Shady business partners pose serious risk

Shady business partners pose serious risk

A KPMG report into corporate intelligence background searches shows troublemaking directors are targeting financial, energy and technology businesses


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  • Report into corporate intelligence background searches has revealed troublemaking directors are targeting businesses in financial, energy and technology sectors
  • Key integrity risks are associated with owners and directors more than companies
  • Middle East, North Africa, Central and Eastern Europe and CIS are ‘red flag’ hot spots

KPMG’s corporate intelligence experts – who conduct background searches for their clients when they enter business relationships with companies or individuals - have launched a study into the risks companies face when they take on customers, suppliers and other third parties.

‘Astrus Insights’, which analysed nearly 8,000 integrity due diligence reports, found financial services to be the most exposed industry to fraud, corruption, insider trading, negligence and bankruptcy. 

Fraud risks high in all sectors and locations

Involvement in fraud was the most prevalent risk we uncovered, exceeding all others including money laundering, regulatory violations and business disputes.

But while a fraud risk associated with a third-party has many implications, using due diligence early on can help organisations avoid reputational and commercial damage.

It can also help organisations assess more accurately the transactions they are thinking of entering.

Early due diligence will help organisations fulfil their regulatory requirements and could highlight commercial risks, including potential fraud by a third party.

Individuals present greatest risks

Third party companies are only as trustworthy as the people who run them; our analysis showed that it is a company's directors, shareholders or ultimate beneficial owners who have the biggest impact on risk.

Negative information on individuals running or owning a company accounted for sixty-eight percent of red flagged reports in the financial services industry since 2009.

David Eastwood, Forensic Partner, said:

“Fraudsters pose, in equal measure, the most sinister and most clandestine of risks which banks must be alert to when entering into business arrangements. In many jurisdictions it can be a challenge to accurately identify shareholders and ultimate beneficial owners. This information is often not readily available on corporate filings and the use of proxy or nominee shareholders or bearer shares can confuse matters. However, regulators have made it clear that financial institutions should seek to unmask the individuals behind the organisations they deal with; ultimately it is people that pay or receive bribes, launder money or commit fraud, not legal entities.”

While businesses face commercial pressure to tap into growth areas, the benefits can be quickly outweighed by regulatory fines and sanctions if things go wrong. While many are doing their best to compete in the new world, too many are still overlooking the risks.

Case study

A transport industry firm was dealing with a UK-based logistics and lifting equipment manufacturer. Researching the manufacturer’s , structure and owners, press coverage, and litigation records revealed it had been accused of serious fraud and orchestrating a  multi-million pound shortfall in their previous business. Former business partners were now pursuing damages against the shareholders of the firm’s supplier and the shareholders were involved in several lawsuits the firm knew nothing about.

This case illustrates that firms can be exposed to fraud risks through third-party relationships in any situation. Identifying risks quickly through effective due diligence can help prevent companies from entering relationship that could pose serious commercial and financial risk.

This article represents the views of the author only, and does not necessarily represent the views or professional advice of KPMG in the UK.

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