Due Diligence, Definition, Principles Types, Examples

"Due diligence" is a term often used in business. It means thoroughly investigating and confirming information about a company or investment. For compliance teams, it's crucial when dealing with new vendors and third parties. However, understanding what it entails and how to integrate it into your procedures can be tricky.

What Is Due Diligence?

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Purpose of Due Diligence

Principles of Due Diligence

1. Recognize and Evaluate: Businesses must figure out if their actions could affect human rights and understand how big that impact might be.
2. Prevent and Reduce: After identifying risks, businesses should take honest steps to stop them from happening or lessen their effects.
3. Record: It's crucial for businesses to keep detailed records of how they're dealing with potential human rights risks proactively.

Types of Due Diligence

1. Vendor Research: Checking the risks associated with current or potential vendors.
2. Third-Party Research: Evaluating the risk level of potential partners, including their vendors.
3. Enhanced Research: Using a risk-based approach to evaluate specific clients or companies.
4. Technology Research: Examining your IT systems for potential risks, often done in mergers and acquisitions.
5. Cyber Research: Assessing, monitoring, and mitigating network risks, especially those from third-party vendors.
6. Supply Chain Research: Evaluating environmental and human rights risks throughout your supply chain.
7. Financial Research: Analyzing financial performance before merging or acquiring.
8. Regulatory Research: Ensuring compliance with relevant regulations by reviewing policies and procedures.
9. ESG Research: Understanding and managing environmental, social, and governance impacts.

How to Conduct Due Diligence?

1. Define goals: Figure out why you're getting into a new business relationship. Knowing how it benefits you helps shape the due diligence process and identify potential risks.
2. Assign roles: Since due diligence can be lengthy and complex, clarify who's responsible for what, both in your organization and the one you're assessing.
3. Review documents and processes: Check various documents, like financial records, IT systems, and compliance procedures, based on the organization and business deal.
4. Evaluate risk management: Understand how your potential partner handles risks. Those without a plan might be riskier to work with, so see how your approaches align.
5. Document findings: Share all your discoveries in a report, usually with the board or top management, to help them decide on the relationship.
6. Monitor and manage risk: Due diligence doesn't stop after the deal. Keep an eye on your partner's activities to ensure compliance and address any emerging risks.

Due Diligence Examples

1. A global marketing agency looking into new project management software would check its price, customer feedback, security measures, and if it works well with the agency's systems.
2. If a company is buying out a smaller competitor, they'd examine things like employee contracts, pay structures, any ongoing disputes, anti-bribery policies, and if they follow all the rules.
3. When a nonprofit wants to team up with a tech provider, they'd want to know about the provider's cybersecurity setup to make sure there are no risks or rule violations.