Client due diligence

The list is not exhaustive. Ultimately, the degree and level of assessment are determined on a case-by-case basis by the Banking team, together with other EBRD departments responsible for risk, legal affairs, compliance, environmental and social affairs, and procurement.

Integrity due diligence and establishing beneficial ownership

This is the first step carried out when assessing new projects. Companies and shareholders are reviewed using the resources available in the company’s or sponsor’s local language, as well as commonly used databases. In some instances, in coordination with the Bank’s compliance department, a more detailed assessment is carried out, if necessary with the help of external consultants.

A thorough study is conducted on the ownership structure of the relevant entity or entities in question, as well as their beneficial ownership, to understand the owners' motivation for using different companies and jurisdictions to organise their business. Transparency and sound business reasons are vital.

In addition, entities and persons linked to the project, as well as any less formal associations – past or present – are explored to assess matters of integrity and reputational concern. While it is impossible to identify every detail of interest, the Bank takes a risk-based approach, conducting even more intensive integrity due diligence where there is reason to do so. Similarly, for repeat projects, the Bank will place some reliance on past experience while simultaneously rechecking core elements.

Financial due diligence

Each project considered for investment by the EBRD undergoes comprehensive and careful assessment of all its financial processes. This includes (but is not limited to) detailed assessment of its financial reports, off-balance-sheet obligations (including hedging), related-party transactions, arm’s length dealing and transfer pricing, management information systems, and cash and working capital management, including sample testing of these. In addition, the company’s financial policy is reviewed and its implementation tested.

Almost all investee companies are required to meet International Financial Reporting Standards (IFRS) or similar, and be audited by an auditor acceptable to the Bank by the time the EBRD invests in the project.

During the due diligence process, a financial business plan must be presented, the key assumptions of which will undergo a process of verification by the Bank. The EBRD builds its own financial models in which base and stress cases are determined independently. In large, sophisticated or acquisition-driven deals, full external financials and tax due diligence may be required with assumptions sanity checked and tested for realism.

Market due diligence

For each project, the Bank takes into careful consideration and closely reviews any country or market (sectoral) implications which are closely reviewed. Together with the Bank’s economist and treasury departments, projections are used to mimic the effects of currency and interest rate fluctuations. Transfer, convertibility and market access that may impact refinancing are also modelled and stressed. Sector considerations, in particular market-share positioning and performance compared with peers, are also analysed and benchmarked.

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 emphasis is placed on assessing management's demonstrable, proven, measurable and relevant track record. The management team’s background and experience is evaluated on an individual basis and current management methods are analysed. External assessment of management capabilities and background is occasionally conducted. The structuring of joint ventures in deals with multiple owners typically requires some form of agreed voting rules and procedures for the appointment of top managers. A practical dispute resolution mechanism is also required.

Technical and operational due diligence

Technical and operational due diligence is carried out on 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 experts in oil and gas, metal and mining, chemicals and pulp and paper, to name but a few. It will always endeavour to ensure that  specialists are carrying out rigorous technical due diligence on all projects, and strict technical project monitors are frequently assigned for each deal disbursement. Companies must present a detailed technical business plan and, as part of the due diligence process, all key assumptions will be reviewed and checked – including engineering design and construction and equipment costs – as well as supervised, 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 uncertainty, and court practices are not always well established. Legal due diligence is, therefore, an integral part of operational preparations. At a minimum, it typically includes a review of a client's corporate documents and material contracts impacting the operation, as well as key licences 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 overall risk analysis underpinning the EBRD's decision to proceed and on what terms.

Environmental and social due diligence

All projects undergo environmental and social due diligence to assess potential environmental and social impacts and risks. The due diligence process will help the EBRD decide whether the project can be structured to meet the Bank's 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 operational phases.