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A regulator rarely asks whether you meant to do the right thing. They ask what you did, when you did it, why you judged the risk acceptable, and what evidence you retained. That is why third-party risk has a habit of surfacing at the worst possible moment – during an audit, after a suspicious transaction, or when a key partner fails.
For compliance-dependent organisations, the third party due diligence process is not a procurement formality. It is a decision framework that protects your licence, your reputation, and your ability to onboard and service customers without constant remediation work. Done well, it creates consistency across onboarding teams, provides defensible rationale for higher-risk relationships, and makes monitoring manageable.
What the third party due diligence process is really for
Third-party due diligence sits at the intersection of AML, operational resilience, and governance. You are assessing whether another party – a vendor, agent, introducer, payment partner, corporate service provider, or outsourced function – could expose you to financial crime risk, regulatory breach, data and confidentiality issues, or service disruption.
In regulated environments, the “third party” label is broad. It includes entities that touch customer funds, influence customer onboarding decisions, provide critical systems, or act on your behalf. The process is therefore less about collecting documents and more about answering two questions: what is the risk created by this relationship, and what controls will you rely on to manage it?
Start with scoping that reflects how you operate
Due diligence fails most often at the start, when scope is defined too narrowly. If the engagement is framed as “vendor checks”, teams miss the real exposure: reliance on outsourced screening, delegated CDD, lead generation via introducers, or operational dependencies that affect transaction monitoring.
A useful starting point is to describe the relationship in operational terms. What will the third party do, what data will they access, will they influence customer decisions, will they handle or route payments, and are they critical to continuity of service? This operational picture helps you determine which regulations and internal policies apply, and it prevents a compliance team from assessing a relationship that procurement has defined in overly simple terms.
Scoping should also clarify whether you are assessing a single counterparty or an arrangement with sub-contracting. If the third party can delegate work further, your assessment needs to consider the chain, not just the first link.
Apply a risk-based approach before you ask for evidence
A risk-based approach is not a buzzword. It is how you avoid spending three weeks on low-risk suppliers while leaving high-risk relationships under-analysed.
Risk rating should be determined early, using factors that actually predict exposure. These typically include jurisdictional risk, product and service risk (especially where payments or onboarding are involved), delivery channel risk, the third party’s role (including whether they act on your behalf), customer impact, and the materiality of the outsourced activity.
It also depends on your own profile. A fintech with rapid onboarding and high volumes may treat reliance on an external identity verification provider as critical. A corporate service provider may focus more on introducers, beneficial ownership complexity, and source of wealth controls. A gaming operator may prioritise payment flows and customer affordability or source of funds triggers.
Where the relationship is higher risk, enhanced due diligence should be expected, and senior ownership of the decision should be explicit. Where it is lower risk, you still need evidence, but it can be proportionate.
Build the due diligence pack around decisions, not paperwork
The strongest third party due diligence process gathers information that directly supports a go/no-go decision and informs ongoing controls. The weakest process collects generic certificates without testing whether they mean anything.
You typically need to establish who the third party is, whether they are fit and proper for the role they will play, and whether their controls can be relied upon. That means validating corporate identity and beneficial ownership where relevant, understanding governance and competence, and assessing regulatory status if they operate in a regulated sector.
For AML-relevant relationships, you also need to understand their own programme maturity. A policy document is not enough. You want to see how they conduct CDD, how they manage higher-risk customers, how they screen and monitor, and how they escalate and report suspicious activity. If you will rely on their work, you need clarity on what “reliance” means in practice, what evidence you will receive, and what the fallback is when their process does not meet your standards.
Information security and data protection controls matter as well, but they must be connected to your actual data flows. It is not useful to file away a generic statement if you have not mapped what data will be transferred, where it will be stored, and what access controls apply.
Test control effectiveness where the risk justifies it
A defensible approach often requires moving beyond document review. This is where due diligence becomes an assurance exercise.
