Many companies in the Alcohol wholesale industry are now coming to terms with HMRC’s FITTED Due diligence condition as part of the Alcohol Wholesalers Registration Scheme (AWRS). For those that are unfamiliar, read HMRC Public Notice 2002 to bring yourself up to speed. Altion Law undertakes a number of these checks on behalf of clients and we have seen the quality of due diligence checks improve over the last 2 years. Due diligence documents should be scrutinised and checked by the business requesting them, it is not sufficient to merely ask for documents and then store them away at the business. Failure to carry out sufficient checks on a business could leave you at risk of assessments and wrongdoing penalties being raised, as well as having stock seized. Remember that the test of your due diligence is one of hindsight. Based on the paperwork and the operations of a trading partner, should you or ought you to have known that there was a problem or a concern? To assist those who are still working on their due diligence here our top tips to help improve your due diligence.
Have a process. Go through the same steps every time you want to work with a new supplier or customer as this helps with consistency. You know what you do as part of your checks but other companies now need to confirmation you are meeting FITTED standards. HMRC will also ask you details of the process you go through as part of your Alcohol Wholesalers Registration Scheme (AWRS) interview. It is easier to write this down in the form of a policy, as this will give you a standard question form and checklist, reducing the opportunity for mistakes. If staff assist with completing these checklists, a written policy will assist with training and consistency.
Check the paperwork. It sounds basic but you cannot rely upon the paperwork given to you and you must confirm its contents. If you are given a Certificate of Incorporation, go onto Companies House or the appropriate state registry (gov.uk contains a list of key states) and confirm the company exists; Check the VAT number matches and is valid online (VIES); Confirm the directors and the registered address are as per your conversations; Carry out websites checks of passports and utility bills you have received (there are various website which permit you to confirm the validity of documents such as passport or ID cards and addresses).
Do a site visit, an identity check and a credit check. You should meet an individual face to face, or, if this simply isn’t possible use Skype, facetime or one of the other online platforms. If you haven’t met the individual in person or seen them, how can you be sure that the person on the paperwork is who they say they are? You want a visual facial match to the documentation in front of you. Online credit checks are easily available and can be sourced on a one off basis for around £10 for UK registered entities or £30 for non UK companies. This will provide you with another independent check and a recommended credit rating. Many agencies also provide monitoring services for a monthly fee and you can create a portfolio of companies based upon their risk ratings.
Duty status & supply chain. For commercial confidentiality reasons you cannot force another company to provide you with details of their supplier but you can ask about where their goods are sourced from. Do they buy from manufacturers, other wholesalers, is it within the UK or from mainland EU? Are those goods duty paid or duty suspended? These answers can help form a defence if the goods are found to be non-duty paid. Remember that a refusal to provide this information is within itself an indicator of a potential risk, provided that no confidential information is requested.
Who actually controls and owns the company? There is a difference between beneficial and controlling ownership. If another company owns the company you want to do trade with, you need to review that company’s ownership as well. Anyone who owns more than 25% of a company needs to be identified and ID obtained. Additionally you need to understand who controls the company and if they know what they are doing, e.g. a director who has a history in the industry or has had some exposure in a previous but similar type of company. You are looking to ensure that you are confident the company is run by the person or people you have met and that there isn’t someone in the shadows controlling the business.
Who moves goods? Some of the most common alcohol frauds are duplicate transport runs in from Mainland Europe, loads that do not actually leave the country, loads that do not actually make it to its destination. Understand who will be moving your goods and whether they have what is required to do this correctly as this could assist if any issues are raised at a later stage. This area is often disputed, but HMRC cannot require FITTED level due diligence to be undertaken on Hauliers by wholesalers unless they are directly instructed, but as they are companies involved in the supply chain of Alcohol, some due diligence on Hauliers must be undertaken.
The deal. How much are the goods? Does it make commercial sense? These are questions that only those in the industry who know the market pricing can answer, markets go up and down depending on demand and product quality. Law firms, accountants, tax advisors are not commercially trading in your market and cannot comment accurately on the commerciality of a deal.
Confidentiality – Your due diligence contains some sensitive business information. It is possible to clone a company and obtain fake utility bills on line so be aware. Don’t make yourself an easy target by putting your paperwork online and only provide your company paperwork to entities that you know you want to trade with and have carried out at least some basic checks on.
Once you have completed your due diligence it must be reviewed. This is your risk assessment. Having looked at all the information, you need to ask yourself further questions. Are you happy to trade with this business? Will you give them credit? There may be risks associated with a business but as long as you can show that you were aware of these, and if necessary took additional measures to protect the Crowns Revenue, the commercial risk you are willing to take is individual to your business and is your commercial decision. We advise clients who may uncover issues through the due diligence process, that placing additional monitoring checks on a business or requesting the use of escrow accounts in bond through the first months of trading for example can negate some issues. However, beware of entities that say they will provide you with a risk assessment for FITTED as they would have to make a commercial judgement on your behalf.
Once you have your risk assessment you must undertake ongoing continuous monitoring. This means you must monitor the performance of the company and the trade you undertake with them. If you continue trading with a company despite there being warning signs you may find yourself answering a number of questions to HMRC about why you didn’t react to an issue. A log book, credit history, VIES check history, email folder of communications or other physical record of this activity will be needed. If you decide to seek support on your due diligence checks, do ask questions to any party you consider outsourcing to a third party. You essentially need to carry out due diligence on your due diligence provider! What checks are they going to do? What is their history? Do they duplicate old checks rather than redo them? Do they provide a risk rating? On what is this based? Do they have professional indemnity insurance? If they have missed something on a report and you find yourself with a penalty assessment, you’ll want to have comeback on this issue. It is also worth noting that you are trying to form a commercial relationship. The personal connection is also important and whilst a thorough job needs to be done, you do not want to damage a new relationship through an aggressive outsourced due diligence approach. There are a number of reputable firms who provide good quality services but it is also equally easy to find consultants who are not performing adequate checks. No reputable firm will mind you asking these questions and will be happy to discuss their approach. Finally be aware that due diligence is risk specific to each trading entity, the questions above are only a few of the questions that will need to be asked and most reputable companies now understand that due diligence is a key component of a successful trading relationship. This message is getting out to overseas based companies trading with UK entities, but it is common that there is often less willingness from overseas companies to provide information as it is not something that maybe required by their own regulating member state. If you need assistance with completing due diligence, staff due diligence training, fraud and risk awareness advice or training or if you just want to have your existing processes checked and audited, Altion Law are happy to assist.