According to Investopedia, the term due diligence refers to an investigation, audit, or review performed to confirm facts or details of a matter under consideration.
In the context of a business, due diligence means employing KYC/KYB procedures to ensure compliance, prevent fraud, and minimise risk exposure associated with various business processes. Its need arises in case of business transactions like acquisitions, customer & third-party onboarding, related party compliance and even in the hiring process of employees.
The process can include reviewing financial statements, database checks, interviewing management, site visits, process audits, and assessing the company’s market position and competitive landscape.
To ensure a risk-free business ecosystem, you need to understand the key aspects of due diligence that your business needs to focus upon. Don’t worry we have got you covered.
Here is what you can expect to learn from this article:
The need for due diligence becomes all the more imminent with ever-evolving technology, and external factors like the pandemic. Trustable business partners and transparent business processes are key to resilience for business owners today. The abundance of digital footprints of customers, business partners and third parties has opened a world of possibilities for fraudulent activities and their associated risk exposure. Traditional due diligence methods are becoming redundant given the complexity of information and lack of appropriate due diligence frameworks.
Businesses are adopting new-age due diligence solutions to minimise their risk exposure, ensure compliance and prevent fraud. As a result, the global fraud detection and prevention industry is seeing a steep spike in demand with more and more innovative solutions coming in every day.
Types of due diligence can be broadly divided into 3 categories. Their use and application vary depending on the sector, area, or type of process in which it is implemented.
It helps you with decision-making in business transactions like M&A, buying a business and onboarding business partners as a part of the expansion into new geographies. It looks at various operational, strategic, technical, environmental and human resource aspects of the business.
It helps you identify the value and risk exposure of a business or individual by looking into financials. It involves a detailed audit of accounting policies, audit practices and publically available like annual statements and MCA filing.
It helps you avoid legal pitfalls like penalties for non-compliance in one or more areas like Regulated KYC procedure, mandated data privacy and security norms and third-party compliance liabilities.
Countries across the globe are continuously working towards making their business ecosystem safe by passing regulations to prohibit bribery, corruption, money laundering and prevent fraud. Companies operating within national boundaries are regulated only by national laws, however businesses with cross-border teams, subsidiaries and subcontractors are also regulated by international laws. Read more about country-wise due diligence regulations here. Here is how a heatmap looks like the location of improper payments, 2013-2022.
Total and Average Sanctions Imposed on Entity Groups
Types of Third-Party Intermediaries Disclosed in FCPA-related Enforcement Actions
Corporate Sanctions Timeline (2013-2022)
Understanding your due diligence requirements could be a challenging task. But, with a team of experts and commitment, you can plan a thorough audit of your internal/external processes, stakeholders and business partners and how much of a risk they are exposed to.
In a general sense, a due diligence audit examines a company’s standings, financial performance and exposure to different kinds of risks. The objective of the audit may vary based on one or more following business transactions.
A well-thought due diligence framework enables informed decision-making in various business transactions. Broadly, there are five categories of business transactions that require thorough due diligence. These are
Requirements for due diligence often help you identify the right type of due diligence solution for your business. A few questions you need to consider to find the right fit are:
Upon answering the above questions, the next step is to step up a due diligence process to Identify, screen, and minimise your risk exposure.
The due diligence process typically involves several stages that may vary depending on your objective, industry, and your risk appetite. In a holistic sense, a typical due diligence process involves three major steps:
First step involves identifying the gaps and factoring their risk exposure
Second step is to assess the level of risk exposure based on the information collected
The third step involves implementing mechanisms to mitigate risk assessed in step two
Keeping risk-based due diligence in consideration, you can segment your customers into three risk categories i.e low, medium and high in order to select the right level of due diligence for them. A clear delineation of the due diligence level will help you offer a pleasant onboarding experience with no unnecessary blockades.
Simplified due diligence is the easiest risk assessment framework, ideal for a low-risk profile with negligible risk exposure. They generally include well-known public enterprises and individuals with impeccable financial records contributing to the lower ticket size of the overall revenue stream. While taking the route, you may only need to know the identity of the entity or the individual. However, storing the proof of qualification for simplified due diligence can ensure compliance and visibility if any corrective action is required in the future.
Standard due diligence is the most commonly used risk assessment framework, the right fit for a medium-risk profile. This involves not just only knowing the identity but also verifying it to ensure they are who they claim to be. Verifying basic information like full name, date of birth and address against a government-issued ID and other databases will help you filter potential threats preemptively.
Enhanced due diligence is the most detailed risk assessment framework, best suited for high-risk profiles. The high-risk profiles comprise your employees, customers and business partners who need comprehensive screening and monitoring to keep a tight eye on identity thefts and credibility throughout the lifecycle and minimise risk exposure.
Below mentioned are some measures worth considering for both businesses and individuals
Depending on the budget and requirements you can choose between two types due diligence services i.e. Offline and Online
With all the information at hand with the help of a due diligence solution you can now put the pieces of the whole puzzle together. A comprehensive due diligence solution will give access to all the requisite information and help you drive informed business decisions with data-driven insights. You may want to look at the offerings of the service providers and gauge them against your business needs.
From a bird’s eye view, your requirements may fall into three major categories. At AuthBridge business solutions, we call them
AuthBridge has 17+ years of experience in providing digital solutions for background verification and due diligence to small, medium and large enterprises across 20+ industries.
Have any questions about due diligence? Reach out to a team of experts to understand your due diligence needs.
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