If the third party performs a control you depend on – for example, sanctions screening, identity verification, transaction monitoring alerts, or fraud checks – you should consider testing. That might include sampling outcomes, reviewing exception handling, checking how quickly lists are updated, or verifying that escalation paths are real rather than aspirational.
The trade-off is time and commercial pressure. Business teams often want speed, especially when a partner is “strategic”. Your process needs a mechanism to manage that pressure without weakening governance. A practical approach is to permit conditional onboarding for certain relationships, but only where risks are clearly bounded, compensating controls are in place, and a deadline for completing enhanced steps is enforced.
Contracting: turn findings into enforceable obligations
Due diligence that ends in a PDF is not risk management. The outputs must shape the contract and operating model.
Where AML and regulatory obligations apply, you may need clauses covering audit rights, access to evidence, information-sharing expectations, incident notification timelines, sub-contracting restrictions, and minimum control standards. If the third party will perform customer-facing activity or influence onboarding, you should also address training, record retention, and escalation responsibilities.
Be realistic about leverage. Smaller firms may not obtain extensive audit rights from a major global provider. In those cases, decision-making should acknowledge the limitation, document why the residual risk is acceptable, and put monitoring in place that does not rely on contractual promises you cannot enforce.
Document the rationale so it survives scrutiny
Regulators and auditors look for traceability: a clear line from risk assessment to due diligence performed, to identified issues, to mitigations, to approval.
A good file makes it obvious why the relationship was rated as it was, what checks were performed, what gaps were found, and what conditions were applied. It also records who approved the decision and at what level.
This documentation discipline has a second benefit: it protects consistency. When teams change, or when you re-tender a service, you are not starting from zero. You have a defensible baseline and a record of what matters.
Make monitoring a living part of the process
Third-party risk changes. Ownership structures shift, services evolve, jurisdictions expand, and regulatory expectations tighten. Monitoring should therefore be built into the relationship, not bolted on after an incident.
The frequency and depth of review should match the risk rating and criticality. Higher-risk relationships may warrant annual refreshes, periodic control testing, and ongoing adverse media or sanctions-related screening on the entity and key principals. Lower-risk suppliers may only need periodic attestations and event-driven reviews.
Triggers matter as much as calendars. Material changes such as new sub-contractors, control failures, security incidents, regulatory action, or significant changes in customer base should force a reassessment. If your organisation has a Business Risk Assessment, monitoring should feed into it, so that third-party dependencies are reflected in your broader view of risk.
Common failure points – and what to do instead
The most frequent issue is confusing activity with assurance. A long checklist can still leave you blind to whether controls work. Another is decentralisation: different teams apply different thresholds, leading to inconsistent onboarding decisions and unpredictable remediation.
There is also a recurring gap between compliance and operations. If the onboarding team does not understand which third parties are approved for which use cases, controls erode quickly. The remedy is simple but often neglected: maintain an accessible register of approved third parties, their permitted scope, risk rating, conditions, and review dates, and ensure operational teams are trained to use it.
Finally, many organisations under-estimate the risk of “strategic” relationships. The more important the partner, the more uncomfortable it can feel to challenge them. That is precisely when governance needs to be strongest.
When to bring in independent support
Independent review is useful when the relationship is high-risk, novel, or business-critical, or when you need assurance that your approach will withstand regulator scrutiny. It can also help when internal teams are stretched and the risk is that due diligence becomes a rushed, document-driven exercise.
A specialist partner can translate expectations into practical steps, perform targeted testing, and produce reporting that is designed for decision-makers rather than file storage. Where you need that kind of hands-on, risk-based support across due diligence, AML controls, and audit readiness, Complipal typically works best as an extension of your compliance function – focused on clear findings, defensible decisions, and implementable improvements.
The closing test is straightforward: if you had to justify this relationship to your regulator tomorrow, would your file show a reasoned decision, or just a collection of documents? Build the process so you can answer that question with confidence.
