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Avoiding ownership blind spots

Proactive due diligence in a time of geopolitical uncertainty

In recent years political events in Russia and Myanmar have seen a broad scope of international sanctions introduced against their regimes almost overnight and without prior warning. The speed of these decisions serves as a helpful reminder of the importance of using proactive due diligence to protect against sudden shifts in the sanctions landscape, rather than focusing only on current and immediate risks. We live in a time of increased geopolitical instability, and as sanctions lists become ever more voluminous and complex, third party risk management systems need to be robust enough to navigate this instability in a timely and responsive way.

In this article we highlight the importance of proactively identifying the ownership and control of your third party companies, as well as understanding their geographical affiliations and – for higher risk jurisdictions especially – identifying government or military links.

Problems faced by seeking ownership information retrospectively

 

Sanctions can be introduced rapidly and may have very broad implications, impacting entire jurisdictions or sectors rather than just specific individuals and entities. Companies without robust due diligence processes may struggle to assess their exposure to new sanctions, resulting in either operational disruption as they stall transactions until the risk has been resolved, or reputational damage and legal repercussions if they proceed without checks and sanctions are breached. There are three key problems faced by many companies in this situation:

1. The sheer volume of relationships – companies operating internationally typically have vast networks of third-party relationships, and if data on their ownership and control is not already held it will be a daunting task to retrospectively gather it, not least as ownership trails cross borders and so even  third parties in low risk jurisdictions could still be owned by a sanctioned individual;

2. Reduced data accessibility – sanctioned countries typically seek to protect their people and economy by removing access to local records, making data remediation a far harder task once sanctions are introduced. This might include closing online access to the corporate registry and stock exchange filings, as well as blocking foreign access to news websites and social media. Dedicated subscription media databases which operate locally may also become inaccessible to foreign companies, if the sanctions prevent payments being made to the database provider.

While corporate intelligence firms could also seek to resolve this question through the gathering of human intelligence (non-public data), this is significantly more time consuming and expensive. In addition, sanctions controls may also prevent firms from operating in the local market, which impacts the effectiveness of these enquiries.

3. Other complexity resulting from efforts to hide ownership – when sanctions are introduced, sanctioned businesses often seek to amend their official structure to mitigate the risk, while in reality nothing has actually changed. For example, various Russian businessmen appear to be using proxy representatives (including unsanctioned family members) to hold assets on their behalf, while publicly announcing that their stake has been sold. Gathering ownership information after this change would provide false reassurance. 

While many off-the-shelf compliance databases promise a one-stop-shop of relevant risk data on your third parties, in reality these may not be sufficient to identify more complex ownership risks. Due diligence consequently requires a thorough and systematic approach, and online tools alone cannot fully mitigate the risks. For example, in our experience the Myanmar military’s corporate holdings are extensive, but their involvement in any particular business is often far from evident without a fuller analysis of its wider partnerships and associations

Strengthening business continuity: the value of proactive due diligence

 

This is where proactive due diligence comes into play. By conducting thorough background checks on suppliers and distributors at the outset of the relationship, businesses can meet their current compliance obligations and also protect against future changes in those obligations. Rather than revisiting tens of thousands of existing relationships to reclassify their risk, if you already possess crucial information about third party relationships you can act swiftly and decisively in the event of new sanctions, ensuring adherence to legal requirements and mitigating risks. This proactive approach minimises disruptions to operations and supply chains, while in the worst case scenario still permits ample time to find alternative partners where necessary to be compliant.

Information can also quickly go out of date, and detailed records on UBOs are not useful if the data was last updated three years ago. For ongoing relationships, proactive due diligence should therefore include regular checks to ensure the records on file are up to date. Rather than full due diligence, this might take the form of high level sanctions screening and monitoring checks – and basic UBO searches – undertaken at regular intervals which reflect the risk profile of the third party.

Deloitte’s approach to Integrity Due Diligence

 

Deloitte’s Corporate Intelligence team supports numerous clients in understanding their third party populations, undertaking thousands of Integrity Due Diligence projects each year on subjects located across the globe. For over fifteen years now, a core part of our standard third party compliance methodology has been to identify key UBOs, their nationality, their sectoral affiliations, and any political or military connections. This data provides a valuable resource in the event of new sanctions announcements, against any jurisdiction globally. We can work with you to design the due diligence process that works best for your business, ensuring it addresses key risks relevant to your sector and regions of operation.

Deloitte’s Extended Enterprise team also includes specialists who can undertake risk exposure assessments, provide guidance on building new due diligence programmes, review company policies and processes, and provide staff to support internal processes, as well as training.

For clients who are facing vast data sets without the data required to make a news sanctions assessments effectively, Deloitte also offers high level screening services and can undertake UBO checks and  quickly screen the names of many thousands of entities and their related shareholders, UBOs and officers against key sanctions and PEP lists.

For more information, please contact Jorge Rivera (jorrivera@deloitte.co.uk) or Rick Dickerson (rdickerson@deloitte.co.uk) in our Corporate Intelligence Services team.

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