Third-Party Risk Management and Financial Crime: A Global Outlook

Introduction

Third-party relationships are essential to modern business operations, enabling companies to expand their reach, reduce costs, and enhance efficiency. However, these partnerships also introduce significant risks, particularly when it comes to financial crime. From money laundering to fraud, bribery and corruption, the actions of third parties can expose businesses to legal, financial, and reputational harm. This blog explores the global challenges of third-party risk management, best practices for mitigating these risks, and emerging trends shaping the future.

Why is Third-Party Risk Management growing in importance?

There are three main drivers behind the increasing importance of third-party risk management, these are:

1. Increasing Complexity of Supply Chains

Globalisation has expanded supply chains across multiple jurisdictions, many of which have varying regulatory frameworks and corruption risks. This complexity creates vulnerabilities for businesses, particularly in sectors like manufacturing, technology, and financial services.

2. Regulatory Pressure

Regulators are holding businesses accountable not only for their direct activities but also for the actions of their third parties. Key regulatory expectations include:

• U.S. Foreign Corrupt Practices Act (FCPA): Imposes liability on companies for corrupt activities performed by third parties on their behalf.
• UK Bribery Act: Requires businesses to implement “adequate procedures” to prevent bribery within third-party networks.
• European AML Directives: Emphasise the need for enhanced due diligence on high-risk third parties, including vendors and contractors.

3. Financial and Reputational Risks

Failing to manage third-party risks can result in severe consequences, including fines, operational disruptions, and reputational damage. High-profile scandals, such as those involving global corporations fined for third-party bribery schemes, underscore the importance of robust risk management frameworks.

What are some of the challenges to manage third-party risks?

There are challenges regulated businesses face in managing third-party risks, these include:

1. Lack of Visibility

Many businesses struggle to gain full visibility into their extended third-party networks, especially when subcontractors or fourth-party vendors are involved. Hidden relationships or shell companies can obscure beneficial ownership structures, increasing exposure to financial crime.

2.  Jurisdictional Variability

Differing regulations, cultural norms, and enforcement levels across countries complicate compliance efforts. High-risk jurisdictions, often with weak governance and corruption issues, require enhanced monitoring.

3. Volume and Scale

Large organisations often have thousands of third-party relationships, making it difficult to conduct thorough due diligence on each.

4. Technological Gaps

Many businesses rely on manual processes or outdated tools for managing third-party risks, leading to inefficiencies and gaps in oversight.

5. Evolving Financial Crime Tactics

Criminals are becoming increasingly sophisticated in exploiting third-party networks for money laundering, fraud, and sanctions evasion.

What are some of the best practices for managing third-party financial crime risks?

There are no hard and fast rules about how to manage third-party financial crime risks effectively but here are a number of suggestions:

1. Comprehensive Due Diligence

Conduct robust due diligence on all third parties before onboarding, focusing on: beneficial ownership transparency; past involvement in legal or regulatory violations and financial health and operational history.  Regulated businesses would benefit from utilising risk-based approaches to prioritise higher-risk third parties for enhanced scrutiny.

2.  Contractual Safeguards

Include clauses in contracts requiring third parties to adhere to anti-bribery, AML, and compliance policies. Another related suggestion includes defining clear consequences for non-compliance, including termination of the agreement.

3. Continuous Monitoring

Monitor third-party activities regularly, using tools like: Ongoing sanctions screening; real-time transaction monitoring for suspicious payments and social media and adverse media monitoring for reputational risks. Also, regularly updating third-party risk profiles as new information becomes available is an important tool in managing third-party risks.

4. Leveraging Technology

Implement third-party risk management platforms that centralise data, automate due diligence, and provide real-time alerts for potential risks. Regulated businesses should be encouraged to experiment with using AI and machine learning to analyse large datasets, uncover hidden risks, and predict potential issues.

5. Training and Awareness

Provide regular training for employees and third parties on financial crime risks and compliance expectations. Foster a culture of accountability and ethical behaviour across the organisation and its network.

6. Cross-Border Collaboration

Engage with industry groups and regulatory bodies to stay informed about emerging risks and best practices. Leverage international frameworks, such as FATF guidelines, to align third-party risk management with global standards.

Conclusion

Third-party risk management is no longer just a compliance requirement, it is a strategic imperative in combating financial crime. Businesses must adopt proactive, technology-driven approaches to assess and mitigate risks across their networks. By implementing robust due diligence processes, leveraging innovative tools, and fostering collaboration, organisations can build resilient frameworks that protect against financial crime while maintaining trust with stakeholders. As regulatory expectations and criminal tactics evolve, businesses that prioritise third-party risk management will be better positioned to thrive in a challenging global environment.