All companies use third parties as an essential component in the running of their business. A third-party may support you by supplying or distributing your goods and services or expanding your channels to customers.

These third parties can certainly bring benefits to your organisation, but they can also expose you to potential risks. Read on to discover how your business can meet these challenges and enhance third-party due diligence.

What is Third-Party Risk?

Any person or organisation that is connected to your business can pose a risk. Whether this is someone in your supply chain; an agent; or a software vendor.

Risks may come in the form of data breaches, operational disruptions, or reputational damage. Whatever the risk it needs to be identified so it can be understood and managed.

What is Due Diligence?

Due diligence is an investigation process that assesses third parties for risk. Traditionally, it occurs before any agreement is entered into, but ongoing monitoring should also be performed to avoid financial or reputational harm.

Why Due Diligence Matters?

Regulation growth in recent years has made us all more compliance conscious. As a result, conducting third-party due diligence has become increasingly important for organisations. It allows informed decision-making about who you are conducting business with and helps you avoid harmful relationships.

With the importance of transparency and ethical business practices, this process will help you avoid the potential problems associated with compliance, regulation, and public image. If you neglect due diligence, you open yourself up to potentially devastating consequences that may not be recoverable from in a competitive global market.

How to Improve it?

Review these effective steps to strengthen due diligence:

  1. Define your own risks first

Your due diligence process needs to support your business strategy. To begin with, you should have a good understanding of your own financial, regulatory, and reputational risks before you examine third party risk.

Third parties can bring up issues such as:

  • Anti-corruption risks
  • Cybersecurity
  • Terrorist links
  • Money-laundering
  • Trade sanctions

Ask yourself how working with a third party may exacerbate risk to your organisation.

 

  1. Gather third-party information in one place

Next, you will need to identify all your third parties.  Ask your accounting team to provide a list of all parties that receive payments so you can figure out the scope of the task.

Once your information is gathered you need to consolidate it in one place and make it accessible. Now you can easily keep your third parties in check.

Organisations should collect basic information on third parties, including:

  • Business details or proof of identity (in the case of individuals)
  • Financial status
  • Group structure and board members
  • Details on key shareholders and beneficiaries
  • Incorporation documents and certificates
  • Political connections
  • Contracts and agreements
  • Official references
  • Assessment results
  • Background checks
  1. Screen prospective third parties

Once the gathering and basic level of vetting has taken place, third parties need to be put through a screening process before they are onboarded.

Names of companies, individuals, and assets should be checked against:

  • Global sanctions lists
  • Law enforcement lists
  • Regulator-published lists of debarred or disqualified companies and individuals
  • PEP lists to identify political connections

Ideally, the screening process needs to be systematic and automated, it should provide accurate input on the third-party relationship. By conducting risk stratification and flagging potential high risks this step will pave the way to effective due diligence.

 

  1. Conduct a risk assessment

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

You will need to scrutinise:

  • Specific sector risks

e.g., the possibility of corruption or bribery in certain situations or industries

  • Entity risks

e.g., exposure to money laundering

  • Country of origin risk

– see Transparency International’s Corruption Perceptions Index rating

  • Internal factors that may result in financial harm

e.g., the bonus culture

Throughout this process, you will need to maintain a complete record of relevant documents, assessments, and decisions. Once again this should be centralised so you can demonstrate ROI and prove that decisions to engage with partners or third parties were made in good faith.

 

  1. Monitor and review

This is an ongoing process. Even after a formal agreement, ongoing monitoring is required to keep on top of changing circumstances and avoid potential problems.

A solid strategy is to employ risk stratification (or segmentation) based on risk assessment score or risk profile. This will ease the burden of conducting due diligence across all your third parties. Having established criteria will help you track things better. Preferably organisations should streamline by automating the process. Software solutions can provide well-defined algorithms that can assist with scheduling and monitoring third-party activities.

You will need to review your due diligence process regularly too. As with step one, it is essential you consider your business needs. If these needs change over time, then align your process accordingly.

Think About Improvements and Automation

Fundamentally third-party due diligence is all about data. Having easy access to such data can protect your organisation from reputational damage and lawsuits, as well as promote ethical business practices.

Typically, improvement in your due diligence will require some form of automation whether that be outsourcing background checks or implementing technological software.

At 1RS we want to help you know your third parties better. Our solution will provide a robust third-party due-diligence system, consisting of screening and onboarding procedures, risk assessments, ongoing monitoring, and preventive actions. This technology enhances efficiency by consolidating all data in one platform, empowering you to improve decision making. Get in touch to book a demo or to speak to one of our experts.

 

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