Due diligence risk factors are the underlying issues behind the risk assessment that goes into the process of conducting a due diligence exam. The process is beneficial to a range of stakeholders, including acquisition companies looking to evaluate their potential partner prior to merger or acquisition; investors seeking an accurate analysis of risk prior to investing; and potential employees who want to evaluate potential candidates for employment.
Due diligence could include different types of checks dependent on the purpose and scope of the process. The checks include identity verification, screening of sanctions lists and criminal watchlists as well as an investigation into funds sources. A risk-based approach is necessary to determine if increased due diligence (EDD) or other measures, are needed. This is because customers who pose the highest risk of money laundering or terrorist financing require additional measures, like increased monitoring of transaction patterns and the collection of more data.
EDD can involve analyzing beneficial ownership of corporate clients to minimize the risks associated with hidden ownership. The process could include examining the structure of the company, and identifying connections with public officials which could lead to corruption. In addition, it is crucial that EDD includes a regular review of international sanctions lists to ensure compliance with the regulations.
A well-run due diligence process will provide a summary of the important findings to people who don’t have time to read the full report. The summary should be brief and include the kind of business due diligence performed (e.g. the complete risk assessment prior to an investment in the company) as well as the rationale behind the due diligence; and any important results from the due diligence.