Why is Counterparty due diligence required?

due diligence

Every business, whether large or small, aspires to become stronger in its niche. Growth can be in the form of adding new products to the portfolio, increasing the customer base, or improving the geographical base, which ultimately requires the help of a third-party. Thus, it is important to carry out counter-party due diligence check as it insulates your business against the challenges that you might face during the expansion stage.

An introduction to the concept

As the business expands its footprints, they come across several organisations to deal with including third parties, vendors, associates, ex-pats, business experts, channel partners, etc.. While these counterparties are important for business growth, they bring along several challenges. Hence, it is important to know what kind of people/institutions you are dealing with to avoid any chance of fraud.

Importance of counter-party due diligence

In certain countries, corporate due diligence has become a mandatory norm to mitigate the business risk. With the help of corporate due diligence, the organisations can look into their prospective business partner’s business history, links related to criminals, political association, and experience level of senior members.

They can also gauge the ethics, standards deployed, and their adherence to the prescribed norms made by the government. Additional points worth examining are their key ratios, their focused business areas, the customers that they possess, their revenue stream, and company valuation. Some companies also assess operational geographies, their documents, audited results, structure map of the organization, stock exchange listing and licensing of the organization.

Such due diligence also checks for any  gaps in managing the undertaking, banking licenses, annual report, type of the organisation whether it is public or private owned, and other factors that can make or break the organizational reputation.

Risks of not opting for counter-party due diligence

As mentioned above, counter-party due diligence is essential for the business organisation to succeed. Such checks are higher than the standard procedure as conducted by the banking or other financial organisations. If the required due diligence is not conducted, it will expose the organisation to more risks and penalties. Inadequate or no corporate diligence can lead to:

  • Brand deterioration
  • Non- adherence to the bribery and corruption regulations
  • Organisation downtime
  • Bad rapport among the customers
  • Fines and penalty
  • Legal risks
  • Licensing risks
  • Financial risk
  • Ethical risk

In this volatile and tough environment, such checks have become all the more important. Several third-party organisations exist that conduct the background checks of the agents or the parties that your business could potentially deal with. Compliance professionals create accurate and trusted data sets so that you can make timely and informed decisions.  They identify the data requirements and communicate the same with you, so that there is no chance of error.

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