Mitigating Third-Party Risks
The entire world is globalized and the new era presents a series of challenges in every domain, including doing business with overseas companies. It has become the need of the hour to implement an approach, which is streamlined, efficient in all the resources and sustainable as well. Through this approach, the third party risks can be mitigated, compliance can be supervised, and issues as well as investigations can be managed more efficiently.
Expansion of business always brings revenues but it also opens up a window to new risks through third-party relationships that may be with a distributor, supplier, lawyer or even a client. Some common types of risks which they bring are related to IT security, environmental, quality, regulatory compliance, corruption, health and safety. Most of the general risks can be assessed and dealt with by the business / company itself. However, with third-party deals there is always extra scope of risks that can only be minimized through due diligence.
If the risks are not identified and mitigated at early stage, they can convert into an avalanche and sabotage the company’s reputation as well as profitability. Adding salt to the wound, in case the fault is of third-party, the original company who made a deal with it, will be held responsible. Hence, one side of coin has progress & growth of their business, the other side has a lot of risks associated with it.
“Due Diligence” it the pathway not only to mitigate third-party risks but also to inspect compliance, carry out assessments related to due diligence, finding of gaps that might convert into risk / compliance violation and proactively remediate the found issues. And this is where the role of due diligence firms arises which provides commercial due diligence services globally. If you are planning to buy any firm then you may need their help to save your time and money.
Key Instances of Third-Party Violation
- In 2009, there was a case in Dallas where a healthcare provider caught its contract security guard for hacking into various computers, which comprised the systems on which the confidential data of the patients was stored
- In 2011, a UK based international insurance intermediary was fined by FSA as it failed its anti-bribery and corruption systems controls.
- In 2012, a third-party contractor was found in violation of most of the rules regarding labor and working conditions in its factories that brought unwanted negative publicity to the top technology manufacturing companies.
Mitigating Third-Party Risks with Due Diligence
There are a series of fragmented approaches being followed by companies based globally in order to develop effective systems that will manage the compliance of third-party risks. Still the companies tend to fall short of a fool-proof system for mitigating the third-party risks. Some companies find themselves between a rock and a hard place concerning the constant changes. Whereas there are few companies, who focus only on managing the third-party. Hence, the companies fail on the ethical aspects such as bribery, regulatory violations, security breaches, money laundering and others.
In such situation, a comprehensive framework is required that will assist in 100% third-party due diligence. Important factors in this regard are:
- Risk Assessments
- Timely Issue Remediation
- Training Programs
If such a strong and comprehensive framework is made and implemented, then not only the the third-party risks will be mitigated, but the companies will be able to forge more credibility in the international arena.
Challenges Related to Third-Party Business Deals
1) The third-party network can be quite complicated. Since they cannot be managed directly like permanent employees of a company, an indirect approach is followed for the management purposes. This makes it very difficult for the main businesses.
2) Redundancies can be seen in case a specific third-party is managed by more than one departments of a business. Duplicate and double efforts are common in this case.
3) High cost are always present that cause the businesses to ignore the due diligence after the deal is made.
4) Regulatory compliance
5) Restricted transparency and huge volume of data to be processed
Highlights of Mitigating Third-Party Risks by Strengthening Due Diligence
The companies or businesses should make a blueprint of schemes or procedures that they need to implement so that risks are reduced to minimum.
1) Take enough time: Businesses should take enough time to conduct background checks on each and every third-party. They should NEVER be casual within even one parameter, as it can lead to unforeseen risks and credibility issues.
2) Conduct comprehensive risk assessment: Companies should consider the country, regions, international laws & regulations, labor issues & guidelines and other related factors will assessing the risks associated with an international third-party deal.
3) Create your own policies and code of conduct rules and make sure to communicate these completely to the third parties. This keeps both the parties on same level and improves the understanding amidst them.
4) Due diligent should be performed without fail for Mitigating Third-Party Risks, especially in the cross border deal.
Authors of this post are Bill Trueman is an eminent payment, due diligence, risk & fraud expert who provide his consultancy services to card issuers, banks, corporates and business organizations all over the world. He is chief executives of RiskSkill, and member of AIRFA.