Creating a Program for Risk-Based Due Diligence of Third Parties in Commercial Contracts | Practical Law

Creating a Program for Risk-Based Due Diligence of Third Parties in Commercial Contracts | Practical Law

This Legal Update highlights resources that in-house counsel can use to develop and implement a program to conduct risk-based due diligence of third parties in commercial contracts.

Creating a Program for Risk-Based Due Diligence of Third Parties in Commercial Contracts

by Practical Law
Published on 10 Feb 2017 • USA (National/Federal)
This Legal Update highlights resources that in-house counsel can use to develop and implement a program to conduct risk-based due diligence of third parties in commercial contracts.
Relationships with third parties, like consultants, agents, distributors, joint venture partners, and other business partners, can help a company advance its interests and perform key business activities. However, conducting the necessary due diligence on third parties can be time-consuming. Not all potential business partners require the same level of investigation. The nature of a third party's business and the proposed relationship may necessitate a deep-dive investigation, or a simple background check of the company's principals. A comprehensive risk-based due diligence program allows the company to select the level of due diligence to conduct based on the level of risk posed by each third party and creates a standardized system for employees to follow.
Practical Law has a set of companion resources that in-house counsel can use to design and implement a risk-based due diligence program, or review and update an existing one.
Practice Note, Risk-Based Due Diligence of Third Parties in Commercial Transactions provides a detailed explanation of risk-based due diligence, including:
  • The purpose of risk-based due diligence.
  • The use of preliminary assessments to assign a risk tier to a third party.
  • Key risk indicators (or red flags) that should be investigated and resolved.
  • Levels of risk-based due diligence.
  • Steps a company can take to manage and address due diligence findings.
Developing a Risk-Based Due Diligence Program Checklist reviews key steps and considerations in developing and implementing a program to conduct risk-based due diligence of third parties in commercial transactions, including:
  • Laying the groundwork for the program.
  • Communicating the reasons for implementing the program and how it can help the company.
  • Assessing the company's due diligence needs.
  • Assigning responsibility for oversight and accountability for the program.
  • Training employees on risk-based due diligence and how the program will be implemented.
  • Performing a preliminary risk assessment.
  • Creating a risk profile for third parties.
  • Conducting due diligence at the appropriate risk level.
  • Managing due diligence findings.
  • Establishing a process for approving or denying third-party relationships based on due diligence findings.
  • Monitoring third-party relationships continuously.
  • Modifying the program where necessary.
  • Documenting the program.
For general and transaction-specific resources on conducting due diligence, see: