The dependency on third parties to enable easy functioning of business is immense. Companies engage the services of various third parties for multiple reasons – it could vary from getting a factory license, securing permission to even obtaining contracts. But the risks associated with such sub-contracting are not given enough importance.
Today, the cost of working with a dubious third party can result in significant losses – financial as well as reputational. It will also reflect poorly on the company who works with that third party, questioning their integrity and ethical quotient. Organisations have to bear the responsibility of the conduct of various stakeholders – employees, management and especially vendors.
Some common fraud scenarios involving vendors or agents include,
- Engaging in bribery and other corrupt practices to get contracts/ tenders
- Kickbacks to employees
Hence, regulators worldwide have intensified their focus on the key role that these third parties can play in cases of fraud, bribery and corruption. Under the Foreign Corrupt Practices Act (US) and the UK Bribery Act 2010, organizations are liable for the act of their third parties.
Multinational organizations are rapidly adjusting to enforcement standards according to which companies are responsible for the actions of their business partners and vendors. Hence, there is a dire need to conduct effective third-party due diligence on them.
Some tips to conduct preliminary checks on third parties are:
- Understand the qualifications and associations of the third party
- Analyse the business rationale for including a third party in any transaction
- Monitor all third-party relationships once they begin
- Perform periodic background investigations of new and existing vendors
- Be alert about companies that have very little information available in the public domain
Organisations need to consider creating a strong and defensible vetting program for all its vendors. Proper diligence and monitoring not only help reduce the risk of corruption but also can cut down on fraudulent transactions, embezzlement, conflicts of interest, related-party transactions and money laundering. The due diligence program should cover the background, track record and reputation of third parties and investigate the possibility of any undisclosed relationships that may lead to conflict of interest. Such programs can help to safeguard the company’s’ assets and reputation and avoid any financial and reputational losses.