Due Diligence Risk Factors
Due diligence issues are the underlying issues that go into the risk assessment process for conducting a due diligence exam. A variety of stakeholders can benefit from the process, such as companies looking to examine the target company prior to an acquisition or merger and investors who want an extensive risk assessment prior investing; and employees looking at the potential candidates for employment.
The process of due diligence can involve a number of different tests based on the intended use and scope. Common checks include identification verification, screening against lists of sanctions and criminal watchlists. They also include an investigation into the sources of funds. Additionally a risk-based approach should be employed to determine if enhanced due diligence (EDD) measures must be applied. This is because customers that pose the highest risk of money laundering or financing terrorists require additional measures, including increased monitoring of transaction patterns and the collection of more information.
EDD could include evaluating the beneficial ownership of corporate clients in order to limit the risks associated with hidden ownership. The process could include examining the structure of the business and identifying any connections to public officials which could lead to bribery. EDD must also be able to conduct regular reviews and updating of international sanctions lists to ensure compliance.
An effective due diligence process will provide a concise summary of the main findings for those who do not have the time to read a complete report. The summary should be brief, and should include the type of due diligence that was conducted (e.g. thorough risk assessment prior to investing in a company) and the purpose behind the due diligence; and any significant results from the due diligence.
