Third Party Due Diligence: A Gateway to Secure Onboarding

Third party due diligence is necessary to onboard the legitimate business partners. Explore the importance of screening in building healthy financial bonds.

The business requires a complete inspection of the third party while onboarding. The assessment of the legal status and financial performance of the business in question is necessary. Several small businesses collapse every year because of onboarding high-risk partners. The high-risk company leads to fraud, financial crimes and legal consequences. Third party due diligence is the way to mitigate risk and ensure economic security while onboarding a business. Here, let's explore why businesses require due diligence to build transparent financial relations and identify potential hazards.

What is Third Party Due Diligence?

Third party due diligence is the inspection process that evaluates the legitimacy of a company's status. The business must check the financial history of the partner company to detect loopholes. An organisation must collect company information from the company and the country or state's parent registry at the same time. The ownership structure of the compnay undergoes screening to detect the legitimacy of all shareholders. Anti-money laundering checks are also applied to all of them, which helps identify red flags. After onboarding the secure business, constant monitoring is a requirement. Let’s explore the complete business verification process in this two-minute read.

Third Party Due Diligence Checklist

For rigorous third-party due diligence, businesses must meet essential requirements. It includes:

• Data Gathering

The business must collect the company information, including the name, address, date of incorporation, registration date, registration number and other relevant data. Once the business information is collected from the third party, it is screened against the public registry. The public registry maintains the data of each and every business within the country or state. 

• Documents Collection and Screening

The business must collect the documents, including proof of address, tax records, cashflow statements, bank statements and other relevant documents. The parent registry maintains the business's and shareholders' documents. So, all the collected documents are cross-checked against the official documents. If the documents are paid, the business has to pay to access those documents. 

• UBO Verification

The ultimate beneficial owner of the company holds a share in business capital. For UBO verification, it is crucial to gather all shareholder's data and documents. The UBO screening is done by assessing the number of shares, designation, capital and legitimacy. The percentage of the UBO share is usually 10 to 25%, but it depends on the region. Once the ultimate beneficial owners are identified, security in financial relations will be ensured in the long term.

• Performing AML Check

Anti-money laundering AML checks run over the company and the shareholders. The business that complies with AML laws is secure to onboard; otherwise, it may lead to sanctions. The companies may face penalties, fines and other sentences as a result. To avoid sanctions after onboarding, it is good to apply AML checks over the counterparty at the onboarding time.

• Enhanced Due Diligence

The constant monitoring of the business throughout the business relationship cycle is necessary. Enhanced due diligence is crucial to maintaining safe financial relations. The red flags are detected through periodic reviews and reporting suspicious activities.

Importance of Third Party Due Diligence Policy

In business due diligence, it is necessary to identify the potential risks associated with third parties. The background checks are applied to the company to assess whether it has a history of black money. These checks are also conducted on business persons to detect criminals, politically exposed persons (PEP), and watchlisted or sanctioned persons. Once the risks are identified, the company can classify the levels of risk in the business, making risk management seamless with the due diligence process.

In the business world, there are national and international regulations that must be complied with. Non-compliance with anti-money laundering AML, counter-terrorist financing CTF, and other laws result in penalties. The partner companies may face financial loss and reputational damage because of legal consequences. However, third party due diligence companies assess the business in question complies with AML laws so that financial risks are minimised.

Final Words

Third party due diligence is the thorough process of verifying the legal status of the company. The business finds that it helps to value financing, which ensures transparency in the future. Businesses must apply AML checks over third parties to comply with national and international standard regulations. Once the business screening is done, it improves reputation and growth in the industry. Through rigorous due diligence, businesses gain the confidence to onboard legal companies. However, the business must rely on expert service providers for third-party due diligence. The professionals have extensive databases to verify business identity, so risks are reduced in the long run.