Counterparty checks

What is happening

A new supplier is quoting well below market and wants full payment up front. The website is new, the company was registered recently, and its director also runs several other companies.

During a tax audit the inspectors start asking about counterparties from past years, and it turns out that checks at contract stage consisted of downloading a register extract. The company needs a procedure it can point to as evidence of due care.

A long-standing customer has started paying late and wants longer credit terms. Before agreeing, the owner wants to know whether other suppliers are suing it, whether its accounts are frozen, and whether creditors have announced plans to petition for its bankruptcy.

What the law says

• Under Article 54.1 of the Tax Code, expenses and deductions on a transaction may be disallowed if the obligation was performed by someone other than the party named in the documents. A documented check carried out when the counterparty was chosen is one of the company's arguments in such a dispute.
• The state register of legal entities is kept under Federal Law No. 129-FZ of 8 August 2001 "On State Registration of Legal Entities and Individual Entrepreneurs"; a note that the address, director or participant details are unreliable is a serious warning sign, as is a mass-registration address.
• A creditor must publish advance notice of its intention to petition for a debtor's bankruptcy; that procedure, along with publication of information on insolvency proceedings, is set by Federal Law No. 127-FZ of 26 October 2002 "On Insolvency (Bankruptcy)". Such notices are among the earliest signs of trouble.
• Information on open enforcement proceedings is public in the bailiffs' database, maintained under Federal Law No. 229-FZ of 2 October 2007 "On Enforcement Proceedings"; the commercial court case index shows the counterparty's disputes both as claimant and as defendant.
• Where the counterparty takes part in public procurement, we check the register of unreliable suppliers maintained under Federal Law No. 44-FZ of 5 April 2013 "On the Contract System for Procurement of Goods, Works and Services for State and Municipal Needs".

What we do

• We check registration data: date of incorporation, address, director and participants, their links to other companies, recent changes and any unreliability notes.
• We look at the financial statements over time: revenue, assets, liabilities, and whether the size of the business fits the size of the deal.
• We check litigation, enforcement proceedings, suspensions of bank account operations, insolvency notices and reorganisations.
• We verify the signatory's authority, licences, membership of self-regulatory organisations and other permits the contract requires.
• We ask the counterparty for evidence of real activity: resources, staff, experience with similar supplies or works.
• We give a written opinion with a risk rating and contract amendments: payment terms, security, liability and termination rights.
• On request, we draw up an internal counterparty-check procedure for your accounts and sales teams.

What we will need from you

• The counterparty's tax number or registration number and the essentials of the deal: subject matter, amount, payment terms.
• Documents the counterparty has already provided: charter, extracts, powers of attorney, commercial offer.
• The draft contract, if there is one.
• The history of the relationship if the counterparty is not new: volumes, delays, claims.
• The depth of check you need: a quick assessment before an advance, or a full review before a long-term contract.