COVID-19 has put tremendous stress on supply chain of almost every business on the face of the planet. There are massive disruptions in working capital cycles and cash flows which are unlikely to normalize in the short-term. The outbreak of the virus has forced a sudden conversion from a physical to the virtual business environment, giving businesses very less time to adapt to, else feel the burnt of business disruption. Corporate compliance units are also being forced to adapt to the new reality and support internal business units in working with vendors and business partners who they may have never met in-person before. Corporate compliance and legal teams are under the spotlight when it comes to establishing counterparty credibility and are expected to be able to substantiate information and do its part in protecting the business from fraud schemes related to COVID-19 and pandemic-related financial crime.

The crisis has forced every business to innovate and come up with digital solutions and radically new SOPs to adjust to the new reality. Onboarding new vendors, suppliers and counterparties to realize these objectives in the current scenario where almost all businesses are stressed requires Corporate Compliance units to bring their A-game in leveraging digital to quickly validate and substantiate information so that the concerned business units can get rolling. The risk of fraud has been elevated overnight and onus of diligence on who you're doing business with now is upon the corporate.

Photo: iPleaders

COVID-19 has imposed significant challenges in conducting due diligence resulting from restrictions on international and domestic travel, stay-at-home orders, and general “social distancing” in response to the virus. However, the pandemic is even making due diligence more important as it's still unclear how long these restrictions will remain in place and if (or when) such restrictions may return after they have been lifted. Given this new reality, parties should consider one or more of several possible modifications to their Vendor and Customer Information programs, most importantly bake in steps to validate the data presented by new counter-parties. The outbreak of COVID-19 has caused potential buyers and sellers to think and analyze the fundamental aspects of the business relationship and the importance of online due diligence.  

The significance of online due diligence during the global pandemic.

The sudden switch from a physical to the virtual work environment is jarring. There are various new challenges such as the need to substantiate the documentation and data provided by counter-parties given the inability to conduct on-site visits, and meet in person. Augmenting existing Vendor and Customer Information Programs with Online Due Diligence is critical to protect businesses from financial, legal, regulatory and reputational counter-party risks. More than ever, now it's important to know who you are doing business with. It's essential to ensure that the vendor has a decent reputation, ongoing business, and clean compliance.

Although there are considerable challenges involved in conducting due diligence in the COVID-19 era, corporate compliance units can make more use of personnel, technology, and partners to fulfill their diligence requirements. Companies need to amend their policies and procedures to account for new information collection methods or the involvement of new service providers in diligence processes.

Risk Management, The Bull Run

Vendor relationships during COVID era

Indian regulators are probably some of the most transparent in the globe considering the amount of data they make available for businesses to protect themselves and stay compliant. Unfortunately, even experienced compliance professionals are sometimes unaware of the gamut of data resources or information utilities as they are called, which they can make use to enhance their compliance processes. The adoption of alternative data sources to enhance information collection and data validation on counter parties is need of the hour. A well experienced due diligence partner can help you exploit all the available information utilities and enhance your Vendor or Customer Due Diligence process.

That said, Vendor management during the COVID era ultimately boils down to communication. It is more crucial now that ever to proactively reach out to critical vendors and understand some of the following aspects.

  1. Understand Business Continuity Risk and prepare contingencies:
    Vendors handling critical business functions must be identified and addressed separately. Establish communication with Vendor's management team to understand their fiscal position and potential business continuity risks. If vendors driving critical components are at risk of insolvency, investigate prospects of bolt-on acquisition or acquire the concerned resources to ensure your business continuity. Fast track due diligence using DD automation platforms like SignalX to understand the counter-party position. Brainstorm possible contract restructuring and payment plans to improve vendor liquidity position and business continuity.  
  2. Understand Vendor's COVID policy on Work From Home and Data Security:
    Inquire about the Vendor's WFH policy and Data Security policies if the Vendor is required to deal with confidential information as part of your engagement. Request the vendor to update you on internal policy changes. Provide guidance to assist the vendor with operational best practices. Discover potential risk elements and require the vendor to address them. Cyber crime is suddenly on the rise. Talk to your vendors to understand their data security position.
  3. Review and strengthen contracts:
    Customers need to scrutinize contracts and agreements, given the uncertainty going around the pandemic. Target companies could invoke force majeure or any other change in the contract to delay and/or avoid performance (or non-performance liability) of their contractual obligations and/or terminate contracts, by showing the impossibility to perform obligations in such circumstances. As per the Office Memorandum on Force Majeure,  COVID-19 outbreak is covered under Force Majeure clause as ‘natural calamity’, and due procedure would be followed by any party seeking to invoke it. Therefore, companies should manage the related legal risk and carefully assess the target company's financial losses caused by COVID-19. Other than force majeure, target companies may also invoke other contractual clauses like price adjustment clauses, material adverse change (MAC) clauses, limitation or exclusion clauses, to limit or exclude liability for non-performance.  All these aspects need to be given special importance during due diligence.
  4. Enhance Vendor Due Diligence with Alternative Data for new vendors and partners:
    Pandemic or not, business must go on. You may also actively seeking to onboard new vendors to realize your COVID adjusted business objectives. It is now critical that you use all the information utilities made available by the regulators to validate vendor information. A strong DD partner will help you understand the financial, compliance, legal and reputational positions of the counter-party and validate the data they present. You can even go as deep as understanding the operational capabilities of the vendor by querying for the number of people on their payroll from the labor department. Leverage all available regulator data sources to accelerate vendor onboarding safely conduct business.

To know more about the Concept of Vendor due diligence, and the importance of vendor due diligence, you could visit the article titled,''Why is Vendor due diligence important?'' available on Signalx Blog and for further info. about Customer / Vendor Identification Program SOPs, and the current services provided by SignalX, visit the official website of SignalX.

Talk to us today to plug-in SignalX's data streams into your due diligence process.