Managing Compliance Costs through Risk-based Due Diligence

Third party due diligence is a key component of any robust compliance program. Many companies go to great lengths to vet third-party intermediaries, and with good reason – the overwhelming majority of international bribery prosecutions involve funneling payments through a third party. But in an era of tight budgets and shrinking profits, there is often a tension between the need to take compliance steps that will mitigate risks and the cost of taking those steps.  In fact, both of these objectives can be achieved in an efficient and cost-sensitive manner if companies abandon the “one size fits all” approach to vetting intermediaries.  Many businesses are doing just that.

How?  By moving to risk-based due diligence.  Companies should assess the risk profile of each relationship, in order to establish the appropriate level of review before the review gets underway.  Criteria such as the purpose for which the intermediary is being retained, its level of interaction with government officials, the proposed compensation (both amount and structure), the volume or value of sales, and the countries in which the intermediary operates will inform the level of risk. For intermediaries that fall into the higher risk category, higher cost is to be expected.   The company must collect more information and conduct a more in-depth review in order to avoid the potentially high fines, reputational damages, and criminal penalties that could ensue if an adequate, appropriate investment in due diligence is not made.

But what about third-party relationships that do not fall into the high-risk category?  Lower risk should translate into lower cost.  In fact, there are many circumstances under which a lower level of review warranted, and this is where companies can save money.  Two categories of intermediaries are appropriate for lower-cost due diligence:  truly low-risk intermediaries, and intermediaries in need of pre-vetting.  Suppliers, and service providers such as realtors, law firms, accounting and public relations firms, resellers and non-commission sales representatives (with no government customers), charities that fall within a company’s established charitable giving program, are all likely to be low-risk relationships.

In some instances, companies need quick, cost effective due diligence as a way to pre-vet intermediaries for a number of reasons, including a high-volume of  intermediaries that haven’t previously undergone due diligence; companies that are working with a potential joint venture partner or acquisition; time-sensitive intermediaries for which an initial lower level of due diligence will allow results to be obtained more quickly than would be possible with a higher level of review; intermediaries bidding for a specific contract or project; and finally, for multiple intermediaries under consideration in a potential new market.

Source: traceblog


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