That is where Due Diligence steps in and provides a careful investigation of the economic, legal and fiscal aspects of a company. It is imperative for any company to conduct detailed examinations of the individual or company they are about to enter a business arrangement with.
Many a times, companies get involved in high-risk transactions. Prior to that it is necessary to conduct Enhanced Due Diligence (EDD).
EDD is an advanced risk assessment process. It provides a deeper insight into complex financial structures and practices of a business.
How is it Different from Standard Due Diligence?
If a customer is considered low-risk, they go through standard Due Diligence, and if they are identified as high-risk, an EDD is conducted. EDD goes beyond basic identification and risk assessment procedures. It involves a comprehensive collection of details and information about a customer and is designed for unearthing deeper insights into a customer’s risk profile.
When Should a Company Conduct Enhanced Due Diligence?
- When engaging with Politically Exposed Persons (PEP)PEPs hold positions of influence. They are constantly exposed to corruption means. They may have hidden affiliations or unexplained sources of funds. In such cases, the company engaging in business with such people can suffer extreme reputational damage, which can hamper the business’ growth.
To prevent such circumstances, EDD conducts verifications of all wealth sources, find out all political connections and affiliations and search sanctions and watchlists for any listing of their names.
- When engaging with an individual or entity that is operating in high-risk jurisdictionsSome countries have weak Anti-Money Laundering laws, higher rates of corruption and unstable governance. EDD helps to conduct business with individuals and companies based out of such regions by verifying if local partners comply with applicable laws, licenses, regulations and business practices. It also enables investors to understand how jurisdiction-specific rules affect operations and investments.
This helps analyze cross-border risks before investments.
- When dealing with private or unregulated entitiesPrivate firms may have layered or hidden ownership hierarchies. EDD uncovers beneficial owners, shareholders and offshore links if any.
Such entities may not publish financial reports regularly. EDD here helps identify any liquidity, insolvency and financial integrity.
Lack of regulation may also expose unethical practices in the workplace, fraud or money laundering. Deep checks in local media and databases can reveal such activities.
- When large-sum transactions are involvedHigh-value transactions are often accompanied by heightened risks. EDD helps prevent this by authenticating the source and flow of funds and investigating documents and transactions.
- When red flags emerge during standard Due Diligence InvestigationIf there are constant inconsistencies, missing information and adverse media content, that demands an EDD check. Deeper background checks reveal what normal investigation can miss.
Conclusion
Companies should treat Enhanced Due Diligence as a strategic protection that can take care of business integrity, build stakeholder trust and ensure high-stake transactions are based on transparency and accountability.