Due diligence-In good faith and without negligence
What is ‘Due Diligence?’
Due diligence has become a buzz word in the recent times. Due diligence has been used since at least the mid-fifteenth century in the literal sense “Requisite Effort.” Centuries later, the phrase developed a series of meanings in different fields of our practical, personal, financial life. Loosely rephrased, “due diligence” means something like “necessary attention”. Strictly speaking, “due diligence” should be used to mean the attention and effort necessary to complete the task correctly. For instance, if you drive with your eyes closed, you are driving without due diligence. Of course, with the way language evolves, this usage has become rare.
Due diligence engages many more things than it simply literally means. It implies that it is a process or procedure of deep attention or close scrutiny or careful study or sincere effort on a particular issue or project or enterprise before taking final decision to get into the main course of action. It helps the people to take decision whether they will go for the things they are intending to. It is commonly believed that if diligence is paid duly there is a very tiny chance of missing necessary information or overlooking the loopholes. It is mainly done to avoid untoward future mishaps.
With the passage of time, the meaning and application of due diligence have spread over legal field, business field, branding, marketing and so on.
Generally, measure of prudence, responsibility, and diligence that is expected from, and ordinarily exercised by, a reasonable and prudent person under the circumstances.
Business, duty of firm’s directors and officers to act prudently in evaluating associated risks in all transactions.
Investing, duty of the investor to gather necessary information on actual or potential risks involved in an investment.
Negotiating, duty of each party to confirm each other’s expectations and understandings, and to independently verify the abilities of the other to fulfill the conditions and requirements of the agreement.
Legal, the care that a reasonable person takes to avoid harm to other persons or their property”; in this sense, it is synonymous with another legal term, ordinary care.
More recently, due diligence has extended its reach into business contexts, signifying the research a company performs before engaging in a financial transaction.
The Due Diligence Process in the Field of Banking
Since we are bankers due diligence for us is related to different banking activities to curb risks as much as possible.
Due diligence considering Walking Customer
Due diligence considering Human Resources (employees, staff).
Due diligence check list considering General Banking
A. Account Opening
C. Deposit Procurement
D. Cash Counter
E. Transaction Profile
F. KYC ( Know Your Client).
G. CTR, STR
Due diligence check list considering Investment
A. Process to go for an Investment
B. Close Monitoring.
Due Diligence check list considering Foreign Exchange.
C. Bill Purchase
D. Remittance ( Inward, Outward).
There lie numerous risks in the banking sector and if we fail to pay diligence duly disaster is a must. Effects failing to pay Due Diligence.
A. Money Laundering.
B. Emergence of default culture.
D. Untimely/late recovery or failing of recover
IN Good faith and without negligence
Effort made, information given, or transaction done, honestly and without a deliberate intention to defraud the other party. However, good-faith does not necessarily mean ‘without negligence.’ Also called bona fides, it is implied by law into commercial contracts.
Under Section 10 of the Negotiable Instruments Act, “payment in due course” means payment in accordance with the apparent tenor of the instrument in good faith and without negligence to any person in possession thereof under circumstances which do not afford a reasonable ground for believing that he is not entitled to receive payment of the amount therein mentioned. In order that such payment may operate as a discharge of a negotiable instrument, it must fulfil the following conditions.
1) That the payment should be in accordance with the apparent tenor of the instrument. The connotation of the expression ‘apparent tenors’ is “in accordance with what appears on the face of the instrument to be the intention of the parties. Consequently, it is imperative that the payment should be made at or after maturity. A payment before maturity is not a payment in accordance with the apparent tenor of the instrument; and as such it is not a payment in due course. Further, for the purpose of Section 10, such payment should be made in money only, because the instrument expressed to be payable in money. A different form of payment may however be adopted but only with the consent of the holder of the instrument.
