enhanced due diligence

Enhanced Due Diligence

What is enhanced due diligence?

Enhanced due diligence is a process used in the maritime industry to identify and reduce potential risks related to compliance, fraud, and money laundering. Enhanced due diligence involves conducting a thorough background check of a company’s operations, financial status, and reputation to ensure they are compliant with relevant laws and regulations. This process also includes identifying any red flags or warning signs that may indicate an issue.

What is the enhanced due diligence process?

The enhanced due diligence process normally starts with a know your customer (KYC) review. KYC is the process of verifying the identity of a customer, or a potential business partner. This includes:

  1. Gathering information on the company’s ownership structure – including knowing the ultimate beneficial owner (UBO), management, and business activities. This information is then used to evaluate the company’s risk profile and determine if any potential issues that need to be addressed.
  2. Background checks on the company’s management and key employees – this includes verifying their qualifications, experience, and professional background. This information is used to evaluate the company’s management team and ensure they have the necessary skills and experience to operate the business effectively.
  3. A review of the company’s financials – analyze the company’s financial statements and assess its liquidity, solvency, and overall financial health. Then evaluate whether the company can meet its financial obligations and detect if there are any potential financial risks.
  4. Conducting on-site inspections or audits of the company’s operations – assess the company’s compliance with relevant laws and regulations, as well as evaluate its business practices and procedures. This data is utilized to identify potential compliance issues and ensure that the company is operating safely and efficiently.

Why enhanced due diligence is important

In the maritime industry, enhanced due diligence is critical for managing compliance risk with international sanctions screenings and anti-money laundering laws. Maritime companies are required to comply with a range of laws and regulations, including:

By conducting enhanced due diligence, shipping companies can ensure that they are in compliance with these laws and regulations and are able to better protect themselves against potential financial losses.

Enhanced due diligence is also important for protection against fraud and other financial crimes. These are particularly common issues in the maritime industry due to the global nature of shipping cargo and the complex supply chains. By doing due diligence, maritime organizations can identify and mitigate potential fraud risks and take steps to protect themselves against financial losses.

How to execute an enhanced due diligence check

Enhanced due diligence is a complex process that requires knowing your customer, the ship, and the cargo. Staying on top of it will reduce the risk of sanctions and can prevent heavy financial penalties.

Key suggestions: 

  • Adopt a risk-based approach – investigate the client and look for any potential risk factors. This should also be part of the comprehensive AML compliance program and is proven to prevent penalties from the authorities. 
  • Get third-party verifications regarding the client collect documentation from a reliable third-party source that lists the nature of the client’s business, where they are located, and any patterns, such as transaction types, volume, amount, and frequency.
  • Uncover the UBO it is important to know who stands to profit from the transaction. The subsidiaries and shareholders of the client should be investigated for any financial inconsistencies and to help determine the identity of the UBO. 
  • Track ongoing transactions – review the client’s traction history and see if you can spot any red flags, such as if the amount paid was significantly more or less than the actual value of the goods. 
  • Perform adverse media checks run an in-depth search in the media for any coverage of the client. It can provide insights into the company’s reputation, the sanctions it faces, and information on any crimes that it may have committed. 

Enhanced due diligence checks should not be a one-off, when starting to work with a new client. A system should be in place that continuously works and monitors the client’s activities.  

How AI can streamline the enhanced due diligence process

A thorough, enhanced due diligence process can be a time-consuming project. However, there are AI tools that quickly scan data from thousands of sources and give you a reliable overview of the important factors. 

Some of the insights you can get are:

  • Know Your Vessel (KYC) – the KYC dashboard includes information on the ship’s ownership structure, the Automatic Identification System (AIS) data, where the ship has docked, and other corporations or individuals that are connected to the ship owner. 
  • Vessel vetting – completes the due diligence on the ship itself. AI provides a detailed report on the behavioral risks connected to the specific ship and highlights any dark activity, voyage irregularities, and more.  
  • Anti-money laundering (AML) – combine leading in-class data providers with real-time behavioral data to uncover any risk exposure. Monitor all transactions to help predict illegal operations. 
  • Identifying the UBO – the AI collects data on seven ownership levels, up to and including the UBO. Knowing who ultimately benefits financially from a transaction can help prevent sanctions, or being inadvertently used to funnel money to a terror organization.