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The present and growing importance of enhanced due diligence in the EU

In recent years, the European Union (EU) has been strengthening its regulations to ensure that companies operating within its borders are held accountable for their actions. One area where this is particularly evident is in the realm of enhanced due diligence for corporate entities. In this blog post, we will explore the reasons behind this trend and why enhanced due diligence is becoming increasingly necessary for companies operating in the EU.


Due diligence experts reviewing documents
Enhanced due diligence is growing in importance and should be conducted by experienced teams

Firstly, it is important to understand what is meant by enhanced due diligence. Enhanced due diligence is a process that goes beyond the standard due diligence checks that companies are required to undertake. It involves a more in-depth investigation into a company's operations, ownership structure, and financial dealings. The aim of enhanced due diligence is to identify any potential risks associated with a company's activities, such as money laundering, corruption, or human rights abuses.


One of the main reasons why the EU is strengthening its regulations around enhanced due diligence is to combat financial crime. Money laundering and other financial crimes are a significant problem in the EU, with estimates suggesting that up to €200 billion is laundered through the region each year. To combat this, the EU has introduced a range of measures, including the Fourth Anti-Money Laundering Directive (AMLD4) and the Fifth Anti-Money Laundering Directive (AMLD5). These directives require companies to undertake enhanced due diligence checks on their customers and suppliers to ensure that they are not involved in any illegal activities.


Another reason why enhanced due diligence is becoming increasingly necessary for companies operating in the EU is the growing focus on corporate social responsibility (CSR). CSR is the idea that companies have a responsibility to operate in a way that is socially and environmentally responsible. This includes ensuring that their operations do not have a negative impact on the environment, that they treat their employees fairly, and that they respect human rights. The EU has been at the forefront of this movement, with the introduction of the Corporate Sustainability Reporting Directive and the proposed Directive on corporate sustainability due diligence.

CSRD at a glance
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These regulations require companies to report on their sustainability practices and to undertake due diligence checks to ensure that their operations are not having a negative impact on the environment or on human rights.


Enhanced due diligence is also becoming increasingly necessary due to the growing complexity of global supply chains. Many companies now operate in multiple countries and rely on a network of suppliers and subcontractors to produce their goods and services. This can make it difficult to ensure that all of these entities are operating in a responsible and ethical manner. Enhanced due diligence can help to mitigate these risks by providing a more detailed understanding of a company's supply chain and identifying any potential risks.


So, what does due diligence mean for companies operating in the EU?


Firstly, it means that they need to be aware of the regulations around enhanced due diligence and ensure that they are complying with them. This may involve investing in new systems and processes to enable them to undertake more detailed due diligence checks. It may also involve working with third-party providers who specialise in enhanced due diligence to ensure that they have access to the necessary expertise and resources.


Secondly, it means that companies need to take a more proactive approach to CSR. This involves not only ensuring that their own operations are socially and environmentally responsible but also ensuring that their suppliers and subcontractors are operating in a responsible manner. This may involve working with these entities to improve their sustainability practices or, in some cases, severing ties with them if they are found to be engaging in unethical practices.


The EU's focus on enhanced due diligence for corporate entities is a reflection of the growing importance of corporate social responsibility and the need to combat financial crime. Companies operating in the EU need to be aware of these trends and take steps to ensure that they are complying with the regulations and operating in a responsible and ethical manner. Enhanced due diligence is no longer an optional extra but a necessary part of doing business in the EU.


Forced labour

Due diligence helps identify forced labour and modern slavery practices in your supply chain
Forced labour and due diligence's role to identify this in your supply chain and other areas of your organisation

In addition to the growing importance of corporate social responsibility and the need to combat financial crime, supply chain and forced labour are also becoming increasingly important issues for companies operating in the EU. The EU has been taking steps to combat forced labour in supply chains, with the introduction of new guidance to help companies eradicate forced labour from their value chains. This guidance provides practical advice on how companies can identify and address forced labour risks in their supply chains.


Forced labour in supply chains is not a new one, and there have been a number of initiatives aimed at addressing this issue in recent years. For example, the International Labour Organization (ILO) has developed due diligence plans to prevent serious human rights abuses in supply chains. The Modern Slavery Act, which applies to any company with a global turnover of over £36 million, requires companies to report on the steps they are taking to address modern slavery in their supply chains.


The EU is also taking steps to address the issue of forced labour in supply chains through its due diligence and forced labour import ban requirements. These requirements are designed to ensure that companies are taking steps to identify and address forced labour risks in their supply chains. They apply to companies operating in a range of industries, including agriculture, mining, and manufacturing. The issue of forced labour in supply chains is particularly relevant to companies operating in industries where there is a high risk of forced labour, such as the garment industry and the electronics industry. These industries often rely on complex global supply chains, which can make it difficult to identify and address forced labour risks.


Proposal for a ban on goods made using forced labour
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To address these risks, companies need to undertake enhanced due diligence checks on their suppliers and subcontractors. This may involve working with third-party providers who specialise in supply chain due diligence to ensure that they have access to the necessary expertise and resources. Companies also need to take a more proactive approach to identifying and addressing forced labour risks in their supply chains. This may involve working with suppliers to improve their labour practices or, in some cases, severing ties with suppliers who are found to be engaging in forced labour practices.


To summarise, the issue of forced labour in supply chains is becoming increasingly important for companies operating in the EU. The EU has introduced a range of measures aimed at addressing this issue, including due diligence and forced labour import ban requirements. Companies need to be aware of these requirements and take steps to ensure that they are identifying and addressing forced labour risks in their supply chains. This may involve investing in new systems and processes to enable them to undertake more detailed due diligence checks, as well as working with third-party providers who specialise in supply chain due diligence. By taking a proactive approach to addressing forced labour risks in their supply chains, companies can help to ensure that they are operating in a responsible and ethical manner.





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