Due diligence risks are the fundamental factors that forms the basis of conducting a due diligence study. The process can be beneficial to a variety of stakeholders, including acquiring companies seeking to examine the potential target company prior to a merger or an acquisition; investors seeking a thorough assessment of risk before investing; and prospective employees assessing possible employment candidates.
Due diligence can involve various checks, dependent on the purpose and scope of the procedure. Typical checks include identity verification and screening against sanctions lists and criminal watchlists. They also include an investigation into the source of the funds. A risk-based approach is also needed to determine whether enhanced due diligence (EDD) or other measures, are needed. This is because customers who have an increased risk of laundering or terrorist financing require additional measures, such as more frequent monitoring of transactions and the collection of more data.
EDD can also include assessing the beneficial ownership of corporate clients to minimize risks associated with concealed ownership. The process can include examining the structure of the company, and identifying any connections with public officials which could result in corruption. EDD must include a periodic review and updating of the international sanctions lists in order to ensure compliance.
A successful due diligence procedure will provide a summary of most important findings for those who aren’t able to read the full report. The summary should be brief, and should include the type of due diligence that was conducted (e.g. thorough risk assessment prior to investing in an organization) as well as the rationale behind the due diligence; and any important results from the due diligence.
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