2) That the person to whom payment is made should be in possession of the instrument. Therefore, payment must be made to the “holder” or a person authorised to receive payment on his behalf. Suppose, the instrument is payable to a particular person or order and is not endorsed by him. Payment to any person in actual possession of the instrument in such case, will not amount to payment in due course. However, in the event of the instrument being payable to bearer or endorsed in blank the payment to a person who possesses the instrument is, in the absence of suspicious circumstances, payment in due course. Any party to a bill, but not any stranger, may pay it; and on payment, such party acquires the rights of the holder against all parties prior to him. But a stranger may pay supra protest and for honour of some party to the bill or note.
3) That the payment should be made in good faith, without negligence, and under circumstances which do not afford a reasonable ground for believing that the person to whom it is made is not entitled to receive the amount. If suspicious circumstances are there, then person making the payment is to at once put on an enquiry. If he does not make the enquiry, and negligently makes payment, that payment would be out of due course and liable to pay again to the real holder for value.
Due Diligence High Level Process (Enhanced Due Diligence).
Understand Compliance Concerns
The global nature of business today subjects enterprises to a growing number regulations—and a greater need to mitigate risk exposure through partners and third parties—regardless of where they are located—in order to comply with these high standards.
Define Corporate Objectives for Due Diligence
Your due-diligence process needs to align with the strategic, financial, regulatory and reputational risks your organization may face. This is especially true for organizations doing business with third parties in countries that attract high levels of regulatory scrutiny.
Gather Key Information
For a corporate entity, organizations need to collect basic information including:
• Incorporation documents
• Details on key shareholders and beneficiaries
• Group structure, board members
• Political connections
• Official references
For an individual, organizations need to focus on gathering:
• Proof of identity
• Source of wealth and funds
• Potential political links
Screen Prospective Third Parties against Watchlists and PEPs
Once a basic level of vetting has taken place, prospective third parties—both companies and individuals—should be subjected to a watchlist screening process. By conducting watchlist and politically exposed persons (PEP) checks early in the process, companies can quickly determine if the potential third-party relationship poses a significant risk. Names of companies, individuals, NGOs and, if applicable, assets such as vessels should be checked against:
• Global sanctions lists
• Law enforcement lists of known criminal entities
• Regulator-published lists of debarred or disqualified companies and individuals
• PEP lists to identify government or official connections
Conduct a Risk Assessment
Once preliminary information collection and watchlist screening has taken place, perform a risk assessment.
Considerations should include:
• Country of origin risks such as those identified by Transparency International’s Corruption Perceptions Index rating
• Specific sector risks like a high level of government involvement that might increase corruption risk in the defense industry or dependence on local agents that might increase bribery risk in the construction industry
• Entity risks such as use of intermediaries in transactions, joint-venture partners and exposure to money laundering
• Essential internal factors related to financial risk including deficiencies in employee training, skills and knowledge, a bonus culture that rewards excessive risk taking, lack of clear policies and procedures related to hospitality and promotional expenditure and political or charitable contributions.
Validate the Information Collected
Following the risk assessment, your due-diligence process should include verification of the information that has been accrued. For low-risk third parties, this final screening involves corroborating details against public records, a credit check, specialized databases like CIFAS and filed reports and accounts. High-risk third parties require an enhanced due-diligence process of the entity itself, as well as known associates, subsidiaries and other related entities. Negative news checks also establish potential reputational risks from media archives, and checks against legal databases detect the litigation history of the prospective client or third party.
Audit the Due-Diligence Process
Throughout the due-diligence process, your organization needs to maintain a comprehensive record of relevant documents, assessments and decisions to ensure you can demonstrate ROI and prove that decisions to engage with partners or third parties were made in good faith.
Establish an On-Going Monitoring Plan
Once a third party has been vetted, you still need to actively monitor the relationship to ensure that you are aware of potential problems before they put your organization at risk.
Review Your Due-Diligence Process Regularly
Business needs change. Commit to recurrent reviews with stakeholders to ensure that your due-diligence process is always aligned with those needs over time.
Due diligence-In Good faith and without negligence
Contributor: Md. NurulAlam
Vice President & Manager
Social Islami Bank Limited
Moulvi Bazar Branch, Dhaka