Before buying a stake in a company, signing a large supply contract, or taking on a new foreign partner, the same question comes up: what is actually behind the other side of the deal, and what risks it carries. The procedure meant to answer that question has become known in business practice by the English phrase due diligence — or, as it’s often called in Russian business usage, “дью дилидженс” (dyu dilidzhens).
The term is used widely and not always precisely: it gets confused with reasonable diligence from Russian tax practice, reduced to a tax-ID lookup, or treated as a legal obligation. Below: what due diligence actually means, what types of it exist, and how counterparty vetting works as a specific case of this procedure.
What Due Diligence Is, in Simple Terms
There is no single normative definition of due diligence in either Russian or international law: the concept took shape in business practice. The working definition the market uses: a comprehensive check of a company, asset, or project before a deal, across several workstreams at once — to see the risks before signing and to negotiate the price and terms on a reasoned basis.
Who performs the check and how deep it goes depends on the scale of the deal. In large deals — a business acquisition, raising investment — due diligence is usually conducted by outside advisors: law firms, auditors, tax and financial experts. In day-to-day work with counterparties, the scope is more modest, and it’s more often performed by in-house staff — a lawyer, an accountant, security, compliance — sometimes with partial automation.
Where the Term Comes From
A common version traces the term to the US Securities Act of 1933. That account is imprecise: the text of the provision itself (Section 11 of the Act, 15 U.S.C. § 77k) does not contain the phrase “due diligence” at all. The Act exempted participants in a securities offering from liability for inaccurate information if, “after reasonable investigation,” they had grounds to believe the disclosed information was true. Professional usage attached the name due diligence defense to this liability shield — even though the phrase itself does not appear in the statute’s text.
In Russian, due diligence translates literally as “должная добросовестность” (“proper good faith”) or “разумная осмотрительность” (“reasonable prudence”), but neither translation caught on as the working term — Russian business usage settled on the transliteration “дью дилидженс” (dyu dilidzhens) and the descriptive phrase “комплексная проверка” (“comprehensive check”). This should not be confused with the separate Russian concept of “reasonable diligence” (должная осмотрительность): that concept works differently and applies in a much narrower context — covered further below.
Due Diligence, KYB, AML, and Reasonable Diligence: What Is Not the Same as What
A number of related concepts have grown up around due diligence that are mistakenly treated as synonyms.
| Concept | What It Is | Same as Due Diligence? |
|---|---|---|
| Due diligence | A comprehensive check of the object of a deal across several workstreams | the core term |
| “Дью дилидженс” (dyu dilidzhens) | The Russian transliteration | yes, the same term |
| Reasonable / commercial diligence | A concept from Russian tax practice about choosing a counterparty | no — overlaps only in the counterparty-vetting scenario |
| KYB (Know Your Business) | Vetting a counterparty company within the anti-money-laundering framework | no — a procedure inside the regulated framework, not a general business practice before a deal |
| AML/CFT | The anti-money-laundering system | no — counterparty vetting is just one element of it, and only for obligated entities |
| Customer due diligence (CDD) | A FATF Recommendations term | partially — in Russian it is rendered as “Надлежащая проверка клиентов (НПК)” (Customer Due Diligence (CDD)), not as “должная осмотрительность” (reasonable diligence) |
CDD deserves a separate note, because this is where confusion happens most often. In the official Russian translation of the FATF Recommendations, Recommendation 10 is titled “Надлежащая проверка клиентов” (Customer Due Diligence), and the document uses the abbreviation “НПК” (NPK) throughout; the phrases “должная осмотрительность” (reasonable diligence) and “due diligence” do not appear anywhere in that translation.
KYB is also a separate story: an industry term for vetting a counterparty company within the AML/CFT and onboarding framework. How that kind of check works is covered in the practical section below.
