When the FCPA Blog looked back at the enforcement actions during 2020, it noted, “In some cases, the agencies reinforced long-standing expectations, and severely punished companies that strayed from them—something old. In other cases, the agencies used enforcement actions to stake out new compliance requirements, causing entire industries to reevaluate their existing anti-corruption programs—something new.” Given this combination of robust enforcement and expanding requirements—as well as the complexity of organizations’ global third-party networks—it’s more critical than ever for you to have an effective strategy for evaluating and monitoring third-party risk. Below we've outlined nine steps for a risk-aligned due diligence process based on guidance from regulators to help companies mitigate financial and reputational harm due to third-party relationships. Take a closer look.

STEP 1—Understand Compliance Concerns

The global nature of business today subjects your enterprise to a growing number of regulations and a greater need to mitigate risk exposure through partners and third parties—regardless of where your enterprise is located.

STEP 2—Define Corporate Objectives for Due Diligence

Your due diligence process needs to align with the strategic, financial, regulatory, and reputational risks your organization may face. This is especially true for organizations doing business with third parties in countries that attract high levels of regulatory scrutiny.

STEP 3—Gather Key Information

For a corporate entity, organizations need to collect basic information including:

• Incorporation documents
• Details on key shareholders and beneficiaries
• Group structure, board members
• Political connections
• Official references
• Ultimate beneficial owners

For an individual, organizations need to focus on gathering:

• Proof of identity
• Source of wealth and funds
• Potential political links

STEP 4—Screen Prospective Third Parties against Watchlists & PEPs

Once a basic level of vetting has taken place, prospective third parties—both companies and individuals—should be subjected to a watchlist screening process. By conducting watchlist and politically exposed persons (PEP) checks early in the process, you can quickly determine if the potential third-party relationship poses a significant risk. Names of companies, individuals, NGOs and, if applicable, assets such as vessels should be checked against:

• Global sanctions lists
• Law enforcement lists of known criminal entities
• Regulator-published lists of debarred or disqualified companies and individuals
• PEP lists to identify political connections
• SOEs to understand potential exposure from working with State-Owned Enterprises

STEP 5—Conduct a Risk Assessment

After preliminary information collection and watchlist screening has taken place, it’s time for you to perform a risk assessment. Considerations should include:

• Country of origin risks such as those identified by Transparency International’s Corruption Perceptions Index rating
• Specific sector risks like a high level of government involvement that might increase corruption risk in the defense industry or dependence on local agents that might increase bribery risk in the construction industry
• Entity risks such as the use of intermediaries in transactions, joint-venture partners and exposure to financial crime
• Essential internal factors related to financial risk including deficiencies in employee training, skills, and knowledge; a bonus culture that rewards excessive risk taking; lack of clear policies and procedures related to hospitality and promotional expenditure; and political or charitable contributions.

STEP 6—Validate the Information Collected

Following the risk assessment, your due diligence process should include multi-source verification of the information that has been accrued.

• For low-risk third parties, this final screening involves corroborating details against public records, a credit check, and using specialized databases like CIFAS.
• High-risk third parties require an enhanced due diligence process of the entity itself, as well as known associates, subsidiaries, and other related entities. Negative news checks establish potential reputational risks from media archives. Additionally, checks against legal databases pull the litigation history of the prospective client or third party.

STEP 7—Audit the Due Diligence Process

Throughout the due diligence process, your organization needs to maintain a comprehensive record of relevant documents, assessment, and decisions to ensure you can demonstrate ROI and prove that decisions to engage with partners or third parties were made in good faith.

STEP 8—Establish an Ongoing Monitoring Plan

Once a third party has been vetted, you still need to conduct ongoing monitoring of the relationship to provide visibility into emerging red flags that could put your organization at risk.

STEP 9—Review Your Due Diligence Process Regularly

Business needs change. Commit to periodic reviews with stakeholders to ensure that your due diligence process is always aligned with those needs over time.

Finding gaps in your process? Find out how the enhanced data and intelligent technologies in Nexis Diligence enable comprehensive, risk-aligned due diligence.