Due Diligence in the Procurement process

Welcome

Welcome to Due Diligence in the Procurement process course.

My name is Paul and I will be guiding you through the various sections of the training program.

In this first module of the course we will be looking at what is meant by the phrase Due Diligence
and how it has been implemented in eni Procurement process.

Well be also providing an overview of the information that the due diligence activity is designed to
collect and assess. Well be taking an in-depth look at the benefits that the Due Diligence analysis
offers and for which types of procurement activities Due Diligence checks are required.

Finally, in the third module of the course, well provide an overview on how the Due Diligence activities
are structured.

The approximate duration of this first module is 20 minutes.

To continue and find out how the course is structured, select Next.

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How the course is structured

As you can see, the course is a sequence of three training modules. The first module, the current
one, gives you an overview of the Due Diligence activities in order to establish the boundaries of
the topic and provide you with general references so youll be able to better understand the next
parts of the course.

The second module addresses a series of issues of a more operational nature, focused on the stage
of gathering the information required for analysis and assessment of a vendor or counterparty.
Well take a detailed look at the sections making up the Due Diligence Card (which, as we shall
see, is an important tool to assist in the reliability survey stage) and, by referring to animated
examples, well focus on critical aspects that call for special attention from the person conducting
the check.

Finally, in the third module well concentrate on the final stage of the Due Diligence activities,
which consists of the formal definition of the assessment and its approval.
At the end of the course youll be asked to test your knowledge by answering 10 questions designed
to check what you have understood.

All we have left to do now is to get started!

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Due Diligence: definition

Lets start by introducing what is meant by Due Diligence.

The expression originated in France, where it was coined in Paris do describe the diligence that
was to accompany each appraisal before granting a loan or line of credit to a company.

In current English Due Diligence refers to the analysis performed on a company or on a line
of business in order to check the real sustainability of a planned transaction for example an
acquisition or investment.

The aim is therefore to obtain a snapshot that is as detailed as possible of thecounterparty to form
a solid basis for negotiation of the contractual terms of the transaction.

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Why are Due Diligence checks necessary?

What is Due Diligence?

Its a structured activity in which the main characteristics of the vendor taken into consideration
are assessed and, according to the final outcome, potential preventive or mitigation actions may
be defined.

As a result of the Due Diligence activities, the vendor will be assigned a ranking: it will be green if
there are no criticalities, yellow if criticalities are not severe and can be mitigated, or red if the risk
rate is high.

After the ranking is assigned, it must undergo a formal approval, depending both on the ranking itself
and whether the procurement process is carried out by eni spa or eni subsidiaries procurement
functions.

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How Due Diligence is implemented in eni procurement process

Now that weve provided a general definition of Due Diligence, lets take a look at how it is
implemented in the context of eni Procurement process.

In the procurement process Due Diligence activities are designed to analyse a candidate vendor
from various standpoints:
economic-financial, ethical and reputational, ownership structure, the control chain and
organizational coherence.

The information required to assess all these aspects may be collected by using specialized info
providers, by consulting generic public domain info providers and by directly contacting the
vendor. In module 2 of the course well be taking a detailed look at the nature of these sources.

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What information is collected and assessed?

What information the Due Diligence activities aim at gathering and assessing?

Lets take a look. To conduct a thorough analysis on a counterparty its important to evaluate the
ownership structure and the control chain, information on the economic-financial data, ethical
and reputational standing.

In compliance with eni Policy Our Partners of the Value Chain, the Procurement Management
System Guideline, also called MSG, states that counterparty assessment is the reference principle
based on which eni enters into business relationship with vendors that must be compliant with
certain economic-financial requirements, that grant a coherent organization, are transparent and
fair, as eni has established.

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Due Diligence documents and scope of application

Due Diligence activities in the procurement process are regulated by the Annex E to the
Procurement Management system guidelines, Compliance with counterparty risk requirements.

Annex E is an integral part of eni regulations on anticorruption. Other reference documents are:
eni Code of Ethics
the Policy Our Partners of the Value Chain
the Anticorruption MSG
and the Procurement MSG

Annex E to the Procurement MSG addresses

procurement functions to conduct verifications within the procurement process,
contract holders for verifications during authorization of sub-contracts
and, more generally, eni representatives within subsidiaries in order to have them adopt the
standards that are outlined in the Annex.

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Who must perform Due Diligence activities?

Due Diligence activities must be conducted by those who:

request the registration of a new vendor;
start a qualification activity;
award or amend a contract;
release a sub-contract authorisation;
issue a request for concurrence to the Operating Procurement of eni spa
performs periodic controls, where required by Annex E to MSG Procurement

Further readings

CONCURRENCE
quality review on the contract strategy performed by eni procurement function (APR) upon eni
affiliate specific request.

