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Enhanced Due Diligence in Construction

May 23, 2023 Red Flag Alert Updated On: May 23, 2023
Enhanced Due Diligence in Construction

The construction industry has been through a lot. As one of the sectors most impacted by the COVID-19 pandemic, when businesses were plunged into chaos as global lockdowns commenced and projects were put on indefinite hold. Some are still recovering from the unplanned pause in work caused by the shutdown.

And now, with inflation at an all-time high, the rising cost of building materials for ongoing construction projects is causing a huge jump in overall costs. These are estimated to be currently 25% higher than it was in 2022, meaning that expenditures are rising overall. 

These higher costs, alongside the post-COVID recovery process, make undertaking enhanced due diligence (EDD) for all business connections, even more vital. The best way to mitigate these issues and others that may arise is to conduct enhanced due diligence checks to neutralise a threat before it impacts your business.

What is enhanced due diligence?

 Enhanced due diligence is typically a more in-depth and thorough investigation of a third party than a company would usually take when bringing on new clients. 

 When evaluating who to work with, most businesses undertake basic due diligence to avoid the risk of bad debt. However, enhanced due diligence (EDD) is recommended in high-risk industries, such as construction, where there is a greater potential for fraud or other financial crimes.

 In the construction industry, EDD can be used to mitigate risk by identifying and assessing the risks associated with a third party. This can include risks such as financial instability, poor reputation, or a history of non-compliance. All firms should have EDD measures in place to adequately protect their business against fraud/ potentially tarnishing their reputation for unknowingly partaking in financial crime such as money laundering.

 It is estimated that roughly £88 billion a year is spent on money laundering in the UK economy. With the government enforcing stricter regulations, businesses must comply with the latest legislation or face harsh punishments such as hefty fines and/or prison time. 

The importance of enhanced due diligence in construction

Around 18% of company failures in the UK occur within the construction industry. This means businesses in this sector are three times more likely to fail than the national average. In construction, suppliers make or break a project, which is why enhanced due diligence is vital to ensure you didn’t miss any warning signs which could have a knock-on effect on your profit margins and turnover 

Performing enhanced due diligence check (EDD) is an essential Know Your Customer (KYC) process for identifying threats from any business you’re dealing with. This protects your organisation from the risks of bad debt, fraudulent crime, and helps minimise the risk of financial sanctions or potential lawsuits.

EDD checks are generally used when dealing with clients or suppliers from high-risk business sectors or countries. However, it’s recommended to vet all potential partners and monitor them throughout your time working together to mitigate risk. 

What is a UBO and why is it relevant in construction?

An ultimate beneficiary owner (UBO) is a person or legal entity e.g., an organisation that directly or indirectly benefits from ownership of an asset or has ultimate effective control over it (even though an asset may be legally owned by a different party).  

There are many reasons a company conceals their UBO:

  • Trading Purposes
  • Anonymity
  • Concealing assets
  • Tax evasion 
  • Money laundering

 Without knowledge of who a company’s UBO is, you leave your business open to severe reputational damage if it comes to light that one of your partners is involved in financial crime. This is why you must obtain information that indicates the origin of your client’s wealth and compare your client’s financial and non-financial assets with their real assets. It’s important these figures match.

If you discover any inconsistencies in a client’s net worth/wealth source/earnings, you must report this to be investigated further as it is highly suspicious. When you have established the UBO of your customer’s organisation, it is then important to double verify the identity through an IDV, AML checks, and adverse media scanner to be safe.

What are KYC checks and why are they necessary?

A know-your-customer (KYC) check is when you collect information on customers and verify their identities. KYC checks not only protect your business from potentially risky clients but also help fight economic crimes such as terrorist financing and corrupt regimes.

KYC checks are a requirement under UK money laundering laws, so it’s important to stay up to date with the latest measures to remain compliant. Inadequate KYC checks expose you to customers who may be involved in economic crimes such as money laundering, which would render other AML systems you might have in place useless. In construction, know-your-customer checks protect firms from being a victim of fraud, as well as suffering reputational damage from being associated with economic crime.

Enhanced due diligence is a more in-depth KYC check for investigating higher-risk customers more thoroughly than you would others. Reasons you may conduct these checks include: 

  • Suspicion of criminal activity
  • Suspicion customer information may be incorrect. 
  • Changes occur in a customer’s circumstances. 
  • Customer makes an unusually large transaction.
  • The customer has made a number of unusual smaller transactions.


How Red Flag Alert can help you 

Businesses in the construction sector are amongst the most vulnerable due to heavy reliance on suppliers. Red Flag Alert allows construction companies to monitor clients, partners and suppliers and get alerted instantly to any signs of financial distress so they can take action to protect your business.Additionally, Red Flag Alert's Platform allows for businesses to complete AML/KYC checks as a part of their enhanced due diligence process.

Red Flag Alert users benefit from:

  • A full range of risk-level checking
  • Unbeatable match rates
  • ID verification
  • Enhanced due diligence.
  • Sanctions and real-time screening of politically exposed persons (PEPs)
  • Monitoring alerts
  • A simple interface 
  • A secure audit trail.

Start making more data-driven decisions and shield your business from risk by starting a free trial today.


Published by Red Flag Alert May 23, 2023