Important Due Diligence Checks
Bad partners, vendors, and suppliers can land you in messy litigations and cause painful financial and reputation losses. Bad counterparties cost you valuable time and money limiting your growth and diluting your focus. Vendor due diligence has become a requisite compliance activity today. Preparing a simple but effective diligence checklist is easy.
Here is an easy-to-execute 5-point vendor due diligence checklist that you MUST adhere to while onboarding a partner or vendor on whom you may invest significant time, money, or intellectual property. We’ve also included a sample vendor due diligence questionnaire that you can use with modifications.
All the below-mentioned checks can be executed on SignalX.ai in a matter of a few minutes, whereas they may take much longer when executed by a legal or financial analyst.
- Financial Health Checks:
Vendors or Partners with stressed liquidity carry the risk of becoming insolvent or bankrupt in the midst of an engagement. You must ask your vendors to declare their last three-year turnover as part of your onboarding process. This helps you gauge and address possible insolvency issues. You can validate the data given by the counterparty by extracting their balance sheets from the MCA (http://mca.gov.in) using the registered name of the business. For relationships where vendor solvency is a key risk, validating vendor financials with their data available on MCA is a must.
- Litigation Checks:
Highly litigious entities are always a red flag. You must request your counterparty to declare any ongoing litigations that could have a material impact on your engagement. You can validate this data by running your own query on the ecourts website of India (https://ecourts.gov.in/ecourts_home/), and separately on key tribunals. This is better done by a legal analyst, and easiest performed on SignalX. Courts and Tribunals are a lengthy list with noisy data. Automation enables us to cut through the clutter and identify relevant litigations in no time. There have been instances where firms admitted for insolvency proceedings have bid for vendor engagements. Litigation checks surface such critical risks. Firms with dubious litigations or criminal charges against their promoters have to be dealt with caution.
- Tax Compliance Checks:
GST (https://gst.gov.in) portal makes it possible for you to check how compliant the vendor is when it comes to filing his monthly GST returns. Vendors with poor filing history could impact your ability to claim tax credits on time. You can run a query on the GST portal using the Vendor’s GST number and check the filing table. You can also identify the registered business name using the GST number from the GST portal. Severe defaults in GST filings will inevitably land the vendor in trouble and can make him insolvent. This comes with the added headache for you of not being able to claim tax credits for the payments made to the vendor.
- Headcount Checks:
You may have to request the vendor to declare his current headcount to get an idea of his operational bandwidth. You can also validate the same using LinkedIn by looking at the number of employees on his Company page, or better, by running a query on the Labor Department’s website. For this, you will need the vendor’s Corporate Identification Number which you will get when you execute pt 1. Headcount check through the labor department (https://www.epfindia.gov.in) also gives you the surety that the counterparty has legit ongoing operations and is not a shell company.
- Reputation Checks:
A customer reference and a cursory check on any search engine help you identify reputational risks that may be of concern. It is also essential for the customer reference to be that of a non-related party. You can verify this by checking for related companies from the MCA or alternatively on SignalX.
It is also quite easy for you to run advanced checks like AML, Watchlists and Sanctions List screenings, or PEP (Politically Exposed Person) screening. These are particularly important if you want to protect yourself from possible bribery or corruption risks or sanction violations. You have options to choose from various vendors who allow you to run these screenings.
Also, here is a FREE vendor due diligence checklist / vendor due diligence questionaire in PDF format that you can use right off the bat. Feel free to customize the same for your needs.
Click to Download Sample Vendor Due Diligence Questionnaire
If you’re looking for guidance in setting up your vendor or partner validation/verification program, you can book a free consultation with us by clicking the ‘Schedule a Demo’ button on the top of this page. We will help you set up the right checks and measures for you to safely conduct your business.