At onboarding and throughout the vendor life cycle, the risk assessment is necessary for business. The business may face financial loss or fraud because of the vendor’s involvement in money laundering or other crimes. The illegal funding ways of vendors affect the business financing and reputation. To avoid such challenges, Know Your Vendor is the safe gateway for vendor onboarding. The inspection of the vendors is necessary to evaluate their legal status and financial performance. Once the vendor is verified through Know your vendor compliance, it ensures financial security for the future. In this two-minute read, let’s explore the potential of Know Your Vendor and how it is essential for onboarding.
Vendor Due Diligence
Vendor due diligence is the legal requirement to verify its identity and prevent financial risks. It involved collecting the information of the vendor and its screening for validation. Anti-money laundering AML checks are applied to the vendors to detect whether they comply with AML laws. These checks reveal the potential risks when the vendor is involved in money laundering, terrorist financing, and other crimes. Adverse media screening is also part of vendor due diligence, which helps evaluate a vendor’s reputation. The negative news screening is conducted to check the company’s name involvement in fraud cases or crimes. Know Your Vendor is not a one-time solution, but businesses require due diligence throughout the vendor life cycle.
The suspicious vendors have a record of breaching the regulations designed by local and international bodies. If the company does not comply with such regulations, the business partners may face legal consequences such as sanctions, hefty fines, and other penalties. If the company’s name is present in the Office of Foreign Assets Control (OFAC) list, it is dangerous to onboard that.
Know your vendor checklist:
The Know Your Vendor checklist is discussed below:
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Basic Company Information
Businesses must collect the company’s information to verify its legal status. It includes:
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- Proof of location or address
- Articles of incorporation (or similar corporate charter)
- Business License
- Biographical information of executives and board members
- Location (are they located in a tax haven or free trade zone?)
- References from credible sources
- Company structure overview
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Financial Information
Businesses must collect vendor financial information to assess their performance and identify potential risks. The checklist for financial information includes:
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- Tax documents
- Balance sheets
- Loans and other liabilities
- Major assets
- Compensation structure
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AML Checklist
Businesses must avoid fines and fraud by conducting anti-money laundering AML checks on companies. The main types of AML checks include:
- Sanction List: The government and international bodies maintain the sanction list of shady businesses. These lists have information about the sanctioned companies and the people behind them.
- Politically Exposed Person (PEP) List: The politically exposed person (PEP) list contains the names of the people with influential backgrounds exploiting the company’s assets.
- Adverse Media Checklist: This check includes collecting the negative news about business and the identities behind it. The news collected from reliable resources is screened against the public databases.
- Watchlist: The government and international bodies keep records of the terrorists, money launderers, and criminals on the watchlist.
Importance of Know Your Vendor
Onboarding the company with Know Your Vendor ensures healthy financial relations with the business. In this process, the company data is collected and screened against databases so the legal status is verified. Fake or invalid data raises red flags, so businesses become aware of it. The ownership structure of the company, its purpose or intended nature, and the products or services it provides are analysed. The scrutiny of all this information is mandatory to avoid financial crimes and risks.
Additionally, Know Your Vendor offers enhanced due diligence to identify risks in the future as well. It provides constant monitoring of the partner companies so that financial crimes will be detected. So, the business remains safe from legal consequences because of partner companies’ non-compliance with laws. Hence, transparent relationships are built, which results in growth in the market.
Final Thoughts
The only way to speed up the business onboarding with security in the finance sector is to rely on Know Your Vendor. This process streamlines the company identification process and pinpoints all the risks associated with it. The risk management facilitated by due diligence facilitates healthy financing of business-to-business bonds. Corporations should also understand that it is necessary to assess the company papers to identify their legitimacy. The company’s data scanning and the criminals, sanctioned people, and fraudsters are unveiled. Hence, long-term financial relations with confidence are built for any business.
