Vendor Due Diligence (VDD)

VDD looks at several risk areas, including financial stability, legal and regulatory compliance, cybersecurity posture, data protection practices, sanctions violations, operational resilience, and any potential involvement in fraud.

Proper vendor due diligence, like any due diligence process, helps identify vulnerabilities in various processes, like the supply chain, while maintaining regulatory compliance and preventing financial crime. When every service, including third-party services, runs smoothly, there’s less chance of a breach or operational disruptions. For example, an attack can spread through compromised vendor software.

There are a few steps or best practices that companies often apply as their VDD strategy. 

For example:

• Using a risk-based approach. That means assessing and categorizing vendors based on their risk profile, from low to high-risk companies. 
• Using a standardized framework. For example, having concrete and consistent policies with metrics to evaluate all vendors and their performance. 
• Using proper documentation. This helps keep records not only for auditing purposes but to help with improvements and risk mitigation plans. 
• Continuous monitoring. This includes reviewing vendor information regularly, especially all vendors that are classified as high-risk. Ongoing due diligence is required because businesses constantly evolve and factors like the geopolitical environment make an impact. 

Many regulations indirectly or directly require VDD, which can also be named under different terms, like Know Your Business (KYB), especially for industries such as finance, fintech, crypto, insurance, or e-commerce. Requirements often come from Anti-Money Laundering (AML) laws, data protection frameworks, sanctions regulations, and sector-specific compliance standards. 

Automated solutions, like iDenfy’s KYB platform, help automate vendor due diligence and onboard corporate clients with automated tools like AI-powered Risk Assessment.