Regardless of the experience and the resources you have available, it is extremely difficult to build a large business by yourself. Therefore, success in business is much easier when you find partners who have the same vision and involvement. Thus, they can complete you, they can come with new resources, and the development process takes place at an accelerated pace.
This is part of the Western business culture, where trust and teamwork are solid foundations in business. When choosing the strategy of attracting partners, it goes without saying that everyone respects a business ethic, so few take into account the enormous risks they are exposed to. Thus, if you enter into a project with an unfair partner, you can be sure that the project has little chance of success. Moreover, it can lead to significant losses, especially if you have complete confidence in the partner and, as such, you are not present in the daily implementation of the project.These things faced a western-European investor when he chose to develop on the Romanian market a large real estate project with a local partner. Dissatisfied with the lack of profitability of the projects in his portfolio, he wanted to investigate in detail how the business was coordinated by the Romanian partner, suspecting the lack of honesty in his business. Thus, the investor called for the support of a multidisciplinary investigation team of Interdilgence.
The challenge was not at all simple, the Romanian partner having a solid background and expertise in the management of real estate projects. He knew how to use certain breaches of the partnership, leaving the appearance of managing the business loyally. During the investigation, the evidence showed that things did not look that way. In a first stage, the analysts and the lawyers of Interdiligence researched the legal documents that were the basis of the partnership, the investment plans, the details of the developed and developing projects, the working procedures, both on site and in relation with the service and products providers, job descriptions of project coordinators as well as access logs at project locations, including offices and construction sites. Following the analysis process, the Interdiligence project team established concrete investigative tasks for the field agents, who conducted checks on multiple players like, local partner, project coordinators, shareholders of the companies providing services and products, as well as their clients.
A first fraud discovered in the land transaction
The investigative activities also followed the sale history of the land on which the investor’s real estate projects were built, as well as the clients of the apartments sold during the real estate development process. Also, a team of financial analysts and accountants conducted an investigative audit on financial documents made available by the investor, including balance sheets, contracts, invoices and bank account statements. Another multidisciplinary technical team made up of architects and engineers with specialties in residential construction, power and plumbing, went to construction sites where they conducted covert audits on two apartment buildings, one finalized and the other one under construction. The results of the multidisciplinary investigation process revealed a whole financial engineering scheme implemented by the local partner, just before the engagement of the Western European investor in the project. Thus, land book excerpts checked by the investigators showed that the land plots, on which the subject real estate projects were built, had been acquired and owned by the local partner long before the beginning of the investigated projects, these being traded, through third parties, several times until the moment of their acquisition with the funds made available by the western-European investor. At the same time, it was found that all companies providing services and construction materials to the subject construction projects were owned by close relatives of the local partner, in partnership with offshore companies owned by him in jurisdictions where the identity of the shareholders is very difficult to access.
Parallel projects and diversion of funds
But all this is only part of the fraud. The Romanian partner has switched to another financial engineering, developing in parallel two real estate projects on his own, these projects being positioned right nearby the projects developed in partnership with the Western-European investor. The Interdiligence investigators found that the local partner used the construction teams for his personal project, these being paid from the budget of the project financed by the foreign investor. The local partner did not stop here, using a fraud system applied on selling the apartments of the project financed by the foreign investor. The apartments were sold through a not very clever system: buyers paid 70% of the sale price to the company account financed by the external investor, and 30% of the price was paid with cash to the local partner.
A solution without headaches
The result of the investigation included a set of information and evidence that showed how the local partner used the financial resources made available by the Western European investor, highlighting the estimated value of the damage suffered by him. In order to avoid a long and costly trial in the courts, the Interdiligence team organized a meeting where the two partners agreed to a business compromise through which the injured investor was compensated, while establishing amicable conditions for leaving the partnership.
Three tips for a healthy partnership
The toxic business behaviour of the fraudulent partner and the tough situation in which the Western-European investor was placed represent strong warnings for those who plan to resort to developing business partnerships. Thus, any investor should go out of his way, in such an approach, ticking three extremely important points:
- checking on the history of the person or entity with whom a partnership will be signed is vital in the healthy development of any project;
- monitoring the development of the project in which it was invested, even by engaging a third party, brings transparency and security to all partners involved;
- continuous and transparent communication on the evolution of the project avoids suspicion and adds value to both the partnership and the developing project.
Therefore, in case of any suspicion of lack of honesty in the management of a project, any hesitation in initiating an immediate investigation can lead to financial losses and even reputational issues hard to quantify.