Do you really know who you're dealing with?

Mia Campbell and David Stevens, of the Fraud Advisory Panel, explain why organisations should know who they are dealing with to avoid falling victim to fraud.

Whenever an organisation interacts with another party there is hand shakealways a risk of fraud and financial crime. This is why it is so important for organisations of all sizes and sectors to do their homework on business partners, customers and suppliers, to protect themselves and their assets.

What is due diligence?

The term ‘due diligence’ refers to the practical steps you can take to get to know the people and organisations that you work with (or intend to work with), so that any associated risks can be properly identified and managed.

At a minimum, you should aim to answer two basic questions: who are they, and are they trustworthy? 

Why conduct due diligence?

Many sectors, particularly those captured by anti-money laundering legislation (including financial institutions, accountants and lawyers) are legally required to perform client due diligence as part of their on-boarding process. Other organisations should also consider this as good practice.

Under the Bribery Act 2010, commercial organisations are also expected to perform due diligence on anyone who performs services on their behalf as part of their adequate procedures to prevent bribery and corruption. (For more information, read the Fraud Advisory Panel’s help sheet on adequate procedures and the Ministry of Justice guidance.)

Who and when

Due diligence is really just good business practice. It’s especially important when:

  • establishing new relationships with business partners, suppliers or customers
  • working in high-risk business areas, sectors or countries
  • undertaking high-volume and/or high-value financial transactions

Because it isn’t always practical or possible to perform due diligence on every third party you do business with, a risk-based approach can be adopted. 

Ideally, checks should be performed on all new business partners and whenever changes are requested in high-risk areas, such as finance. For example, always independently verify requests to change supplier bank account details or customer address details – fraudsters are known to impersonate both to divert payments and goods.

Due diligence can also reduce the likelihood of falling victim to other common business frauds, such as when a customer of apparent good character purchases goods from you for a while, builds up a good reputation and credit history, and then suddenly stops making payments and 'disappears'. Sometimes these frauds occur over a much shorter timeframe (especially online), with no real attempt to build up a good credit history, except for maybe filing accounts at Companies House.

Before performing due diligence, create a policy setting out:

  • what enquiries will be made
  • how the information will be gathered, stored and for how long
  • what will happen if any negative information is found
  • your review processes
  • any statutory, regulatory or contractual obligations that need to be complied with

What basic checks can be performed?

When dealing with UK-based parties, there are some basic checks that you can perform:

  • A simple online search will often produce results and can be a useful way to see what other people are saying. Try to go beyond the first page and use different search terms and different search engines.
  • Credit reference agencies can provide reports which include details of county court judgements, bankruptcies and insolvencies, and trade payment performance.
  • Companies House holds information on UK limited companies including directors, beneficial owners, date of incorporation, filing history and company address, as well as a register of disqualified directors. But be aware, Companies House is only a public registry and performs no checks on the information submitted to them, so be alert to the risk of fraudulent filings.  
  • The Insolvency Service also holds information about individual insolvencies and people with bankruptcy or debt relief restrictions.
  • Alternatively, insolvency notices and Companies House information can also be accessed for free in the Companies area of The Gazette.
  • Request trade references where appropriate, and follow them up.
  • Finally, be particularly diligent when it comes to businesses that have only web-based email addresses and mobile phone numbers, and which operate out of a multi-occupancy business estate or office.

For more information, read the Fraud Advisory Panel’s help sheet on due diligence on UK-based third parties.

About the author

The Fraud Advisory Panel is the UK’s leading anti-fraud charity. It publishes free help sheets on a range of topics designed to help businesses protect themselves from fraud, including how to create an anti-fraud policy.