When the pressure builds, streamline your due diligence process
10 Oct 2019 10:46 am by Mark Dunn
The sustained drop in the price of oil has had a substantial effect on oil and gas businesses. Impacted companies are looking to all areas of their business to cut costs and increase revenues to make up for the depreciation. Compliance is one area that should not be overlooked, but by using technology businesses can increase efficiency and experience significant savings.
It's no surprise the fall in oil prices we're all so familiar with – from around $115 per barrel in 2011 to less than $50 per barrel in 2016 – is having a serious impact. The Financial Times reports investment in new liquefied natural gas (LNG) and deepwater exploration projects is becoming increasingly rare and around $400 billion in expected investment has been cancelled or delayed.
2015 saw an annual earnings and profit declines and present day is threatened by the increasing popularity of renewable energy and international agreements designed to minimise fossil fuel use.
In this time of distress, some are looking at compliance as an area of the business where resources can be minimised with little effect, but by cutting compliance resources a company will be exposing itself to significantly increased risk should it fall foul of the law.
Balancing risk against cost
Companies that make compliance processes more streamlined, efficient and cost-effective – rather than simply cutting resources – will be rewarded with lower compliance costs while maintaining an effective program. By utilising technology and taking a risk-based approach, businesses can minimise the regulatory, financial, reputational and strategic risks of compliance failures.
Anti-money laundering and anti-bribery and corruption regulations require companies to carry out due diligence and screening on third parties. A comprehensive and cost-effective due diligence process aligns resources to the level of risk that needs to be managed. All third parties need to be covered – suppliers, sales agents, resellers, distributors, targets for a merger or acquisition or joint venture, prospective customers, sponsors, prospective employees.
A risk-based approach to due diligence should follow a standard format:
- Initial screening – verifying third parties against a comprehensive set of global sources including news, company information, watchlists, politically exposed persons (PEPs) and sanctions lists, biographies, legal cases and public records content
- Risk assessment – determining which due diligence tier the entity falls into
- Due diligence checks – simplified checks for low risk entities and enhanced due diligence where the risk is greater. Escalation and outsourcing for the highest risk areas
- Ongoing monitoring – monitoring news, watchlists and databases for changes in status of customers, partners, agents and suppliers to proactively mitigate third-party risk.
Applying a risk-based approach to due diligence
The risk assessment determines what steps are needed when implementing a third party due diligence process and how frequently an entity needs to be monitored. Common external criteria for a risk assessment include: location (is the entity located in a high-risk country?); sector (is the entity in a sector prone to corruption risk?); transaction type (does the transaction involve charities, political figures or public procurement?) and transaction value (is the transaction high value, does it include significant commissions, or does it involve a large number of contractors or intermediaries?).
After the level of risk is determined, due diligence follows a three tiered approach:
- Simplified due diligence checks for the lowest risk entities
- Enhanced due diligence checks for medium to high risk entities. This should involve both individual and aggregated subscription services dedicated to due diligence screening
- Where an entity poses significant risk due diligence should be outsourced to specialist risk advisors
Technology to reduce compliance costs
Taking a risk-based approach to due diligence screening allows an organisation to dedicate most of its resources to the highest risk entities and minimise expenditure in low risk areas. Integrating technology within the process enables additional savings to be made across all three process tiers.
Automated batch checking simplifies and streamlines both the initial check and the ongoing process by providing real-time screening of multiple entities. Both new and existing customers can be checked in real time against centrally updated lists covering sanctions, PEPS and government watch lists. Low risk (tier 1) and medium to high risk (tier 2) entities can be quickly checked, while entities that pose significant risk (tier 3) will be flagged for external specialist assessment.
Aligning due diligence to price points
A manual due diligence escalation process requires significant resources. Manual processes can be particularly costly if low risk entities are flagged for unnecessary outsourced checks, and even more so if a high-risk entity is missed. Organisations can utilise automation software to align due diligence requirements with price points. Avoiding manual checks and automating the screening process enables the 'cost per check' to be significantly reduced compared to manual processes.
Regulators and enforcement agencies are increasingly cooperating and sharing intelligence across the world to enforce financial crime regulations and using high volume third-party screening and monitoring technology has two main benefits. It can help an organisation comply with anti-money laundering customer due diligence and manage third-party anti-bribery and supply chain risk cost-effectively, while also demonstrating to regulators that the company is in full compliance and understands the risk profile of its client base.
As regulatory scrutiny and expectations continue to intensify in response to global security challenges, organisations employing the best technology will be best placed to minimise risk across the board.
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p.s. 3 ways you can apply this information right now to better understand your responsibility in Human Trafficking awareness
- Read the STOP THE TRAFFIK and LexisNexis report on link between tea and human trafficking.
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