Types of Due Diligence
There is no fixed classification of due diligence types either — the set of workstreams is tailored to the specific deal. Market practice consistently distinguishes four core workstreams and several additional ones.
| Type | What’s Examined | When It Matters Most |
|---|---|---|
| Legal | Title documents, corporate structure, authority of governing bodies, rights to assets, encumbrances, litigation, terms of existing contracts | Buying a business, a stake, or a major asset |
| Financial | Accuracy of financial statements, revenue and expense structure, debt load, earnings quality, off-balance-sheet liabilities | Investment deals, buying a business |
| Tax | Correctness of tax calculations, open periods, risk of additional assessments, disputes with the tax authority | Any deal involving a change of control |
| Compliance | Sanctions status, politically exposed persons among owners and management, licenses and permits, adverse media | Deals with a foreign element, regulated industries |
| Other areas | Commercial — market position and customer base; operational — processes and supply chains; IT and cybersecurity; ESG; HR — employment relationships and key personnel | Selected based on the specifics of the particular deal |
The first four workstreams are combined in practically any significant deal, while the additional ones are brought in selectively, based on the specifics of the company and the deal.
Due Diligence in Business Acquisitions and Investment Deals
The scenario that demands the greatest depth is buying a business or a stake in one, or an investor entering a project. Here, due diligence is usually run in parallel across several workstreams at once: lawyers check the corporate structure and rights to assets, financial experts check the accuracy of the financial statements and the real debt load, and tax consultants check the risk of additional assessments for past periods. The result directly affects the deal’s terms: the price may be adjusted, and the contract may add seller warranties and a holdback mechanism for part of the payment in case problems the seller did not disclose come to light after closing.
In investment deals, legal and financial checks are supplemented by commercial due diligence: revenue stability, dependence on individual customers, the company’s actual market position — the investor needs to understand not only the risks, but also exactly what they are paying for.
Counterparty Due Diligence: When It’s Needed and How It Differs
Vetting a counterparty before a one-off deal or a supply contract is also due diligence, but on a noticeably narrower scale than in a business acquisition. A full-fledged financial or commercial analysis is rarely needed here: it is usually enough to confirm that the company exists, operates legally, is run by the person signing the contract, and shows no obvious signs of financial or legal trouble.
The depth of the check is proportionate to the price and risk of the specific deal: for a one-off, low-value supply, a basic check against public registries is enough, while a long-term contract or a large advance payment warrants a closer look — including at the ownership structure and beneficial owners.
An ultimate beneficial owner is the natural person who, in the final analysis, owns or controls the company, even if someone else is formally named in the documents. For a one-off deal, disclosing the full ownership chain is not always justified by the deal’s scale, but for long-term partnerships and major contracts, establishing the beneficial owner is no longer an optional step.
Due Diligence and Reasonable Diligence Under the Tax Code
One clarification up front: the term “reasonable diligence” does not appear in the Tax Code of the Russian Federation. It took hold in practice around a 2006 Plenum resolution of the Supreme Commercial Court, and the market still uses it, even though the Federal Tax Service (FNS)’s current 2021 guidance speaks of something else — commercial prudence, meaning the standard of reasonable counterparty selection accepted in ordinary business dealings. The upshot is the same either way: the law does not require a company to vet its counterparties, but if a check was performed and documented, the company has something to push back with against a claim.
What Article 54.1 of the Tax Code Actually Says
Article 54.1 of the Tax Code, introduced by Federal Law No. 163-FZ of 18 July 2017, contains neither “reasonable diligence” nor a counterparty-vetting checklist. It sets the limits within which a taxpayer is entitled to reduce its tax base, and paragraph 3 of the article expressly states that the signing of documents by an unidentified person, a counterparty’s violation of tax legislation, and the possibility of achieving the same result through a different, lawful transaction cannot, on their own, serve as independent grounds for finding a reduction of the tax base unlawful. The mere fact that a counterparty violated tax legislation does not, by itself, make a deduction unlawful.
Commercial Prudence: What the FNS Says
The standard whose breach lets the tax authority disallow deductions and expenses is set out not in the Tax Code, but in FNS Letter No. BV-4-7/3060@ of 10 March 2021, “On the Practice of Applying Article 54.1 of the Tax Code of the Russian Federation”: the letter states that the standard of reasonable counterparty selection accepted in business dealings — commercial prudence — also applies in tax relationships (paragraph 14). The letter lists the circumstances tax authorities are entitled to examine — for example, a failure to review publicly available information about the counterparty on the FNS website, the absence of publicly available information about its actual business activity, and the absence of documented confirmation of the authority of the persons who signed the contract.
Meeting the standard has a direct practical consequence: if an audit establishes that the taxpayer exercised commercial prudence and neither knew nor should have known of circumstances marking the counterparty as a “shell” company, the letter concludes that there is no element of an offense in the taxpayer’s conduct (paragraph 20).
