Fraud Prevention and Due Diligence

Continuing with the theme of Fraud Prevention Month, in this post we examine various applications of background due diligence, sometimes referred to as “Enhanced Due Diligence” as a fraud risk mitigation tool.

Enhanced due diligence is mandatory under some legislation. For example under the guidelines issued by the Financial Transactions and Reports Analysis Centre of Canada, “enhanced due diligence” (i.e. verification of a client’s identity beyond the normal identification requirements and an examination of a client’s money laundering risk more generally) is required if an organization’s risk assessment of a client indicates that the client has a high risk of money laundering.

Enhanced due diligence measures are also a requirement under certain international sanctions legislation. Multinational companies employ enhanced due diligence measures on vendors and channel partners to ensure that they are complying with fraud prevention and internal controls requirements under Sarbanes-Oxley Act and international anti-corruption laws.

However background due diligence is not just appropriate in situations where one must comply with legislation, it often just makes good business sense. A company or an individual that has a history of litigation, financial difficulties or regulatory sanctions may not disclose that information upfront and it may not be identified in standard legal or financial due diligence. Those historical activities could be a risk to the success of any future business relationships. These risks cannot be mitigated if they are not identified.

Vendor and channel partner due diligence is important for other reasons. These organizations gain access to sensitive intellectual property and customer relationship data. In the case of channel partners specifically the organization represents a manufacturer’s products in the market and therefore the channel partner’s reputation becomes associated with the original equipment manufacturers reputation. Background due diligence can identify reputation issues that may be of concern. It can also reveal undisclosed corporate interests that a channel partner is operating and sometimes these compete directly with what it is your organization is trying to accomplish.

Where vendors are concerned, enhanced due diligence can help you determine if the organization has a history of infringing on  their client’s intellectual property.

If you would like to learn more about enhanced due diligence services please contact us.