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Deep-level due diligence is a targeted approach that aims to provide meaningful verifications concerning third parties and responding to corruption risk.

Any business decision has a degree of risk. When it comes to major decisions like acquiring assets overseas or entering into joint ventures, business leaders and company directors face growing risks. In addition, as countries begin to tighten its laws on corruption and can hold a company liable if a bribe is paid by or through a third party, business leaders realise that they must now pay a closer look at transactions and the use of third parties, especially if the third parties representing them take bribe or engage in criminal activity.

Due diligence is an investigative process used to identify the unknown elements or verify claims made by third parties prior to a business activity. It has long been a favourite tool used by companies to understand potential impacts and take control to mitigate risks.

In the field of anti-corruption, due diligence on third parties has been expanded as international trade becomes more prevalence than ever and the chances of getting involved in corruption through third parties are also higher than ever. Third parties in this instance can be individuals or companies whose key players now become people of interest. If they are individuals, they can be advisors, agents, customers, contractors, distributors, partners, service providers and vendors, to name but a few.

As the nature, scale and complexity of a company’s activities vary widely, the level of third-party due diligence needed should be directly proportionate to the risks the company faces. Accordingly, when it is responding to corruption risk, due diligence is further categorised into three levels: levels I, II and III. The rule of thumb is the higher the risk, the deeper and broader the due diligence should be.

The three levels of due diligence

Level 1 due diligence

First level due diligence is the first step in preventing bribery and other corrupt activities. It involves a standard search on a person or an entity against global databases and criminal databases. The purpose is to make sure that they are not included on the global watch lists.

As it is relatively inexpensive, first level due diligence is often part of a company’s compliance policies. It is a standard practice to show that your company is actively seeking to prevent corruption.

Level II due diligence

Extending beyond databases, level two due diligence adds analysis of international media from both open-source and subscription-based services. If the third party is based in another country, then in-country research should also be conducted. The aim here is to uncover information about the person, their related company or companies, as well as other associated parties. If the target is a company, then it is about the reputation of the said company.

Level III due diligence

Level three due diligence, often known as deep-level due diligence, requires local knowledge as it delves deeper to seek undisclosed or hidden information about the third party. If the target is a company, then its business transactions, along with its key executives and their background, would be reviewed. If the third party is a person, then their past conduct and all associated companies would be examined. Deep-level due diligence aims to reveal any history of litigation, criminal involvement, as well as secretive deals.

A level III due diligence example

In a deep-level due diligence exercise we carried out on behalf of a client against a company based in Europe, we learnt that a minority shareholder of the other company had previously been accused of corruption and subject to legal proceedings in another country. This piece of information was concealed by the minority shareholder and if you were to do a standard search about the company, you wouldn’t have found out the history of this particular person, let alone the fact that they are now active in another country.

Making an effective anti-corruption due diligence process

When it comes to third-party due diligence, it must be made clear that not all third parties must be subject to the same anti-corruption due diligence process. Verifying every third party would be too costly and not a good use of resources. An extensive process would also add little value to the company’s anti-corruption efforts.

At Blackhawk Intelligence, our due diligence team helps you make the due diligence effective by conducting an initial screening and using a tiered risk approach, as illustrated below.

Identifying third parties through an initial screening

  • Focus on the third party who is from a country or industry perceived to have higher corruption risks.
  • Anticipate the level of engagement, like if the third party will be authorised to represent your company or put in a position that can influence decisions of others.
  • Think if the third party will come into contact with government officials when representing your company.

Assessing levels of risk

Not all third parties identified for due diligence would need the same level of check since the level of due diligence should always be comparable to the risk. Accordingly, use a tiered risk approach to manage the process.

Key risk indicators

Once a third party is identified as high-risk and should subject to level III due diligence process, then the next step is to look at key risk indicators to assess the risk of corruption. The indicators can include but not limited to:

  • Geographic location – the country where the third party operates. Sometimes, it pays to look at countries subject to sanctions laws of your government as well as countries neighbouring those states.
  • Industry – check if the third party is in an industry where corruption is common.
  • Background of its key executives – a company cannot operate without its staff and therefore, key executives are a risk factor. It is worth reviewing their background.
  • Connection with government officials – a company that has won many government contracts or an individual who is connected with politicians is a risk factor.
  • Compensation structure – if the third party’s compensation is based on performance, then the risk for corruption or fraud is greater.

Monitoring measures

Third-party due diligence shouldn’t be a one-off process. Rather, it should be conducted regularly as circumstances change. For example, by working with our due diligence team, we can regularly search the international databases to identify new threats or conduct periodic risk-based audits of the third party.

Your company should also request the third party to submit an annual certification of compliance applicable to the anti-corruption regulations and reviewing the third party’s payment requests or invoices.

When you will need deep-level due diligence

Levels I and II due diligence will often suffice when you are dealing with a lower level of corruption risk. However, there are times when you need to take the investigation further and deep-level due diligence is particularly useful when you’re in any of the following situations:

  • You’re dealing with a foreign company from a country perceived to have higher corruption risks.
  • You need to comply with the Bribery Act or the US Foreign Corrupt Practices Act.
  • It is a big-ticket merger or acquisition.

Usually, deep-level due diligence involves deploying agents on the ground in a destination where the other company or person of interest is located. The agents seek to verify the third party’s reputation, business practice, and compliance with local anti-corruption requirements, if any. In some instances, conducting discreet interviews to obtain the necessary information may be needed.

Call Blackhawk Intelligence for deep-level due diligence today

Financial institutions, legal firms, and many other companies rely on Blackhawk Intelligence to carry out level III or deep-level due diligence on their behalf. They choose to work with us because:

  • We are highly discreet
  • We respect confidentiality
  • We have legal, compliance, audit, security, and local experts in our team to ensure good faith judgement
  • We have trusted partners across the world when local knowledge is essential
  • Our fees are transparent with no hidden charges

Deep-level due diligence is a targeted approach that aims to provide meaningful verifications concerning third parties and responding to corruption risk. Apart from meeting compliance, deep-level due diligence is also a strategic part of your operation in high-risk markets such as emerging countries.

So whether it is anti-corruption regulatory compliance or strategic business decisions involving new partnerships or acquisitions, you can count on the due diligence team at Blackhawk Intelligence. Call +44 (0)20 8108 9317 today to discuss how our due diligence team can help your company.

This post is intended to provide information of general interest about current business issues. It should not replace professional advice tailored to your specific circumstances.

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