Verity journal

In Malaysia, Designated Non-Financial Businesses and Professions (DNFBPs) play a vital role across key industries such as real estate, law, accounting, and jewellery trading. These sectors are often involved in large-value transactions, sensitive legal documentation, and high-trust relationships.

As these businesses grow and outsource more functions, their reliance on third-party vendors, suppliers, contractors, and partners has increased significantly. While these partnerships offer operational advantages, they also introduce serious risks—including fraud, corruption, regulatory violations, and reputational damage.

This is where third-party due diligence becomes essential. By thoroughly vetting partners before engagement, DNFBPs can protect their operations and uphold compliance with Malaysia’s AML/CFT regulations.

What Is Third-Party Due Diligence?

Third-party due diligence is the process of assessing and verifying the integrity, compliance status, financial health, and background of external entities before forming business relationships. This includes evaluating:

• Vendors and suppliers
• Contractors and subcontractors
• Agents and brokers
• Business partners and service providers

The goal is to identify red flags such as criminal activity, financial instability, or non-compliance with regulations before they become liabilities. For DNFBPs, third-party due diligence is not only a good practice but also a regulatory expectation.

Why Third-Party Due Diligence Is Crucial for DNFBPs in Malaysia

1. Regulatory Requirements

Under Malaysia’s Anti-Money Laundering and Counter Financing of Terrorism (AML/CFT) regulations, DNFBPs must perform Customer Due Diligence (CDD) and Enhanced Due Diligence (EDD)—not just on clients, but also on third-party service providers. The Bank Negara Malaysia (BNM) and Malaysian Anti-Corruption Commission (MACC) enforce these obligations across non-financial sectors.

Failing to screen third-party partners can lead to unintentional compliance violations, resulting in fines, license revocations, and legal action.

2. Risk Mitigation

Third parties can become weak links in your compliance chain. Common risks include:

• Bribery or kickbacks
• Money laundering via shell vendors
• Embezzlement or invoice fraud
• Non-compliance with data protection regulations

Thorough due diligence prevents these risks from infiltrating your operations and protects your organisation from financial and legal exposure.

3. Protecting Brand Reputation

In an era of social media and instant news, a single third-party scandal can irreversibly damage your business’s public image. Whether it’s a vendor involved in tax fraud or a contractor accused of unethical practices, the reputational consequences often fall on your business as well.

By screening third parties, DNFBPs can demonstrate a commitment to ethics, security, and regulatory compliance, thereby boosting stakeholder confidence.

Common Risks Associated with Third Parties

In 2022, Kiplepay, an e-wallet operator and Green Packet subsidiary in Malaysia, reported a potential data breach through a third-party payment gateway provider. Even sectors like law and accounting who handle highly confidential client records are vulnerable if third-party vendors lack robust data security protocols. Below are some common risks associated with third parties:

1. Financial Risks

Working with financially unstable third parties can expose your business to:

• Project delays or failures
• Payment defaults
• Unreliable service delivery

Due diligence allows DNFBPs to detect red flags like bankruptcies, legal disputes, or poor financial reporting before signing a contract.

2. Legal and Regulatory Risks

If a third-party vendor is engaged in illegal activities such as money laundering, tax evasion, or bribery, your business may be held liable under joint responsibility doctrines. This is especially true in regulated industries like law and accounting, where compliance violations by association can be damaging.

3. Data Security Risks

Many third parties such as IT vendors and document handling services have access to client databases, financial records, or legal documents. If these third parties are not secure or compliant with laws like the Personal Data Protection Act (PDPA), your business may suffer a major data breach.

4. Reputational Risks

Any unethical activity or controversy tied to a third-party vendor can spill over into your brand reputation. This may lead to:

• Client loss
• Decline in public trust
• Damage to partnerships and referral networks

The Key Components of Effective Third-Party Due Diligence

1. Criminal Background Checks

Before engaging any vendor or contractor, it is critical to assess the background of their owners, directors, and key staff. Verity Intelligence offers advanced criminal screening solutions that help DNFBPs:

• Detect individuals with fraud, bribery, or money laundering convictions
• Uncover connections to blacklisted entities or politically exposed persons (PEPs)
• Identify red flags before they become liabilities

2. Financial Background Screening

Financial health is a strong indicator of reliability. Verity Intelligence’s financial screening solutions help businesses:

• Identify vendors with histories of bankruptcy or insolvency
• Detect delayed payments, lawsuits, or irregular accounting
• Evaluate long-term viability before committing to a contract

3. Compliance and Regulatory Checks

Verity Intelligence assists DNFBPs in verifying that third parties comply with all relevant local and international regulations, including:

• Anti-Money Laundering (AML) guidelines
• Counter Financing of Terrorism (CFT) policies
• Personal Data Protection Act (PDPA)
• Anti-corruption laws

These checks ensure your business is not indirectly exposed to financial crimes or legal violations.

How Verity Intelligence Can Support DNFBPs with Third-Party Due Diligence

Verity Intelligence provides instant and scalable background screening solutions that make third-party due diligence seamless and effective. Our services include:

• Criminal record checks on third-party stakeholders
• Financial assessments for fiscal health and risk scoring
• Compliance checks to flag non-compliance or political exposure
• Education and credential verification, where relevant

Whether you’re onboarding a new legal consultant, outsourcing to an accounting partner, or contracting a property management firm, Verity Intelligence helps you make informed decisions backed by robust data.

Conclusion

Third-party due diligence is now a compliance and risk management necessity for DNFBPs in Malaysia. In sectors like real estate, law, and accounting, the wrong vendor can expose your organisation to legal penalties, financial losses, and reputational damage.

By adopting a proactive approach to third-party vetting and background checks services like those provided by Verity Intelligence, your business can operate with confidence, compliance, and credibility. Reach out to Verity Intelligence for reliable third-party background checks and compliance solutions.