Third-Party Due Diligence Proces – Everything You Need to Know

Due diligence is the primary part of building a business relationship. Be it an individual or entity, conducting due diligence helps a business analyze the amount of risk associated with someone. In compliance, the term is often related to third-party due diligence. 

Conducting due diligence allows compliance teams to make informed decisions on whether or not they should conduct business with an entity or individual. The third-party due diligence process is an essential function for organizations. It helps businesses to minimize the onboarding to risk elements. 

In this blog, we’ll go over what is third-party due diligence, the third-party due diligence checklist, and how to make a third-party due diligence process.

What is Third-Party Due Diligence?

Third-party due diligence definition is an investigation that a business conducts of an individual or a business before entering into a partnership with them. Usually, businesses have internal teams that conduct due diligence. Whenever a business looks to enter into a partnership with a new supplier/vendor/individual/business, they conduct third-party due diligence. It is undertaken to understand the level of risk associated with the entity.

The process of third-party risk assessment involves first making a list of all prospective third parties and assessing the risk level for each of them. Compliance teams collect crucial data about the vendor, their reputation, ownership data, and operations information. Businesses then do deeper research into the relevant areas to meet regulatory compliance. 

Every organization has its own third-party due diligence process. These rules change based on the region of operations, UBO information, industry, and much more. The due diligence process may be conducted by the organizations or with the help of third-party service providers.

Importance of Third-Party Due Diligence

As businesses grow, they have to become more careful of regulations, data privacy rules, and financial risks such as money laundering and terrorism financing.

With a lot of regulatory practices set in place, companies today have to uphold a higher standard. This means businesses have to invest more in third-party due diligence processes.

Unvetted third-party relationships can lead to several risks for the business. Large enterprises with multiple third-party relationships should make third-party due diligence processes their first and foremost priority.

It is essential because it helps businesses keep risk factors at bay. Every organization should have some kind of third-party due diligence checklist to verify vendors and individuals.

Third-Party Due Diligence Best Practices

As mentioned above, every business has its own third-party due diligence checklist, but there are some best practices every business should follow.

Here’s a list of third-party due diligence best practices to include in your due diligence process.

  • Make a list of all risk factors specific to your organization. 
  • Test your risk factors and the amount of risk they pose over and over again. 
  • Focus on building dynamic workflows. 
  • Database screening just won’t be enough, to combine human effort with automation. 
  • Make your third-party due diligence process based on your current risk framework. 
  • Use third-party due diligence software to enhance your current process. 
  • Find an ideal balance between centralized processes and decentralized teams. 
  • Use outsourcing to find gaps in your current due diligence process and to fix gaps n your internal knowledge. 
  • Take advantage of workflow automation tools.

How to Build a Third-Party Due Diligence Process?

Implementing a third-party due diligence process can be challenging if you don’t know where to start. Businesses spend months to come up with a due diligence process and overlook some crucial points.

Here’s how to break down the process and build a third-party due diligence checklist from scratch.

1. Make a List of All Current Third Parties

To start, make a list of all the third parties associated with your business. As a business, you have to be aware of all the current risk factors for your business.

You could ask the leaders of business operations to come up with a list of vendors, resellers, local agents, and more. Identifying all current third-party providers will help you understand the current scope of risk.

2. Know your Organizational Risk

Ensuring that your organization is risk-proof, including money laundering, trade sanctions, antitrust, or cybersecurity risks should be the priority. The goal should be to understand your own organization’s regulatory and compliance obligations.

Once you have that understanding, focus on learning how your relationships with current third parties magnify those risks.

3. Identify High-Risk Regions

Every country has a certain level of corruption risk. Countries that have high-corruption risks tend to have local agents and vendors that also contain a level of high risk.

If you’re operating in a high-risk area, you need to be wary of onboarding third-party vendors with a lot of risks. You should focus on conducting due diligence on who you onboard.

4. Have an Understanding of Current Regulations

Every organization does some level of due diligence, even if someone asks third-party vendors for their addresses. You need to have complete information about the current regulatory landscape.

5. Learn About Current Reporting Processes

Every organization is required to report shady activities to their respective regulatory bodies. To ensure your organization can take swift action, you need to be sure about current reporting processes.

6. Rely on Automation

Third-party due diligence software is the perfect solution for businesses that are just starting to build their compliance process.

Third-party due diligence software like DIRO can help businesses onboard vendors and suppliers quicker and with complete surety. DIRO allows businesses to verify third-party vendors’ proof of address, bank statements, UBO information, and more in minutes.