Financial and asset verification – Enhancing lender due diligence in export finance

Case Details

Buyer/Borrower location: Kingdom of Saudi Arabia (KSA)

Buyer/borrower type: Private corporate

Value: Contract value of EUR 6.5 million

Payment terms: 5 years

Sector: Water Bottling equipment

Background

A European bank received a request to provide a buyer credit facility to a Saudi corporate to finance the purchase of a water bottling plant from a German manufacturer.

In the origination phase, suspicions emerged over the authenticity of the buyer’s financial statements which appeared to be inconsistent. Without a local branch in KSA, and to effectively navigate these concerns, the bank engaged us to conduct a thorough investigation into the buyer’s credibility and the validity of their reported financial data.

The Challenge

The investigation centred on two key questions:

1. Audit Authentication
   Was the Saudi auditor’s endorsement on the 2022 financial statements genuine, and did the auditor officially recognize these documents?
2. Asset Verification
   Did the Saudi company actually possess the assets reported on its balance sheet?

These questions were vital to ensure that the bank did not inadvertently finance a transaction founded on potentially fraudulent information.

Methodology & Process

Drawing on our specialist trade and legal expertise and on-the-ground presence in KSA, we undertook the following investigations:

1. Direct Engagement with the Auditors
   Contact was initiated with the Saudi auditors who purportedly issued the financial reports on the buyer. We sought to confirm whether the reports were indeed issued by them, and the initial response raised red flags regarding the legitimacy of the documentation. From further direct discussions with a management representative, it was confirmed that the financial statements were not recognized by them and had not been prepared by their office.
2. Scrutinizing Signatory Authenticity
   Our inquiries involved targeted questions regarding the signatures on the reports and the possibility of forgery. Although the auditors refrained from an official statement without formal correspondence, they noted that the signature did not match that of the authorized personnel.
3. Meeting with the buyer’s Managing Partner
   Acting on these irregularities, we arranged an in-person meeting with the managing partner of the Saudi company. The partner explained that the individual responsible for carrying out the audit preparation was a former accountant who had departed the company under adverse circumstances. Additionally, an ongoing court dispute involving the expelled accountant for suspected embezzlement was disclosed – casting further doubt on the integrity of the financial statements.
4. Asset Verification
   We also conducted a thorough inquiry into the company assets reported on the balance sheet. It was confirmed by the managing partner that the Saudi company did not possess any physical assets corresponding to those listed in the financial statements. The reality was that the company operated on a modest scale within the facility maintenance management sector.

Outcome and Decision

Based on our comprehensive investigations, the following conclusions were drawn:

Fictitious Financial Statements
The evidence strongly indicated that the financial statements for the fiscal year 2022 were not prepared by the official Saudi auditors but were likely fabricated.

Asset Discrepancies
The investigation confirmed that the assets reported on the financial statements did not exist in reality. This mismatch between reported and actual assets significantly undermined the company’s credibility and creditworthiness.

In light of these reported findings, the German bank decided not to proceed with financing the transaction, thereby avoiding potential financial loss and reputational damage.

Key Takeaways

1. Value of specialist expertise
   Engaging a firm with on-the-ground presence and specialized trade and legal expertise in Saudi Arabia proved crucial in navigating local complexities and uncovering fraudulent practices.
2. Importance of direct verification
   Direct engagement with auditors and company management enabled the swift identification of inconsistencies that might have otherwise gone undetected.
3. The need for vigilance against forgery
   The case highlights that even seemingly official documents require rigorous verification to ensure authenticity—especially in high value international trade transactions.