Due Diligence in Latin America: Basics for Investors
Every investment landscape has its unique opportunities, rules, and risks. Due diligence focuses on avoiding setbacks and generating sound strategies for safe and successful business.
Investors planning on entering Latin American markets should be aware of region-specific risks and regulations so that their due diligence process can focus on adequate mitigation and compliance strategies. In this guide, we’ll take a high-level look at common due diligence concerns for Latin America.
Risks and rewards associated with Latin American investments
An early step in due diligence procedures is understanding the benefits and risks implied by the context into which the investor is entering–in this case, Latin America.
Some of the most pressing investing risks in Latin America at this time include:
- Political uncertainty
- Regulatory changes
- Supply-chain and business interruption
- Weak currencies
- Corruption
This being said, Latin America also offers unique benefits, which are convincing reasons to enter this market despite certain risks. With a young workforce, a wealth of natural resources (like agricultural products and minerals), vigorous green energy initiatives, and an energetic entrepreneurial ambience, Latin America is positioned well heading into the future. What’s more, certain currencies are strengthening.
Due diligence to mitigate risk and bolster compliance
In the context of investing, due diligence can be defined as the research investors perform on every aspect of their business that could pose a risk or require that certain obligations be met. This investigation turns up essential information on:
- Corporate establishment requirements
- Tax obligations
- Labor laws
- Government anti-crime initiatives that require companies to perform specific training and compliance/reporting procedures
- Property laws and real estate best practices
- Zoning restrictions
- Ecological regulations
- Intellectual property laws
- Financial and accounting requirements and best practices
- Market and competitive landscapes
Excellent due diligence takes a comprehensive look at the aforementioned and other key aspects of running or investing in a business so that stakeholders can structure risk mitigation strategies, implement internal procedures that uphold laws and compliance requirements, and prepare for the nuances of a new market.
Due diligence in Latin America: What to expect
Due diligence procedures in Latin America respond to the region-specific risks associated with doing business. These risks vary by country, but in general, investors can expect to focus on the following types of due diligence.
KYC and AML Compliance
In an effort to combat money laundering and other illicit activities, Latin American countries often have KYC (know your consumer or know your customer) and AML (anti-money laundering) compliance guidelines.
KYC due diligence implies investigating the people with whom you do business—not only consumers but investors and stakeholders—to ensure that they are not illicit actors and that their financial data/funding sources are legitimate.
AML due diligence prevents money-laundering by leveraging KYC/CDD (customer due diligence) and implementing internal trainings and procedures to spot potentially fraudulent or malicious transactions. Investors in Latin America—especially in the financial sector—are likely to find additional country-specific reporting guidelines and compliance procedures to uphold.
Land and Real Estate Due Diligence
Land due diligence (also known as ground due diligence) and real-estate due diligence are essential considerations for anyone renting, purchasing, or selling lots or buildings in Latin America or who plans to carry out activities (like agriculture or mining) on local land. Investors should deeply investigate (with the help of a legal professional in the destination country), the current owners, transaction history, and any encumbrances, liens, or legal disputes associated with the real estate in question.
Each Latin American country offers a distinct real estate panorama and related challenges. For example, in Colombia, disputes or incomplete paperwork on rural land can be common. Mexico has foreign investment restricted zones. And Brazil has limitations on how much rural land foreign individuals can acquire. Due to differing land and zoning laws, acquisition proceedings, and risk factors, solid due diligence relies on a focused approach that considers the local context, the intended real estate transaction, and the projected business activities (if any) to be performed on the land/in the building.
Environmental Due Diligence
Some Latin American countries have a complicated history of negative ecological impacts like biodiversity loss, deforestation, and water pollution, as well as human rights abuses related to illegal working conditions and land rights violations. Thus, investors in certain industries, like agriculture, energy, and extraction, will likely have to follow environmental regulations. Researching these rules is an essential step in any due diligence strategy. Business often need special permits, third-party advising, and site inspections that ensure ecological guidelines are being met.
M&A Due Diligence
Latin America can provide attractive opportunities for mergers and acquisitions, but investors must be careful about whom they go into business with. It’s essential that investors thoroughly research the target company’s history, especially with respect to labor disputes and contractual violations that the merging or acquiring company wouldn’t want to inherit, as these problems can be costly to fix.
Other issues to look out for include missed tax obligations, violations of data privacy or intellectual property, and inconsistencies regarding environmental regulations.
Assessing other risks
As cited in the list of common risks affecting Latin American businesses, political instability, corruption, interruptions, and currency fluctuation (or weakness) are all worth assessing in a thorough due diligence analysis. An investor who is not as risk-adverse as some may be more willing to enter a country with one or a combination of these factors than their more conservative counterpart. So, this research ultimately helps the investor assess the comfort and viability of their proposed business.
Due diligence assessments around these risk factors can include economic analysis, advising from local legal and investment professionals, supply-chain research, and an investigation around the country’s current political landscape.
Get localized, expert advising
Even an investor who’s an expert in due diligence at home may find themselves with questions when navigating new legal, regulatory, and cultural landscapes abroad.
The professionals at LaGrande Global can help you enter Latin American markets successfully and confidently with extensive due diligence services that range from compliance to financial analysis.