Know your business partner


Know your business partner

Why is the business partners verification so important?

Risk Advisory 2023

Knowing your business partners, including suppliers of goods and services, is not only a legal requirement for corporations - it is fundamental for well-run business.

The right choice of suppliers is one of the key elements of the functioning of a company, but it is a much more complex process than it might seem. There are definitely more factors at play here than the classic combination: price - quality. Our choice will translate into a number of aspects of the organization, starting from financial results, timely performance of services, to legal and reputational consequences.

The main question is: how to choose a supplier that we could trust and establish cooperation with? There are several solutions, but the most effective method to minimize the degree of risk to the greatest extent will be careful verification of the contractor, i.e. the so-called ‘supplier due diligence’. It is a comprehensive process aimed at getting to know a potential supplier, while maintaining due diligence.

Supplier due diligence is based on the review, verification, implementation and monitoring of the potential partner's activities, it examines the current condition of the company in order to assess its strengths and weaknesses. This allows to determine what are the potential benefits and risks of the transaction even before starting the negotiation process.

Thanks to supplier due diligence we can avoid transactions with dishonest business partners and minimize the risk of losing money or goods. It can also protect us from tax liability for the obligations of the fraud, damage to the image caused by theirs activities or legal sanctions.

How should the business partner verification look like?

We present the list of the key actions that should be performed:

  • Review of the formal documents publicly available in free public registers, for example in Poland: CEIDG (Central Registration and Information on Business Activity), KRS (National Court Register), REGON, whitelists of VAT or VIES taxpayers, and, in the case of contractors from abroad in registers available in a given country. For a fee you can also obtain documents from the Tax Office, Insolvent Debtors Register, the Economic Information Bureau or international business intelligence entity;
  • Verification whether the third parties and management board members appear on a sanction list or hold politically exposed position;
  • Risk analysis on several levels: assessment of operational, regulatory, reputational, cyber security risk. One should take into consideration the potential contractor’s country of origin, the sector in which it operates and logistics.
  • After establishing the cooperation with the potential supplier, the plan for monitoring the level and current assessment of contractor’s risk should be implemented.

The above-mentioned steps can or even need to be adjusted depending on the needs of the organization. The above instruction can serve as a guideline.

Contractor’s verification as a company’s protection against threats

What can happen if the client verification process lacks due diligence? There are plenty of threats and no lack of dishonest companies and frauds pretending to be a reliable business partners, ready to take advantage of even the smallest negligence.

It is estimated that in the UK alone 675,000 businesses have been victims of invoice fraud at some point in their trading history. Dishonest suppliers are a real threat not only to small and medium-sized enterprises, but also to global corporations, which, despite having a number of security features, are still an attractive target for potential criminals. For example, in 2019, both one of the most popular websites and the company that manages a well-known web browser fell victim to invoice fraud, with the funds stolen totaling nearly $123 million.

Supply Chain Due Diligence Act

SCDDA (Supply Chain Due Diligence Act) was passed in Germany on 11 June 2021, which entered into force on 1 January 2023. The Act covers organizations from all sectors, which employ more than 3000 people. Starting from the beginning of 2024, organizations with more than 1000 employees, will also be covered by those provisions.

The main objective of the SCDDA is for organizations to comply with their due diligence obligations to ensure or improve compliance with human rights and environmental standards within their supply chains. Obligations resulting from the new regulations include: establishing a risk management system in order to identify, prevent and minimize human rights and environmental violations in the supply chains (Section 4 SCDDA), conduct risk analysis within the supply chain in terms of human rights violations and care for the environment (Section 5 SCDDA) and introducing appropriate preventive measures for organization’s own business activities as well as the activities of direct partners (Section 6 SCDDA). Such requirements will become common in most countries over time, so organizations will need to pay more attention to whom they choose as partners in their supply chains.

Choosing a supplier is a complex and difficult decision. It involves a number of potential risks that every organization would like to avoid. However, if we use due diligence during the prospective partner verification process, we should be able to make the right decision.

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