Enhanced Due Diligence

Contents:

• Risks in different countries
• What else is at risk?
• Risk assessment is the foundation of success
• How do I get additional data?
• Analysis of the origin of money and beneficiaries
• Analysis of current transactions
• Collection of data from social networks and open sources of information
• On-site analysis
• Developing a risk assessment strategy
• What do you need to apply due diligence schemes properly?
• EDD as a Service

Our company offers you a comprehensive Enhanced Due Diligence (EDD) service. This check is necessary to minimize the risks when you enter into a deal for large amounts of money. Similar checks are almost always carried out before entering into a deal with any counterparty, but EDD has a peculiarity: it provides a more detailed and thorough check of risky counterparties. Therefore, the first thing is to determine whether a potential partner can be classified as a risky one. And the KYC mechanism (know your customer) is used for this. This technique was developed and implemented by the FATF (Financial Action Task Force on Money Laundering). FATF is an intergovernmental organization that develops global standards in the field of combating money laundering and the financing of terrorism (AML/CFT), it also evaluates the compliance of national AML/CFT systems with these standards.

So, here is the list of the factors that make it necessary to apply the EDD technique:

• Almost all clients of your potential partner are located abroad and are not residents of your jurisdiction.
• Your potential partner is involved in some political activities.
• The company has nominee shareholders.
• Cash payments prevail with your potential partner. That is, a smaller part of the funds passes through the banks. In such cases, AML/CFT schemes or similar local laws are applied. As for the Russian Federation, the Law on AML/CFT (115-FZ) is used here.

Risks in different countries:

• There are countries in the world that do not apply AML/CFT schemes at all. This is, for example, the DPRK, or the Islamic Republic of Iran. Accordingly, if your potential partner is registered there, this is a very high risk.
• There are some countries subject to sanctions, various embargoes, and other restrictions. This is also associated with a certain toffee of non-performance of contracts.
• We can also mention countries with a high level of corruption, and those blacklisted for financing terrorism, or terrorist organizations openly operate on the territory of these countries. All this is also a great risk.
• And finally, the last group of countries – those that are not members of the FATF (and they are not obliged to comply with its rules and requirements).

What else is at risk?

Offshore jurisdictions. As a rule, there is a very high level of confidentiality in such countries, all registers are closed and it is difficult to establish a real company owner. All this is actively used for money laundering, which means it poses an additional risk for potential counterparties.

Therefore, in order not to face unpleasant consequences when signing risky contracts with counterparties, listed above, and to insure yourself, the best solution is to order the Enhanced Due Diligence (EDD) service.

Once again, this is almost the same procedure as regular due diligence, but for counterparties and partners, which are potentially very risky.

So what exactly is EDD in detail? Let’s take a look at this.

Risk assessment is the foundation of success

This risk-based approach will provide a complete picture and holistic vision of your potential partners. It will allow you to take a more thoughtful approach to the deal and assess the potential risks, knowing exactly what you may face and when. This should be at the heart of the company’s commercial policy.

How do I get additional data?

So, one of the sources of additional information that you can (and should) use within the EDD procedure is the counterparty itself. That is, you receive information about it from its owners voluntarily. To do this, you can send them the appropriate questionnaire, which they must fill out.

You can include the following things there:

• Copies of registration documents from their register.
• Copies of the memorandum of association, license, other commercial agreements (depending on the type of registration and the nature of the business).
• Information about its customers and suppliers (if this does not violate the rights of third parties).
• Data from the bank about servicing the counterparty.
• Information about owners and directors.

Analysis of the origin of money and beneficiaries

At this stage, it is necessary to assess the financial condition of the company as far as possible, its history, and prospects. This requires:

• Get available data on completed projects to estimate their earnings.
• Obtain data on the ultimate beneficiaries at the place of registration.
• Get banking data of your beneficiary.
• Analyze the legitimacy of the net worth.
• Identify discrepancies in the data (if any).
• Analyze data on ownership of the real estate and other property.
• Analyze assets and liabilities. Here you have to appreciate debtors and creditors and debt repayment schedules, as well as the history of claims and data on any contingent financing; etc.

Analysis of current transactions

At this stage, collect as much of the available information about the details of the transactions carried out as possible. Pay attention to various details, for example, their duration, the parties involved, etc.

You also have to keep in mind that they (transactions) should be consistent with the stated purpose. And for this you need to carefully examine the following documents:

• Copies of agreements with partners, copies of distribution agreements, outsourcing services, examples of standard agreements with suppliers, purchase/sale agreements, and services.
• Examples of loans and credit agreements.
• Data on the quality of compliance with contracts (if there is a non-compliance with contracts).

All identified problems (if any) have to be analyzed carefully. If there are none of these, you can proceed to the next stage.

Collection of data from social networks and open sources of information

It is very important to estimate the reputation of your potential partner correctly. Therefore, everything will do: data from social networks, articles from the Internet, reviews on Google. But it is important to remember that these are not official figures and may be the result of a planned discrediting campaign. Therefore, if the review is negative and there are no details in it that could be checked and confirmed, you should not fully trust it. Just keep this in mind.

On-site analysis

Sometimes it happens that everything is fine in the documents, the data from their open sources does not cause any suspicion, but if you look at the company’s office with your own eyes, you will understand that something is wrong. Besides, the legal address must be up-to-date, and you can check that company really owns this property.

You can also access physical documents that are not available electronically. A personal visit will help you to get a more complete picture.

Developing a risk assessment strategy

As you can see, during a comprehensive EDD assessment, you have to evaluate quite a lot of documents, analyze the overall picture, compare the available information, identify possible inconsistencies, therefore, a comprehensive risk assessment strategy with counterparties is required here. This is the best approach. To have a comprehensive risk assessment strategy means:

• Understanding of all parameters for a comprehensive risk assessment.
• Understanding when to check counterparties.
• Understanding which techniques should be applied in each specific case.

What do you need to apply due diligence schemes properly?

1. The main thing is a well-thought-out integrated approach. You should have a clear scheme for different cases. It should clearly state what, when, and how to apply. Even if some of your specialists leave the company, this general scheme remains.
2. Don’t ignore the details. Your experts should evaluate all information and not ignore anything suspicious. Compromises are not allowed, because in these cases the potential losses can be huge, in no way comparable to the small profit that you get from this unreliable counterparty.
3. Coordination of data exchange. It is important to organize everything so that no data is lost anywhere, and would get to the assessment of the appropriate specialist. Nothing should go unnoticed. Data must be integrated to facilitate analysis and efficiently identify potential problems.
4. Use specialized programs. The KYC methodology is widely known and its basic principles have already been implemented in specialized software. This will greatly simplify, speed up and automate the due diligence process. Such software can be both cloud-based and local. Which one to choose is up to you. However, you should remember that this software can be quite complex, so you need an expert.
5. Experts at EDD. Without the professional approach of a good specialist, all of the above listed is not effective, so you need an EDD specialist, in-house, or outsourced, doesn’t matter.

EDD as a Service

If your business is small and you do not have a specialist on staff who is can carry out an effective EDD – that is not a problem! We offer you special services, including various types of due diligence and EDD in particular. All our people are perfectly familiar with this issue, they have extensive experience, a comprehensive understanding of the laws of the Russian Federation and proven schemes, you can simply use our ready-made solutions – it is very convenient.

Each case is special, so the first stage is an initial consultation, which will allow you to accurately assess the work and help you to complete your understanding of the process.

Call, or write to us using the contacts on our website in the “Contacts” section, you can also sign up for a consultation in our office in Moscow by calling us on the phone: +7 (495) 7-888-096.