Due Diligence When Renewing a Third Party Relationship
Happily married couples like to renew their wedding vows. It is a great celebration of love. When you meet the spouse of your dreams, it is a wonderful ceremony. I look forward to such an event with my wonderful wife, Rosetta.
Things may not be so smooth when it comes to a company renewing its relationship with a third party. Hopefully, it will be a smooth review and renewal process.
Companies need to include a renewal process in its due diligence program. Luckily, the company has a lot more information to evaluate the third party and the risks of corruption. There is a track record of performance and compliance.
The due diligence process has to be modified to reflect this track record. If the company had a long relationship with the third party (over ten years) without any blemishes, a due diligence review will be less onerous than the renewal of a third party after an initial three-year term.
As always, due diligence begins with the collection of information. The first source is always within the company. The sponsor of the third party should provide information about the relationship, how it has been operating and the identification of any problems. The sponsor should complete a questionnaire.
Similarly, the third party should be required to complete a questionnaire, which needs to be tailored to the individual circumstances. If there has been a long-standing relationship, the questionnaire should reflect this reality.
It is always important to confirm ownership of a third party and the absence of relationships with current and former foreign government officials. This inquiry is always required no matter what the relationship between the third party and the company.
The due diligence process should include a review and evaluation of internal controls. The internal auditors and controller should be consulted to ensure that third parties are complying with invoicing requirements and payment arrangements. If additional certifications or representations are needed, they should be requested from the third party.
The internal auditors need to provide any results of any audits of the third party books. If anything unusual has been identified, or if the third party resisted the audit, these issues need to be resolved before renewal of the contract with the third party.
If there is any fresh information about possible corruption allegations involving the third party or anyone associated with a third party, these need to be examined as well.
It is a good practice to interview the key owner of a third party representative before renewing your vows. Past performance is not an absolute guarantee of future performance, depending on the length of the relationship with the third party.
It never hurts to conduct an interview and only helps to ensure that going forward is based on a fair and objective view of the relationship and relevant risks.
Just to be clear, I am not advocating a due diligence renewal for happily married couples seeking to renew their vows. After all, when it comes to matters of love, the heart always can tell you the truth. That same principle does not apply when it comes to matters of business.