What is Enhanced Due Diligence?
Enhanced Due Diligence (EDD) is an essential step in the know your business (KYB) process and ensures that an organisation complies with regulatory requirements, prevents financial crime and safeguards business relationships. EDD becomes relevant when investigating a high risk individual or entity that raises red flags during the initial standard due diligence stage, works in a high risk jurisdiction or is involved in a field where regulation compels a higher standard of scrutiny. An EDD investigation will involve in-depth checks and verifications to ensure that the integrity and reputational risks of an entity or its principals are identified using a combination of online, offline and boots-on-the ground research.
Due diligence is a cornerstone of sound corporate governance, and when it comes to preventing bribery, due diligence will frequently be integrated into a broader framework. Due diligence processes serve as a way to assess the risk of bribery and also act as a strategy to reduce that risk.
When should Enhance Due Diligence be conducted?
To ensure compliance with regulatory requirements such as the U.K. Bribery Act, organisations are required to adopt a risk-based approach and conduct risk assessments as per the guidance document published by the U.K. Ministry of Justice. In this document, the government provides six principles to help companies negotiate the complexities of the Bribery Act. According to the fourth principle, any person performing services for a commercial organisation should be subject to due diligence. However, the appropriate level of due diligence will vary based on the risks stemming from the relationship. This means identifying and categorising high risk jurisdictions and individuals and then following up with an EDD process.
Similarly, to avoid liability under the US Foreign Corrupt Practices Act (FCPA), businesses must establish a robust compliance program capable of both preventing and identifying non-compliant actions. The presence of such a program significantly influences the decision of the Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) in pursuing enforcement actions against a company.
What does Enhanced Due Diligence involve?
An EDD investigation will typically involve a comprehensive examination of both online and offline sources in order to assess the reputation and reliability of an entity or its principals. The goal of an EDD report is to provide an extensive risk assessment covering a range of areas such as:
- Sanctions
- Political Exposure
- Bribery or Corruption
- Money Laundering
- ESG concerns
- Fraud and Regulatory concerns
- Civil Litigation
- Bankruptcy and Insolvency
At the beginning of an Enhanced Due Diligence project an investigator will use the same techniques and practices used in standard due diligence such as gathering information from publicly accessible online sources, retrieving offline corporate records and performing adverse media checks.
Next an investigator will move on to more in depth and focused techniques which go beyond online sources and records. Human source enquiries (HSEs) are not only essential in overcoming jurisdictional constraints, but also provide political, cultural, historical, or commercial context and corroborate information uncovered in previous stages. Physical site visits are another important tool that investigators use to verify information filed in corporate records, fill in information that online sources cannot provide, and gather the most up-to-date information.
Enhanced Due Diligence in action
The information landscape looks different from country to country. The jurisdiction as well as the objective of a project often directs the research route taken by an investigator. In areas where corporate records are not digitised, it is imperative to engage the right boots-on-the ground partner who has the skills to fill in the data gaps.
Let’s take a look at an example of enhanced due diligence in action. Our multinational corporate client needed to conduct enhanced due diligence on a European-based distributor with 19 subsidiaries across sub-Saharan Africa. Through the GTI platform, we matched our client with a specialist in Sub-Saharan investigations, who possessed extensive local knowledge and a substantial presence within the region. As well as choosing a Network Partner to manage the extensive regional project, our client was also able to choose multiple investigators in each country.
The outcome of this approach was a tailored and flexible risk-based strategy for third-party risk management. This allowed the client to explore new commercial relationships that were previously inaccessible due to the limitations of conducting comprehensive due diligence in a cost-effective and efficient manner.
Discover more about how the GTI platform can enhance your due diligence by exploring our other Use Cases.
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