Nine Steps to Effective Third-Party Due Diligence
Due Diligence High-Level Process
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.
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.
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
For an individual, organizations need to focus on gathering:
- Proof of identity
- Source of wealth and funds
- Potential political links
Screen Prospective Third Parties against Watchlists and 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
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 money laundering
- 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.
Validate the Information Collected
Following the risk assessment, your due diligence process should include 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.
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.
Establish an On-Going Monitoring Plan
Once a third party has been vetted, you still need to actively monitor the relationship to ensure that you are aware of potential problems before they put your organization at risk.
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.