Enhanced Due Diligence Reports are an essential part of a risk-based approach to third party management and due diligence. They also provide a critical framework to understand the third party, your businesses risk exposure and any instance of corruption, money laundering or other risk areas in your engagement. The reports are comprehensive offering detailed, discerning and ethical business intelligence as organizations face increasing challenges in handling reputational, regulatory as well as compliance risks. It has become essential to understand all aspects of the entity before entering into a business relationship.
Enhanced Due diligence reports are often used for ascertaining risk of the third party:
- When acquisitions, mergers or joint venture proposals are being finalized.
- If a risk is revealed during automated risk evaluation screening.
- Screening procedure for supply chains, distributors, intermediary agents, multinational companies etc.
- During the on-boarding of high net worth individuals or clients with a high profile.
- Under regular comprehensive compliance procedures followed by the companies as a best practice.
- As a measure to enhance the existing compliance process in case the resources of the risk assessment unit are stretched.
- For individuals exposed to political, bribery, labor practice anomalies, corruption, and financial crime screening.
- When the transaction or individual is flagged during geopolitical risk information analysis as possibly linked to a high-risk country or jurisdiction.
Enhanced Due Diligence Reports normally gather the following information:
In case of a corporate entity or an organization, the information pertaining to the following are collected
- Documents of Incorporation
- The structure of the entity and the members of the board (and their backgrounds).
- Individual details of key beneficiaries and stakeholders.
- Official reference documents pertaining to periodic reports and finance.
- Political affiliations and possible connections.
- Negative media and/or implications of previous wrong doing
- Site inspections, on-the-ground source commentary and business intelligence can also be provided.
After the preliminary collection of the information and screening has been completed, the risk assessment is performed considering the factors like
- Sector-specific risks where there is a high-level involvement of the Government Departments like Defense or Construction. The corruption risk is high in such transactions and dependency on local agents prone to bribery risks are also high.
- Risks pertaining to the country of origin in case of those countries identified by ranking done by the Transparency International Corruption Perceptions Index.
- Internal factors related to financial risk due to and including deficiencies in the managerial persons and middle-level organizers. It can be due to the prevalent company culture like awarding incentives for high performance encouraging excessive risk-taking, lack of clear policies and practices, employee training, irregular practices in hospitality and promotional expenditure and contributions made towards charity or political nature.
- Risks due to engagement of intermediaries or joint venture partners in financial transactions with the potential for money laundering and/or corruption.
Enhanced Due Diligence Reports have become an essential part of every businesses third party compliance programme in order to be compliant and avoid regulatory complications due to the actions of the individuals, corporate entities or organizations with the potential for money laundering, bribery risk, corruption risk etc.