Due Diligence Pack

A due diligence pack is the set of documents that the seller of a business, typically a licensed financial company such as a money transmitter, an electronic money institution (EMI) or a payment institution, assembles so that a prospective buyer or investor can verify what the entity actually is. It covers the company's corporate history and ownership, the scope and condition of its licenses, its compliance program, its finances and its handling of customer money.

The pack is evidence rather than a sales document. Its completeness, organization and consistency tell a buyer a great deal about how the business is run, and gaps in it often signal problems that would otherwise surface only after closing.

When a licensed financial business is sold, the license is usually its most valuable asset, and that value depends on the license being valid, in good standing and transferable to new owners. Due diligence lets the buyer confirm this, price the deal and decide what warranties, indemnities and conditions to require. Regulators also take an interest, because a change of control of a licensed entity usually needs their prior approval, and the buyer's own application relies on understanding the target.

• Corporate records — incorporation documents, constitution, share register, board minutes, group structure chart and beneficial ownership information.
• Licenses and permissions — copies of each license and any conditions or restrictions, filings with regulators, and for US money transmitters the company's records in NMLS, including its NMLS MU filings and the list of control persons.
• Compliance program — the written AML program, risk assessment, policies on customer due diligence and sanctions screening, training records and the latest independent AML review with management responses.
• Customer funds — evidence of safeguarding or permissible-investment arrangements, account agreements and recent reconciliation records.
• Financial position — audited accounts, management accounts, capital calculations showing compliance with regulatory capital or tangible net worth requirements, and surety bonds where required.
• Operations and contracts — banking relationships, partner and agent agreements, technology and outsourcing contracts, and key staff details.
• Disputes and complaints — litigation, customer complaint logs and any regulatory findings or enforcement history, to the extent they can lawfully be shared.

Some material cannot simply be placed in a data room. In the United States, the existence of a suspicious activity report is confidential by law, so a seller can describe its reporting procedures but must not disclose individual filings. Examination reports issued by state and federal regulators are often treated as confidential supervisory information that may be shared only with the regulator's permission. Personal data of customers and staff is subject to privacy law. A well-prepared pack explains what is withheld and why, rather than leaving silent gaps.

Experienced buyers test whether the documents agree with each other and with the regulators' records. Common warning signs include a compliance program that does not match the products actually offered, an overdue independent review, unexplained changes of control persons, weak reconciliation of customer funds, reliance on a single bank that could exit the relationship, and license conditions the seller did not mention. Buyers also check the source of wealth of the sellers and confirm that the business does not depend on arrangements such as license sponsorship that will not survive the sale.

Where the target is a money transmitter license holder or a small electronic money institution, buyers pay particular attention to whether the license can be retained after the change of control, since regulators may impose conditions or reject an unsuitable acquirer.

Sellers usually organize the pack in a virtual data room with an index and version control, and update it as questions arise. Preparing it early helps the seller identify and fix weaknesses before buyers find them, and it shortens the timetable for the regulatory approval process that follows signing.