Third Party Due Diligence That Stands Up
A regulator rarely asks whether you meant to do the right thing. They ask what you did, when you did it, why you judged the risk acceptable, and what evidence you retained. That is why third-party risk has a habit of surfacing at the worst possible moment – during an audit, after a suspicious transaction, or when a key partner fails.
For compliance-dependent organisations, the third party due diligence process is not a procurement formality. It is a decision framework that protects your licence, your reputation, and your ability to onboard and service customers without constant remediation work. Done well, it creates consistency across onboarding teams, provides defensible rationale for higher-risk relationships, and makes monitoring manageable.
What the third party due diligence process is really for
Third-party due diligence sits at the intersection of AML, operational resilience, and governance. You are assessing whether another party – a vendor, agent, introducer, payment partner, corporate service provider, or outsourced function – could expose you to financial crime risk, regulatory breach, data and confidentiality issues, or service disruption.
In regulated environments, the “third party” label is broad. It includes entities that touch customer funds, influence customer onboarding decisions, provide critical systems, or act on your behalf. The process is therefore less about collecting documents and more about answering two questions: what is the risk created by this relationship, and what controls will you rely on to manage it?
Start with scoping that reflects how you operate
Due diligence fails most often at the start, when scope is defined too narrowly. If the engagement is framed as “vendor checks”, teams miss the real exposure: reliance on outsourced screening, delegated CDD, lead generation via introducers, or operational dependencies that affect transaction monitoring.
A useful starting point is to describe the relationship in operational terms. What will the third party do, what data will they access, will they influence customer decisions, will they handle or route payments, and are they critical to continuity of service? This operational picture helps you determine which regulations and internal policies apply, and it prevents a compliance team from assessing a relationship that procurement has defined in overly simple terms.
Scoping should also clarify whether you are assessing a single counterparty or an arrangement with sub-contracting. If the third party can delegate work further, your assessment needs to consider the chain, not just the first link.
Apply a risk-based approach before you ask for evidence
A risk-based approach is not a buzzword. It is how you avoid spending three weeks on low-risk suppliers while leaving high-risk relationships under-analysed.
Risk rating should be determined early, using factors that actually predict exposure. These typically include jurisdictional risk, product and service risk (especially where payments or onboarding are involved), delivery channel risk, the third party’s role (including whether they act on your behalf), customer impact, and the materiality of the outsourced activity.
It also depends on your own profile. A fintech with rapid onboarding and high volumes may treat reliance on an external identity verification provider as critical. A corporate service provider may focus more on introducers, beneficial ownership complexity, and source of wealth controls. A gaming operator may prioritise payment flows and customer affordability or source of funds triggers.
Where the relationship is higher risk, enhanced due diligence should be expected, and senior ownership of the decision should be explicit. Where it is lower risk, you still need evidence, but it can be proportionate.
Build the due diligence pack around decisions, not paperwork
The strongest third party due diligence process gathers information that directly supports a go/no-go decision and informs ongoing controls. The weakest process collects generic certificates without testing whether they mean anything.
You typically need to establish who the third party is, whether they are fit and proper for the role they will play, and whether their controls can be relied upon. That means validating corporate identity and beneficial ownership where relevant, understanding governance and competence, and assessing regulatory status if they operate in a regulated sector.
For AML-relevant relationships, you also need to understand their own programme maturity. A policy document is not enough. You want to see how they conduct CDD, how they manage higher-risk customers, how they screen and monitor, and how they escalate and report suspicious activity. If you will rely on their work, you need clarity on what “reliance” means in practice, what evidence you will receive, and what the fallback is when their process does not meet your standards.
Information security and data protection controls matter as well, but they must be connected to your actual data flows. It is not useful to file away a generic statement if you have not mapped what data will be transferred, where it will be stored, and what access controls apply.
Test control effectiveness where the risk justifies it
A defensible approach often requires moving beyond document review. This is where due diligence becomes an assurance exercise.
