Risk Factors for Due Diligence

Due diligence is a critical compliance process that acts as a defense against financial crimes, such as money laundering and terrorist financing. Due diligence requirements are growing and it is essential that companies develop strategies that are adapted to the specific requirements of each region, while adhering to international best practices.

Although it might seem like an exhausting and time-consuming job conducting due diligence is essential to the success of any business. This process is usually divided into two main areas that include the purchase or sale of services or goods, and mergers and acquisitions. Due diligence in both cases is performed to ensure that businesses are completely informed prior to entering into a transaction.

Businesses must check the background of the company, its reputation, and affiliations with third parties. This could involve an internet search and questionnaires, or verification via independent sources like business registers or watch list databases. An in-depth analysis of the management structure is also essential. Founders and other top executives usually hold more company shares, therefore it is important to understand their levels of ownership. In addition it is important to determine whether these individuals have been selling shares recently.

KYC/Know Your Customer checks are more thorough for high-risk clients as required by anti-money laundering regulations and anti-terrorism financing regulations. This is usually based on factors such as the jurisdiction they operate in and the type of transactions they make and the source of the funds used for those transactions. A thorough examination of AML policies and the local market’s reputation via media sources can aid in determining risk assessments.

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