When a company intends to buy, work with, or develop a commercial alliance with another company, it conducts vendor due diligence (VDD). Vendor due diligence, like customer due diligence (CDD), is an important component of AML/CFT since it guarantees potential buyers that their prospects are financially secure and represent no risk of money laundering.

Firms must understand what information is required to demonstrate financial health and how that information should be gathered to complete the vendor due diligence process correctly.

What is VDD?

A target company does vendor due diligence before purchasing or collaborating. Customer due diligence assists financial institutions in determining whether their customers are telling the truth about their identities and the level of money laundering risk they pose, whereas vendor due diligence assists companies in verifying the nature of their business and their risk of being involved in financial crime.

VDD includes the following stages:

• As part of the due diligence process, the vendor (target firm) hires an outside party to conduct an audit. A third party who is impartial, objective, and qualified should conduct the audit.
• The third-party audit the vendor before the start of the sale or partnership arrangement.
• The third party develops a drafted vendor due diligence report on behalf of the target firm, which is distributed to all possible purchases or partners.
• Once the sale or partnership agreement is concluded, the buyer receives the final version of the vendor due diligence report.

What is the objective of VDD?

Vendor due diligence primarily helps the successful sale (or partnership) of businesses and their assets, but it can also assist vendors in better understanding the risks that their businesses face. The following are the specific goals of vendor due diligence:

• Providing buyers and partners with clarity about the target company’s financial health and cash flow.
• Facts, figures, and other data to back up the sales memorandum.
• Assisting vendors in making suitable price decisions for their company and its assets.
• Disruption reduction throughout the sales process.
• Identifying major risk issues and other liabilities.
• Helping all concerned parties execute the sales process or partnership arrangement with speed and efficiency.

Process of VDD

1. Learn everything you can about the company: Begin by gathering basic company information to ensure the validity of the organization and that all compliance needs and standards are met.
2. Investigate financial records: Before engaging with a vendor, it’s critical to review the organization’s financial information to ensure it’s financially sound and current on any obligatory licensing fees or taxes.
3. Be on the lookout for operating hazards: If a vendor in your supply chain experiences a data breach, your organization will be held accountable for any sensitive customer data exposed as a result.
4. Assess the legal risk: Some organizations will have access to sensitive information about your company, clients, and employees. As a result, assessing a company’s legal culpability is an important part of due diligence.
5. Evaluate the risk of cyber-attacks: It is vital to manage cybersecurity risk across partners, suppliers, and vendors so that vulnerabilities may be identified and remedied before a breach occurs.
6. Priority should be given to risk profiles: Certain third-party providers will have greater access to your company’s network than others, necessitating more frequent monitoring.
7. Keep a close watch on vendor risk: An effective third-party risk management program should monitor new hazards and ensure the vendor has a secure network.