Who Is Required to Vet Counterparties Under 115-FZ
The obligation to identify customers and their beneficial owners under Federal Law No. 115-FZ (“On Combating the Legalization (Laundering) of Proceeds from Crime and the Financing of Terrorism,” hereafter 115-FZ) is a separate story from tax practice: it is addressed not to business in general, but to a closed list of organizations under Article 5 and persons under Article 7.1 of the law. A separate article covers exactly who 115-FZ applies to and what it requires, in detail.
It’s convenient to reduce this to three levels of obligation.
| Level | Who | What’s Required |
|---|---|---|
| Business practice | Any party to a deal | Nothing — due diligence is a management decision, not an obligation |
| Tax diligence | Taxpayers | The law does not require vetting a counterparty; exercising diligence works as a defense in a tax dispute |
| 115-FZ | Organizations under Article 5 and persons under Article 7.1 | Identify customers, representatives, beneficiaries, and beneficial owners; take reasonable and available measures |
How to Conduct Counterparty Due Diligence
The law does not establish a single methodology for vetting a counterparty, but a working procedure has taken shape in practice.
To match the price and risk of the specific deal: a basic set is enough for a one-off supply, a broader one for a long-term contract.
Confirm that it actually exists, and check its status and registration data.
The charter, an extract from the Unified State Register of Legal Entities (EGRUL), and the power of attorney.
As deeply as is justified by the scale of the deal.
Check financial, litigation, debt, and bankruptcy signals.
Check sanctions status, politically exposed persons, and adverse media.
Check licenses, if the counterparty’s activity is subject to licensing.
Assess the collected information as a whole and document the decision.
Next: exactly what to look at under each area, and what should be treated as a reason to look more closely.
| What to Check | Where to Check It | What Counts as a Risk Signal |
|---|---|---|
| Registration details, status, address, director, participants, OKVED codes | The Unified State Register of Legal Entities / Individual Entrepreneurs (EGRUL / EGRIP) | A record flagging the information as unreliable; liquidation or reorganization status; an address on the mass-registration list; OKVED codes (the Russian classifier of economic activity codes) that don’t match the subject of the contract |
| The signatory’s authority | The charter, the registry extract, the power of attorney | No documented confirmation of authority |
| Ownership structure and beneficial owners | EGRUL, requesting information directly from the company | A complex or opaque ownership chain |
| Litigation | The Commercial Courts Case Database (kad.arbitr.ru) | Not the mere fact of litigation, but its nature, the amounts involved, and the party’s role |
| Enforcement proceedings | The enforcement proceedings database of the Federal Bailiff Service (FSSP) | Multiple outstanding proceedings |
| Bankruptcy | Fedresurs (fedresurs.ru), the Commercial Courts Case Database | Including notices of intent to file for bankruptcy |
| Financial standing | GIR BO (the state information resource for accounting statements) | Statements appear with a lag after the filing deadline and are not available for all organizations |
| Tax-related signals | The FNS’s “Transparent Business” service (pb.nalog.ru) | Special tax regimes, average headcount, disqualification, mass-registration addresses |
| Account suspensions | An FNS service | Active decisions suspending operations on accounts |
| Director disqualification | The FNS register of disqualified persons | The director being listed in the register |
| Unreliable suppliers | The register in the Unified Procurement Information System (EIS) | The company being listed in the register |
| Sanctions | Sanctions lists — see below for detail | See the sanctions section |
| Politically exposed persons | PEP lists — see below for detail | Heightened scrutiny, not a prohibition |
| Adverse media | Open sources | Verifying the reliability of the source itself is mandatory |
| Licenses and permits | The register of the relevant licensing authority | Missing a license where the activity requires one |
No single signal, on its own, provides a ready-made conclusion: litigation does not equal unreliability, a change of director does not equal fraud, a loss does not equal walking away from the deal, PEP status does not equal a ban on working with the company, and a name match on a sanctions list does not equal being the sanctioned person. Every signal is a reason to look more closely and request documents — not a verdict.
A detailed checklist for each area — with specifics on what to look at within each item — is covered in a separate article on how to vet a company before a deal.
