Quality research is the cornerstone of robust due diligence, but finding the necessary information can prove difficult to say the least.
EDD is integral to the risk-based approach
As banks, financial institutions (FIs) and corporations increasingly implement a risk-based approach to compliance, enhanced due diligence (EDD) is moving front and center as an indispensable tool to help identify potential risk.
M&A activity and expansion into emerging markets, for example, can expose organizations to new risks as they will be operating in unfamiliar environments with new suppliers and third parties. Therefore they must undertake thorough due diligence to ensure that they fully understand the nature and magnitude of any potential pitfalls. It goes without saying that the consequences of failure are significant, including often substantial financial losses, hefty fines, reputational fallout and even personal liability.
In the last few years some of the highest fines have been levied on financial institutions and multinationals because they did not follow proper customer due diligence measures.
The increasing importance of banks carrying out enhanced due diligence profiling on their customers
Poor transparency and accessibility
Quality EDD relies on quality research, but finding the right information can be extremely difficult. For example, higher risk locations (for some emerging markets) often have less transparency when it comes to commercial data. Some locations have under-developed systems or even no sources that are accessible online. Only a physical presence coupled with a sound understanding of the local retrieval processes can access the required documentation in these jurisdictions.
Secrecy laws are particularly prevalent in jurisdictions with sub-standard tax regulations and in some cases, disclosure of the shareholders when registering a corporation is not even required. Obstacles like these can render the process of conducting robust EDD both time-consuming and challenging.
A note on UBO: still mired in secrecy
A significant issue that is currently unfolding relates to ultimate beneficial ownership (UBO). This has become a top priority for compliance professionals in European banks and FIs (as well as corporates) given that the requirements of the 4th EU Money Laundering Directive will imminently apply.
Uncovering the necessary information, however, is still often impossible because of a general lack of transparency.
“Despite international commitments to increase transparency, very little has actually transpired over the last twelve months, with governments and politicians not ‘walking the talk’ alongside banks and FIs”. Sylwia Wolos – Head of Proposition, Enhanced Due Diligence, Thomson Reuters.
The EDD obstacle course
Let’s take a look at some of the challenges a small in-house compliance team could encounter when conducting EDD.
A lack of knowledge of different languages is often the first hurdle to be overcome. Many useful sources and databases may not be available in English and inaccurate translations can filter through to produce incorrect risk assessments.
Then there is the sheer volume of information available, which can be overwhelming. Often too much information means that it is harder to find the right information. Conducting a search on a specific search engine actually requires an understanding of that search engine’s specifications, including the algorithms it operates and the limit of sources it covers. There can be a tendency for small teams to rely on one or two dominant search engines, potentially leading to serious omissions and a sub-standard research outcome.
Moreover, smaller teams can find it challenging to keep abreast of myriad local law and regulation changes across the globe.
Discover Thomson Reuters Enhanced Due Diligence. An EDD provider with a global presence, a wealth of experience and the local knowledge needed to produce consistent, quality research. Thomson Reuters only uses the best quality researchers and analysts to guarantee information quality. We have the capacity to research in more than 60 local languages and all our key staff are certified anti-money laundering and anti-fraud specialists.