed to introduce compliance programs to control implementation of legislation and avoid corruption risks (analysis and assessment of all potential economic, financial, tax risks and possible negative consequences; development of the procedure and conditions for conversion of shares, exchange of shares for shares (units), their economic feasibility and justification), the key role in the implementation of which is assigned to the supervisory board or board of directors in joint stock companies.