Sanctions and Politically Exposed Persons
Sanctions screening is one of the workstreams of due diligence, and it’s also an easy place to get things wrong: the three main regimes are structured differently, and a rule from one cannot be mechanically carried over to another.
- OFAC (the United States) looks only at ownership: a company is blocked if blocked persons own 50% or more of it in the aggregate, with stakes under different programs added together. Control without such an ownership stake does not trigger automatic blocking.
- The EU looks at both ownership — more than 50% — and control under eight criteria; the presumption of control is rebuttable in a specific case.
- The United Kingdom — more than 50% of shares or voting rights, or the right to appoint a majority of the board of directors, or a reasonable expectation that the business is conducted in accordance with that person’s wishes.
The claim that “a beneficial owner on a sanctions list means the company is automatically under sanctions” is inaccurate for all three regimes: the outcome depends on the size of the stake, its aggregation with stakes held by other blocked persons, and the presence of control. The “more than 25%” threshold from the 115-FZ definition of beneficial owner has nothing to do with the sanctions rules — those have their own 50% thresholds and control criteria. For more on the mechanics of list-based screening, see “How Sanctions Screening, PEP Checks, and Risk Profiling Work” and “AML for International Onboarding: How to Screen Customers Against the OFAC, EU, and UK Lists”.
The status of a publicly exposed person (PDL, the Russian abbreviation for the same PEP concept) among a counterparty’s owners or management means heightened scrutiny and a more thorough check of the source of funds, not a ban on working with that company. The obligation to identify PEPs is addressed to organizations under Article 5 and persons under Article 7.1 of 115-FZ; for the rest of the business world, it is an additional precaution. For more, see AML verification for customers and counterparties.
How Long Due Diligence Takes and What It Depends On
There is no universal timeline or price for due diligence: the ranges published by consulting firms are a commercial pitch, not a verifiable fact. In practice, the scope and duration depend on the depth and set of workstreams, the size of the company and the volume of documents, the number of ownership tiers and the presence of foreign links, the availability of registries in specific jurisdictions, the share of manual analysis, the type of deal — a one-off supply or a business acquisition — and also the geographic scope of the sanctions checks and the need for expert judgment on disputed situations.
Automation speeds up specifically the data collection: pulling data from registries, building the ownership chain, and screening against lists. Assessing how material a risk is and deciding on disputed cases remain a human task — these cannot be closed out with a single automated answer.
How to Automate Counterparty Due Diligence
Part of due diligence lends itself well to automation: collecting registration data, building the ownership chain, screening against sanctions and PEP lists, and tracking changes over time. The substantive assessment is harder to automate: understanding what a specific legal dispute means for a specific deal, or weighing conflicting signals, is still a job for a human. Full-fledged due diligence therefore cannot be reduced to a single API call.
How This Works at NeuroVision
According to NeuroVision, its KYB verification of legal entities builds an ownership chain showing the ultimate beneficial owners, directors, and related parties, includes AML screening against sanctions and PEP lists and Rosfinmonitoring (the Federal Financial Monitoring Service) databases, as well as an adverse media check module, supports monitoring for changes over time, and works with companies from 100+ countries, including EGRUL, Companies House, and OpenCorporates. The check is launched via a REST API, incorporation documents are recognized through OCR with cross-checking against registries, and complex cases are finalized by human experts. For more, see automated KYB verification of companies and beneficial owners.
Registration data, ownership structure, sanctions and PEP screening, and adverse media are collected automatically, while complex cases are finalized by human experts
Due diligence is a business-practice concept: a comprehensive check of a company, asset, or deal across several workstreams at once, with no single normative definition and no mandatory set of steps. What distinguishes it from reasonable (commercial) diligence in tax practice and from customer identification under 115-FZ is that due diligence is a management decision made by the parties to a deal, not an obligation established by law.
The depth and set of workstreams always depend on scale: buying a business requires the parallel work of lawyers, financial experts, and tax consultants, while vetting a counterparty before a one-off deal calls for a noticeably narrower set of steps. In both cases, every risk signal found is a reason to look more closely, not a ready-made conclusion.
There is no universal timeline or price for due diligence: they depend on the depth of the check, the availability of sources, and the share of manual analysis. Collecting data from registries and screening against lists are both easy to automate, but assessing how material a risk is in disputed cases remains a human task.
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