Exactly what does "due diligence" mean?

Full Question I am translating an introduction to China sourcing for our Russian buyers. "Due diligence" is one of the terms I see all over the place. But I am not sure exactly how to explain it in Russian.

In my dictionaries it means slightly different things. So in our case is it:

1. Checking a business to make sure it is legitimate, has all papers etc.?
2. Checking anything you want to see?
3. Something else?

Answer In the China sourcing industry, "due diligence" is used primarily in the following ways:

Type 1

An investigation of a business prior to signing a contract to ensure the company (supplier) signing the contract is who they say they are. For example, do they really have 1000 employees, US$50 million in exports, own the factory 100%, have happy customers, are in good financial situation (will not close doors suddenly) and so on.

Type 2

Sometimes people include "audit of QC system" under "due diligence" to ensure the supplier has the equipment and experience to make a given product.

Due diligence can be conducted by the buyer, but usually third-party experts are hired to do the research. In my experience, the third parties that conduct the due diligence specialize in doing either type 1 or type 2 but I don't know of any that do both. To get technical, type 1 is "financial due diligence" or "operational due diligence" while type 2 is "quality systems audit." But many buyers just use the terms "due diligence" to cover both types. In short, "due diligence" means to verify that what the supplier is telling the buyer is accurate.

In my opinion, doing the due diligence is an essential step when sourcing from China. Perhaps I am jaded after 12 years living here, but I assume the worst unless proven otherwise. Trust BUT verify. Reference Two of the CSIC sponsors are involved in the due diligence industry.

To get a feel for the service providers doing type 1, check out www.CBIconsulting.com.cn

To get a feel for the specialists of type 2, visit www.AsiaQualityFocus.com