Due Diligence - An Approach to Mitigating Risk In Relationships With Third Parties

Abstract

The due diligence process, adopted previously to the relationship with third parties, is an inherent activity to integrity programmes. However, its effectiveness can be questionable, especially to mitigate the risk in third parties relationships and in the potential to cause financial and reputational damage to an organisation. Therefore, this article aims to propose an integrity risk classification with third parties, in order to allow companies to adopt adequate monitoring actions for those most exposed to possible irregularities during this relationship. Firstly, a literature review will be presented, associated with the regulatory framework, in order to show that the adoption of due diligence has become a common practice in compliance programmes, not associated with the results. In the second section, the research proposes to explore third- party integrity assessments which, for the most of it, can be due diligence questionnaires application and performing public data mining (background checks) to classify the integrity risk. In the end, based on a case study, the third section will present a quantitative approach to risk classification, according to the exposure level integrity risk to the company, the capacity monitoring and does not represent an excessive monitoring cost. The article will adopt the deductive method, in order to suggest new hypotheses. It is expected, with the methodology adopted and the results obtained, to contribute to scientific research, the compliance environment, corporate governance and risk management, as corporate mechanisms for the prevention and detection of fraud with third parties.