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Many factors have come together recently – notwithstanding the new Money Laundering Regulations (MLR 2017), which increases the pressure on both FCA regulated and non-regulated companies to better find out with whom they are doing business.

Regulated firms – including financial, law, accountants, dealers of high value services such as art, casinos, estate agents and even car dealers are subject to anti-money laundering regulations – recently beefed up by the MLR 2017, which came into force 26th June.

So if there is focus on the regulated sectors, why do other companies need to be concerned?

The first reason is that all of these service providers need banks. Given increased banking surveillance procedures, they too are rightly risk averse around the integrity of their own customers or their dealings. Those concerns may surround higher risk export markets. For banks, they need to be concerned about customers who are setting up sales agents, supply chains or any other commercial deals, including acquisitions and disposals.

The requirements for simple and enhanced due diligence for regulated firms are set out in the new MLR 2017 regulations, but for all firms regulated or otherwise, the requirement for due diligence is further underpinned by the Guidance to the Bribery Act 2010.

Complying with the Guidance to the Bribery Act 2010

Complying with the Guidance to the Bribery Act is not just froth on the top of the coffee. The Guidance outlines six principles, including the requirement to evidence ‘adequate procedures’ of a commercial organisation to prevent bribery by a person acting on its behalf (an ‘associated person’). Evidence of adequate procedures is the primary legal defence a company has if prosecuted under Section 7 of the Bribery Act – by which time it is too late!

Most organisations conduct a level of due diligence on potential employees (are they suitable?), on customers (can they pay?), those representing them such as agents and distributors (are they ethical or do they have any unsavoury connections or business practices?) and of supply chains.

Due diligence around suppliers is essential given the UK Modern Slavery Act and the implications of enforced and child labour. MLR 2017 further sets out clear rules in respect of determining the Ultimate Beneficial Owner (UBO) of a third party and to root out connections to Politically Exposed Persons (PEP). These levels of due diligence require expertise and access to global databases – not just a perfunctory Google search before putting it in the bottom drawer of the filing cabinet forever!

Integrity due diligence in M&A

While in company M&A activity there will be intense legal and accountancy/tax due diligence, the integrity element is often treated more lightly and sometimes overlooked. This may cost organisations dearly further down the track when the acquiring company is forced to address and take responsibility for the past misdemeanours of its newly acquired asset.

Benefits of compliance to your organisation

So why is all of this so important? It’s not just about adhering to regulation (compliance) and staying on the right side of the law. As important are the commercial benefits of due diligence – creating a confident and trusting relationship with your bankers, export insurers and shareholders. All this is a given in a well-run organisation but not for all! The most valuable output of integrity due diligence is really knowing with whom you are doing business and taking on board their:

  • Level of business ethics and processes, their people, organisation and housekeeping,
  • Ability to support your business activities/mesh with your company’s values and objectives
  • Capability to add value by providing a return on your investment
  • Transparency – No surprises! – be that criminal, undisclosed litigation, adverse media/reputation, enforced labour, unpalatable extremist or ownership links.

To discuss the right way to create ethical partnerships, do contact us for a chat.