If the third party performs a control you depend on – for example, sanctions screening, identity verification, transaction monitoring alerts, or fraud checks – you should consider testing. That might include sampling outcomes, reviewing exception handling, checking how quickly lists are updated, or verifying that escalation paths are real rather than aspirational.
The trade-off is time and commercial pressure. Business teams often want speed, especially when a partner is “strategic”. Your process needs a mechanism to manage that pressure without weakening governance. A practical approach is to permit conditional onboarding for certain relationships, but only where risks are clearly bounded, compensating controls are in place, and a deadline for completing enhanced steps is enforced.
Contracting: turn findings into enforceable obligations
Due diligence that ends in a PDF is not risk management. The outputs must shape the contract and operating model.
Where AML and regulatory obligations apply, you may need clauses covering audit rights, access to evidence, information-sharing expectations, incident notification timelines, sub-contracting restrictions, and minimum control standards. If the third party will perform customer-facing activity or influence onboarding, you should also address training, record retention, and escalation responsibilities.
Be realistic about leverage. Smaller firms may not obtain extensive audit rights from a major global provider. In those cases, decision-making should acknowledge the limitation, document why the residual risk is acceptable, and put monitoring in place that does not rely on contractual promises you cannot enforce.
Document the rationale so it survives scrutiny
Regulators and auditors look for traceability: a clear line from risk assessment to due diligence performed, to identified issues, to mitigations, to approval.
A good file makes it obvious why the relationship was rated as it was, what checks were performed, what gaps were found, and what conditions were applied. It also records who approved the decision and at what level.
This documentation discipline has a second benefit: it protects consistency. When teams change, or when you re-tender a service, you are not starting from zero. You have a defensible baseline and a record of what matters.
Make monitoring a living part of the process
Third-party risk changes. Ownership structures shift, services evolve, jurisdictions expand, and regulatory expectations tighten. Monitoring should therefore be built into the relationship, not bolted on after an incident.
The frequency and depth of review should match the risk rating and criticality. Higher-risk relationships may warrant annual refreshes, periodic control testing, and ongoing adverse media or sanctions-related screening on the entity and key principals. Lower-risk suppliers may only need periodic attestations and event-driven reviews.
Triggers matter as much as calendars. Material changes such as new sub-contractors, control failures, security incidents, regulatory action, or significant changes in customer base should force a reassessment. If your organisation has a Business Risk Assessment, monitoring should feed into it, so that third-party dependencies are reflected in your broader view of risk.
Common failure points – and what to do instead
The most frequent issue is confusing activity with assurance. A long checklist can still leave you blind to whether controls work. Another is decentralisation: different teams apply different thresholds, leading to inconsistent onboarding decisions and unpredictable remediation.
There is also a recurring gap between compliance and operations. If the onboarding team does not understand which third parties are approved for which use cases, controls erode quickly. The remedy is simple but often neglected: maintain an accessible register of approved third parties, their permitted scope, risk rating, conditions, and review dates, and ensure operational teams are trained to use it.
Finally, many organisations under-estimate the risk of “strategic” relationships. The more important the partner, the more uncomfortable it can feel to challenge them. That is precisely when governance needs to be strongest.
When to bring in independent support
Independent review is useful when the relationship is high-risk, novel, or business-critical, or when you need assurance that your approach will withstand regulator scrutiny. It can also help when internal teams are stretched and the risk is that due diligence becomes a rushed, document-driven exercise.
A specialist partner can translate expectations into practical steps, perform targeted testing, and produce reporting that is designed for decision-makers rather than file storage. Where you need that kind of hands-on, risk-based support across due diligence, AML controls, and audit readiness, Complipal typically works best as an extension of your compliance function – focused on clear findings, defensible decisions, and implementable improvements.
The closing test is straightforward: if you had to justify this relationship to your regulator tomorrow, would your file show a reasoned decision, or just a collection of documents? Build the process so you can answer that question with confidence.
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