The top 4 gaps in business partner due diligence

We live in a tangled world in which the effects of corruption are ever more evident - drugs, bribery, back-handers, money-laundering, terror financing, human trafficking, modern slavery, the list goes on - so it's hardly surprising that compliance regulators on both sides of the Atlantic are taking an ever tougher line, forcing us to do the right thing by thoroughly investigating our partner companies, their directorships and their ownership structures.

Not only this, we're having to actively demonstrate that we've done adequate due diligence on all of our dealings, whether with customers, suppliers, agents and distributors, or business partners and joint ventures. Ignorance is no longer bliss.

But where do we start this thorough process? All too often our knowledge extends only as far as the readily available information on the more transparent companies; in other words, the ones we probably need worry least about. After all, as Bill Hauserman, Senior Director for Compliance at Bureau van Dijk, says: "the standard is 'know with whom you're doing business'; it doesn't say 'know with whom every fourth person you're doing business'."

While the process can be full of gaps, effectively identifying these gaps is the first step on the road to plugging them.

A leading exponent in anti-corruption and methods to control it, Hauserman discusses what he sees as the top four gaps in partner due diligence in this short video, highlights of which are discussed below.

Gap 1: Decisions around "perceived risk" and "unknown risk"

According to Hauserman, not all business partners are getting covered in companies' due diligence programmes, primarily because they can't afford it. "What's happening," he says, "is that they're taking a minority of business partners and, through a risk assessment, suggesting that there's a 'perceived risk' that what they do and where they do it, and the value of their engagement, is what drives potential bribery risk. And that's [just] a perception." He adds that, worse, "the majority typically are not being included in the programmes," leading to a whole range of unknown risk, which can have a far worse long-term impact.

Gap 2: Poor "core" data on business partners

"Core" data is often very poor, says Hauserman. Because of out-of-date databases, some companies simply don't know the registered names of their business partners or the countries in which they're registered. Says Hauserman: "The problem is that the due diligence activities require good registered names in order to be able to find these companies in commercial databases. So that's a major second problem. Not everyone's in the programme."

Gap 3: Flawed questionnaires for entity data collection

"Questionnaires are suspect by definition," says Hauserman, who cites companies' over-reliance on them. He adds: "At a minimum [questionnaires] need extensive validation. [But] what's better is to be able to eliminate [them] as the source of due diligence information." This hugely increases accuracy, Hauserman says, with company financials providing an example of common discrepancies between reality and the answers given on questionnaires.

Gap 4: Lack of ownership transparency