More efficient third-party due diligence  in international trade | Prospire

collaborative evolution More efficient third-party due diligence in international trade

Author: Andreas Mentel, Dr. Ege Tufan, Armand Hofstetter

The International trade of goods is based on the cooperation between parties along global supply chains. It involves the cooperation between companies moving physical goods from one place to another but also cooperation with banks for trade financing. More than ever, all of these players are subject to political legislation, in particular to third-party due diligence rules that require collecting and evaluating information on partners. In this article, we highlight potential implications for players involved in global trade and outline new directions for third-party due diligence and cooperation across global supply chains.

The rules for third-party due diligence are constantly evolving and becoming more rigid. Trade financing banks are particularly affected. For example, in July 2021 the European Commission put forward a new package of proposals to strengthen the EU’s anti-money laundering and countering the financing of terrorism (AML/CFT) regulation. According to the proposal, more specific and detailed provisions are laid down on the identification of the customer and on the verification of the customer’s identity. This is accompanied by the plan to create a new EU authority to ensure EU rules are correctly and consistently applied.

The rules for third-party due diligence are constantly evolving and becoming more rigid.

Above that, new regulations are emerging that increasingly place requirements on shipping and transportation companies. For instance, a German bill on mandatory human rights due diligence in supply chains was passed by the government in March 2021. It requires that companies implement measures for monitoring partner companies to determine negative effects on human rights across the international supply chain. In the same month, the European Parliament adopted an outline proposal with similar rules for companies operating in the EU internal market, including those from outside the EU. It is expected that the European Commission will press ahead with the legislation later this year with member state ratification in 2023.

Another important development is the September 2015 ruling by the European Court of Justice related to the European Union’s regulation governing the manufacture and import of chemical substances. It requires importers to examine their supply chains and investigate if any of the components that make up the finished product contain substances or mixtures that need to be disclosed to authorities. This affects exporters, too, as they become subject to due-diligence measures.

The rules impact different kinds of companies in different ways. However, the effects which are already faced within the financial industry can be expected to hit parties in international trade as well. Above all, compliance associated with third-party due diligence rules involves substantial costs. $48m is the average annual spend on KYC in the financial sector, with large institutions spending above $150m. Whereas fines for non-compliance are not yet included. In the financial services industry, the fines related to AML, KYC and sanctions regulations amounted to more than $20bn in the last decade.

But due-diligence measures also affect revenues. Client managers have to spend more time on onboarding activities – time that otherwise would be used to actually process client business or push sales. And the intricate requirements of third-party due diligence impacts customer loyalty. In the financial services industry, 12% of companies changed banks because of negative experiences related to KYC, diminishing revenues to a significant extent. The precise effects outside of the financial industry are not known yet. However, cumbersome processes could add to barriers with costs of doing business with new partners growing.

New solutions are needed to make third-party due diligence more efficient and strengthen cooperation in international trade.

In view of the business impact, new solutions are needed to make third-party due diligence more efficient and strengthen cooperation in international trade. What we observe is that a new ecosystem is emerging with players and technologies that can help – albeit in different ways – the companies taking part in international trade:   

  1. Trusted identity provider embedded in regulatory approval and supervision: Service companies provide the KYC-relevant company data and documents in a standardized process. The verified data record including the required documents can be forwarded even across national borders. The automatization and reuse reduce the costs in relation to KYC measures. Moreover, it speeds up the process of onboarding new third-parties and improves the relationship management.
  2. Trusted quality certifier: Certifier verify the quality of the cargo and confirm it meets its declaration and specifications. This reduces the risk of sanctions for partaking in non-compliant trading and ensures that cargo actually contains what is declared and paid for.
  3. Trusted IoT partner: Innovative hardware and software solutions help monitor cargo throughout the supply chain and around the globe and hence generate critical information on the parties involved. The information can be used to improve the assessment of business relationships.
  4. Digital Twins: All data flows together in digital representations of real assets and controlled access to asset data is provided via wallets. According to the OECD, through enhanced information recording and sharing, asset tokenization can bring benefits of increased transparency regarding transactional data and information around the issuer and the asset characteristics. Most importantly, it speeds up the due diligence process enormously. Due diligence can become as easy as gaining access to the wallet.

Value proposition Prospire
Prospire supports companies becoming part of the ecosystem and to obtain value in return. This involves a strategy to identify and build up the necessary partnerships and capabilities to not only meet regulatory requirements but also to make third-party due diligence efficient. At a minimum, this provides a competitive edge for companies. But above that it can also become vital to maintain growth and profitability as legislation becomes ever more rigid.

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