Why customer and 3rd party due diligence must evolve

James Swenson, Thomson Reuters

More companies are realizing the need to go beyond a tick-box approach to customer and third party due diligence

In the last few years we have seen some of the highest fines levied on financial institutions and multinationals because they did not follow proper customer due diligence measures.

Anti-money laundering regulations (such as the EU Money Laundering Directives and the US PATRIOT Act) as well as anti-corruption legislation (such as the US Foreign Corrupt Practices Act) require organizations to identify customers and third parties who may pose a heightened risk, and to conduct further Enhanced Due Diligence (EDD) research on these entities to better assess the risks they constitute.

Today, companies (and in some instances senior management) are increasingly held accountable for transactions that facilitate or allow money laundering, corruption or fraud to occur.

Many companies, particularly in the banking and financial services industries, devote significant resources towards compliance and due diligence given the high possibility of unknowingly becoming involved in financial crimes like fraud or breaching sanctions.

Similarly, organizations generally should allocate more resources toward investigating vendors, partners and customers that pose a greater risk, such as those located in heightened risk jurisdictions or engaged in heightened risk industries, like oil and gas or pharmaceuticals.

When considering due diligence partners, there are certain capabilities that should not be overlooked and be prioritized. Can your vendor confidently say they offer:

• A global research infrastructure with analysts working in over 60 languages
• In-house research analysts supported by sophisticated workflow automation and advanced research tools
• A premium dataset that includes sanctions, vessel and PEP data
• Specialized reports that support specific compliance requirements, including economic citizenship and ultimate beneficial ownership reports
• Research that spans multiple jurisdictions and languages
• The full risk picture with research completed on the organization, its owners, and its operating and litigation history, as well as key management, decision makers and beneficial owners, providing insight on their background, track records, competencies, potential conflicts of interest and political and criminal link

Using risk screening solutions to monitor heightened risk individuals and entities, and uncover hidden risks in business relationships, can be very valuable as a first step in helping to identify risk.

However, the simplicity and convenience that such databases provide is not without its drawbacks.

Additional research may be needed to truly know and understand what that data means. A human researcher is always better equipped to determine how to process this information and whether more research into a certain issue is needed.

As technological improvements allow for development of better tools to facilitate research, the human element cannot and should not be underestimated as a necessary component in the due diligence process.

About the author

James Swenson, is the Global Head of Proposition for Risk Managed Services (RMS), a division of Thomson Reuters dedicated to providing customers with due diligence and know-your-customer (KYC) on-boarding solutions. In his role, James is responsible for the development of commercial roadmaps related to financial crime prevention and compliance services. He is a subject matter expert in anti-money laundering (AML), counterterrorism funding (CFT), anti-bribery and corruption risk (ABC) assessments, enhanced due diligence (EDD), and politically exposed persons (PEP) screening.