Third-Party Risk Management
Risks that threaten your business
Whether suppliers, software service providers, or consultants: as a company, you work with a multitude of other business partners. This collaboration creates risks. From delivery delays and payment defaults to insolvency – these and much more can threaten your business.
Added to this is the issue of financial crime in the form of money laundering and corruption. Plus: SanctionsThe ongoing Russia-Ukraine war has exacerbated this problem, which has been worsening since 2022.
However, without collaboration with other companies and individuals, it is no longer possible to be competitive in today's world. The question is: How can a company meet the challenges of growing and increasingly complex business relationships?
The answer lies in so-called Third-Party Risk Management.
Definition: Third Party Risk Management
The term "third-party" refers to all third parties. Business partner This refers to those with whom you collaborate. These include suppliers, service providers, consultants, salespeople, brokers, resellers, or agents.
A third-party relationship can exist with both natural and legal persons. It is based on a business agreement, such as a contract. It's important to know that subcontractors also fall under this category. In this case, they are referred to as "fourth parties."
Third-party risk management (TPRM) involves assessing the risk posed by collaborations to one's own company. This assessment is ongoing, as conditions and risks can change.
Potential risks – An overview
There are fundamentally different types of risks that can threaten your business. These include:
- Supply ChainDelivery delays or even supply failures hinder your business operations and can result in significant financial losses.
- Bribery and corruptionRising FCPA penalties and international standards necessitate strict anti-corruption measures. Third parties can be potential channels for bribes.
- Sanction violationsDynamic sanctions landscapes require detailed information about all transaction participants – otherwise, high fines may be imposed.
- Damage to reputationReputational damage can be just as harmful as regulatory measures, e.g., in the form of brand damage resulting from sanctions violations or corruption.
Components of Third-Party Risk Management
Let's move from theory to practice: How can third-party risks be assessed and effectively managed? We see several key components.
Master data & credit information
Especially at Establishing a new business relationship It is essential to gain a comprehensive understanding of the potential partner. This includes gathering basic information such as name, registered office, and authorization to represent the company.
Equally important is clarity regarding creditworthiness. After all, no one wants to do business with a company that is on the verge of bankruptcy or cannot pay outstanding invoices promptly.
Beneficial owners and intermediate companies
The investigation of beneficial owner This is part of TPRM. Who benefits from the company? You need to identify this person(s) in order to verify them in the next step.
This also requires examining the business partner's intermediary companies. Only by gaining a comprehensive overview of their activities and the companies involved can you adequately assess the risks.
Name Screening
Another core competency of Third Party Risk Management is the vetting of potential partners for any sanctions or similar issues. This is done through name screening, where individuals are checked against various name lists, blacklists, watchlists, and sanctions lists.
If a match is found, there is an increased risk in the business relationship. In some cases, such as a hit on a sanctions list, no business transactions may be conducted – existing relationships must be terminated.
PeP status
A special feature is the so-called PeP status. PeP stands for “Politically exposed person“Stricter due diligence requirements must also be applied here. People with political or political influence (PEPs) wield considerable power in public life and are therefore considered more susceptible to corruption.”
Adverse Media Screening
A particular focus is currently on the topic Adverse Media ScreeningBackground: In February of this year, the BaFin decided to hold companies more accountable for risk assessment.
According to BaFin, it is no longer sufficient to determine potential customer risk solely by examining sanctions or high-risk country lists. Information from media reports must now be more strongly incorporated into the assessment.
Adverse Media Screening incorporates current news and media reports into the risk assessment.
Third-Party Risk Management in Practice
Third-party risk management is not a one-off process – rather, it is a standard component of a solid compliance strategy.
The process begins with onboarding. Before signing a contract with the new partner, the entire range of TPRM options should be reviewed. This allows the risk to be assessed at the start of the business relationship.
However, risks can change. Just as the economic world is constantly changing, so too are the circumstances of your business partner.
Inventory management today requires smart technological support for continuous monitoring. Otherwise, there is a risk that relevant changes will be detected too late, making it impossible for your company to react, or at least not without significant effort or even losses.
Addressing the risks with artificial intelligence
The use of artificial intelligence in third-party risk management will become increasingly important in the future – if not a basic requirement for a competitive company.
Modern technologies enable the rapid scanning and analysis of millions of data points and messages. AI continuously monitors all data sources in various languages to generate precise alerts.
Potential corruption, sanctions violations and reputational risks can thus be uncovered in real time, while simultaneously relieving the burden on compliance personnel.
Choosing the right TPRM tool
When choosing a software solution for third-party risk management, several points should be included in the evaluation:
- ScopeTo keep costs down, you should opt for an all-in-one tool that covers not just one, but all aspects of TPRM. Modern KYC tools such as KYCnow offers a comprehensive solution that can be assembled modularly depending on company requirements.
- AutomationThe tool of choice should have a high degree of automation. Whether it's data acquisition, data evaluation, media and news analysis, or audit-proof archiving: the software should be able to handle 90% of the necessary tasks without your intervention.
- QualityThe data provided should be of high quality and ideally verified by a reputable source. Quality also applies to media screening. False positives should be kept to a minimum. Modern identity-matching technology makes this possible.
- OffererSince the EU GDPR came into effect, you should prioritize European, ideally German, providers when making your selection. These providers are committed to German data protection regulations and offer high security standards.
- UsabilityThe tool should be easy and intuitive to use, minimizing training and personnel costs. A modern web interface or API interfaces to the company's own system ensure that employees can quickly familiarize themselves with the solution.
Easily manage third-party risks
With the knowledge gained from this article, you are now equipped to meet the demands of collaborating with your business partners.
We'd be happy to help you manage your risks efficiently with a modern software solution. Simply schedule a free consultation and let's discuss your specific needs. We're here to help.
Sources
Credit: Photo by Amy Hirschi on Unsplash
Roczniewski