Due diligence
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What is due diligence?
Due diligence is the process of investigating and evaluating a person, company, or transaction before entering into a business relationship or agreement.
In the UK, due diligence is most commonly associated with mergers and acquisitions (M&A), regulatory compliance, financial services, and vendor due diligence. The goal is to identify risks, confirm information accuracy, and ensure compliance with applicable laws and regulations.
Why is due diligence important?
Due diligence is a vital process used by businesses and individuals to assess potential risks and make informed decisions before entering an agreement or transaction. It ensures all relevant details are thoroughly examined and nothing important is overlooked.
In the UK, due diligence plays a key role in:
- Mergers & Acquisitions: Validating financial records, ownership structures, and liabilities before purchase or investment.
- Regulatory Compliance: Meeting requirements under anti-money laundering (AML) laws, and industry-specific regulations.
- Third-Party Risk Management: Vetting suppliers, vendors, and contractors to ensure ethical practices and compliance.
- Financial Services: Assessing creditworthiness and identifying potential fraud or corruption risks.
Historically, due diligence in the UK has evolved alongside financial regulation, gaining prominence after major corporate scandals and regulatory reforms. Today, digital tools and global data access have made the process faster and more comprehensive.
How does due diligence work?
Due diligence typically involves several stages:
- Information Gathering: Collect, financial documents, regulatory filings, litigation history, and media coverage.
- Verification: Validate identities, business ownership, and claims made by individuals or organisations.
- Risk Assessment: Evaluate potential red flags such as sanctions, politically exposed persons (PEPs), litigation, adverse media, or regulatory breaches.
- Reporting: Summarise findings in reports or dashboards for decision-makers.
- Ongoing Monitoring: Continue monitoring relationships to detect risks that may arise after onboarding.
Types of due diligence
Different contexts call for specialised due diligence processes:
- Financial Due Diligence: Review of financial statements, liabilities, and projections.
- Legal Due Diligence: Examination of contracts, litigation, intellectual property, and compliance.
- Operational Due Diligence: Assessment of internal controls, supply chains, and processes.
- Reputational Due Diligence: Review of media, public perception, and ESG (environmental, social, governance) practices.
- Regulatory/Compliance Due Diligence: Ensuring adherence to UK laws like AML.
Examples of due diligence in practice
- Professional Services
A consulting firm performs reputational due diligence on a potential partner, identifying negative media coverage tied to labour violations. - Financial services
Financial due diligence assesses an individual’s or organisation’s financial health by reviewing earnings, assets, liabilities, cash flow, debt, and management. It evaluates both historical performance and future prospects based on the current business plan.
Due diligence vs. enhanced due diligence
While standard due diligence involves gathering and verifying information to assess risks, enhanced due diligence (EDD) is a deeper, more comprehensive review conducted in higher-risk situations. EDD is often required by regulators and compliance frameworks when dealing with politically exposed persons (PEPs), high-value transactions, or operations in jurisdictions with elevated corruption or financial crime risks.
Key differences include:
- Scope: EDD goes beyond basic identity checks and financial reviews, incorporating extensive background research, media analysis, and source-of-funds investigations.
- Regulatory Expectation: In the UK, financial institutions are expected to apply EDD to meet AML requirements when standard due diligence may not sufficiently mitigate risk.
- Outcome: EDD provides a higher level of assurance, helping organisations avoid reputational damage, regulatory penalties, and financial losses.
By understanding when to escalate from due diligence to enhanced due diligence, organisations can better align with compliance obligations and safeguard against hidden risks.
Due diligence summary
|
Term |
Due diligence |
|
Definition |
The process of investigating a person, company, or deal before a business relationship |
|
Used By |
Financial institutions, legal teams, corporations |
|
Key Benefit |
Identifies risks, ensures compliance, supports informed decisions |
|
Example Tool |
Nexis Diligence+, Nexis+ AI |
How LexisNexis can help with due diligence
LexisNexis provides trusted, comprehensive tools that streamline due diligence investigations:
- Nexis Diligence+™ – A platform that consolidates global news, company data, sanctions, watchlists, and legal information into a single workflow.
- Nexis+ AI™ – Enables conversational due diligence research, summarisation, and reporting powered by trusted LexisNexis content.
By combining authoritative data with advanced technology, LexisNexis helps organisations reduce compliance risk, meet regulatory requirements, and make confident business decisions.
Related terms
Business intelligence
The ways organisations collect, process, and analyse data in order to make informed business decisions.
Sanctions
Measures imposed by one country or a group of countries against another country, organisation, or individual to encourage a change in behaviour, punish non-compliance with international norms or laws, or achieve specific policy objectives.
Third party risk management
The process of identifying, assessing, and mitigating potential risks posed by an organisation’s external partners, vendors, or suppliers to ensure compliance, security, and operational resilience.
Frequently asked questions
Yes, in certain contexts, such as anti-money laundering (AML) compliance, Terrorist Financing and Transfer of Funds Regulations 2017.
Background checks focus on individuals, while due diligence is a broader, more comprehensive process that evaluates companies, transactions, and third parties.
Modern due diligence increasingly relies on AI, automation, and access to global data sources to accelerate investigations and improve accuracy.
Proactive due diligence happens before entering agreements. Reactive due diligence is conducted in response to red flags, regulatory inquiries, or emerging risks.
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