PERIODIC CONTROL (also called COMPENSATIVE CONTROL)

controls carried out by the relevant vendor management function on contractors and authorized
sub contractors.

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Covered business partner vendors

Lets take a look at a due diligence special feature, in case it is performed on covered business
partners vendors.

But, who are COVERED BUSINESS PARTNERs vendors?

They are the vendors that provide consultancy and professional services where the management of
Significant Contacts on behalf of or in the interest of eni with a Public Official or the management
of relations on behalf of or in the interest of eni with Significant Private Entities is an integral part
of the object of the contract and not only an accessory/ancillary part of it.

Furthermore they are identified as highly risky by eni Anti-Corruption Legal Support Unit with
the support of the Procurement Function of eni spa (activities/businesses with significant risk of
corruption, is available on the e-procurement portal).

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Exclusions

The Due Diligence activities are mandatory for all procurement processes subject to the application
of MSG Procurement.

However Due Diligence activities are not mandatory for:

eni subsidiaries or affiliates;

entities subject to the Regulatory Authority, such as banks and insurance companies;
public administration or state-controlled companies, provided the ownership structure does
not include minority interests holding at least 25% of the share capital;
international governmental organisations, such as the United Nations, the World Bank, the
International Monetary Fund;
vendors who have been assigned contracts for an amount below the settled thresholds
low value procurement.

For Covered Business Partner Vendors, Due Diligence activities are not mandatory for:

eni subsidiaries or affiliates

international governmental organisations,

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Exclusion thresholds

Is there a threshold below which Due diligence is not required?

Annex E to Procurement MSG (and its subsequent updates) defines a threshold value of 250.000
for each individual contract, below which verifications of counterparty risk is not requested

However, remember that Due Diligence checks are mandatory

for Covered Business Partner Vendors, irrespective of thresholds

contracts awarded as single source for an amount above 5.000 Euros (unless a valid green
Due Diligence card is available)
whenever a previous due diligence is expired

In case of contract amendments and/or exercise of contractual options of existing contracts,

performance of a Due Diligence is mandatory when
1. the original contract duration is increased of more than 1 2 months
2. the total final value of the contract (original value + revision/exercise of contractual options)
is above the established threshold
3. the contract value is increased of more than the 20% of the original contract value.
4. a previous due diligence is expired

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The competent procurement function (vendor management unit, if any) performs a quarterly
ex-post assessment on ethical and reputational aspects as well as the ownership structure of
counterparties that have not been subject to Due Diligence checks because the value of the
contract to be awarded was below the mentioned thresholds. Authorised sub-contractors are also
subject to quarterly checks, performed on a random basis.

For further cases in which Due diligence checks are not mandatory, refer to Annex E to MSG
Procurement and any subsequent update.

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Lets see an example

Well now step back to test your knowledge.

Julia is examining the documentation concerning the proposal for the supply of flanges by the
company Flangex. In the sales proposal she received from the vendor two months ago, the prices
for the supply of commodities was 210,000.

However, a few days later, after receiving a request to increase the quantity of some items, Flangex
has transmitted a supplementary contract for the value of 45,000.

How should Julia proceed?

Read the answers and select the one that you think is correct.

a) Julia is not supposed to compile the Due Diligence card because the supplementary contract
value (45,000) does not exceed the threshold of 250,000 above which DD checks are
mandatory.

b) Julia must compile the DD Card because the contractual increase is above 20% and the original
contract value plus the supplementary contract value exceed the threshold of 250,000.

c) Julia must compile the DD Card because Flangex is CBP Vendor because the commodities
provided belong to a high-risk supply category.

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Summary

Well end this first module with a handy summary of the topics discussed so far. Due Diligence
refers to an exploratory assessment aimed at analyzing a company from various standpoints: in
terms of its economic and financial soundness, its reputation, the ownership structure and control
chain, including the disclosure of potential conflicts of interests.

The aim of Due Diligence activities is primarily to identify the potential risks when dealing with
counterparties and to be able to adopt effective mitigation measures.

The Due Diligence activities are regulated by the Annex E to the Procurement MSG.

Due Diligence activities performed for Covered Business Partners, a specific group of vendors,
imply a series of more accurate checks.

The final outcome of Due Diligence activities is a ranking: green if there are no criticalities, yellow
if criticalities are not severe and can be mitgated, or red in case of high risk rate.

Based on the ranking, Due Diligence activities shall be approved according to specific authorisation
escalation flows.

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Conclusions

You have gone through the module. Click the button Exit in the layout and go to back to the table
of contents to launch the following module.

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