When Your Investment Target Has Drug Cartel Ties

By Nicholas Elliott

When Ken Springer was called in by a private equity firm last year to conduct what it called a “quick and dirty” background check on a businessman in Colombia, the investigation turned out not to be quick but the results were surprisingly dirty.

Springer is president of investigative firm Corporate Resolutions Inc. and a former agent with the Federal Bureau of Investigation. He often works with private equity firms and, as in the case of the prospective Colombian investment, is accustomed to being called in late in the deal-making process. As in this instance, he is often contacted after a letter of intent has been signed for the private equity firm to acquire a company.

In this case, the firm was about to make an investment in a company run by a businessman with a successful record. Springer declined to name either the private equity firm, the company or the businessman.

The firm had done some due diligence and found the businessman had a strong record going back eight years. Springer’s firm formed the same impression, but Springer said he was suspicious that there was no information before that time, so he asked the firm for more time to dig deeper.

That additional investigative work involved contacting a former U.S. intelligence agent in Colombia to ask around. When word came back, it was shocking – the businessman had been working for a drug cartel, had been convicted of related crimes and had spent time in jail. Moreover, the reason there was no trail going back more than eight years was that bribes had been paid to destroy the record of his jail time, the former agent reported.

“Although entrepreneurial [in his previous life], he wasn’t who he said he was,” was Springer’s wry assessment.

Needless to say, the private equity firm dropped the idea of investing with the businessman, thus avoiding what could have been a major embarrassment to the firm and its limited partners.

Springer makes the case that reputational risk can be just as important as financial risk, so  thorough background checks can be worthwhile.

Bringing in an investigator is “probably the most inexpensive part of the due diligence process,” he said.