Due diligence risks are the fundamental concerns behind the risk assessment that goes into the process of conducting a business due diligence study. A wide range of stakeholders can benefit from this process, including firms looking to assess their target firm prior to an acquisition or merger; investors looking for an exhaustive risk assessment prior to investing; and employees assessing potential employment candidates.
Due diligence can involve a number of different tests based on the intended use and the scope. Checks can include identity verification, screening of sanctions lists, criminal watchlists and an investigation into the funds sources. Additionally an approach based on risk must be used to determine if enhanced due diligence (EDD) measures must be applied. This is because clients who are at greater risk of laundering or terrorist financing require additional measures, such as increased monitoring of transaction patterns and the collection of more information.
EDD can include assessing beneficial ownership of corporate clients in order to limit the risk of hidden ownership. The process can include examining the structure of the company and identifying any connections with public officials which could lead to bribery. EDD should also include a regular review and update of the list of sanctions in order to ensure compliance.
A thorough due diligence process should provide a clear summary of key findings to those who do not have the time to read an entire report. The summary should be brief and include the type of due diligence conducted (e.g. an exhaustive risk analysis prior to investing in a company), the reason for the diligence, and any important results.
