STRIKING THE DELICATE BALANCE BETWEEN RISK & REWARD IN COUNTERPARTY RELATIONSHIPS

In today's fast-paced corporate environment, managing counterparty relationships has become increasingly complex. Most modern organizations rely on third parties to keep operations running smoothly. However, numerous risks arise from third-party relationships whether at the pre-inception or post-inception stages of these relationships. In order to manage resultant risks, organizations should understand the third parties they use, how they use them, and what safeguards their third parties have in place. Where organizations do not manage third-party risks diligently, it can leave them exposed to regulatory action, financial loss, litigation, reputational damage, and can impair the organization's ability to gain new or service existing customers. With emphasis on the Oil & Gas industry, we will be analysing the challenges of balancing risk and reward when dealing with business partners, clients, vendors, and other stakeholders, to determine how businesses can manage these relationships effectively. In other to achieve these, we will be focusing on the below highlights for our discussion:

1. What are the approaches to conducting due diligence in the onboarding of vendors?
2. What are the duties of the Board of Directors, the Management Team, and the Process Owners in managing the relationship with counterparties?
3. How can technology effectively improve the due diligence process?
4. What are the key considerations in relation to the renewal of counterparty contracts?
5. What are the corporate failures that may arise from an organization neglecting to manage its counterparty relationships?
6. How can a business ascertain the level of credibility of the source of information provided by the client?
7. How can organizations avoid the risk of bid tailoring?
8. How can an organization deal with a vendor previously involved in a fraud case, especially money laundering?

1.      What are the approaches to conducting due diligence in the onboarding of vendors?

The risk-approach is the most advisable approach to vendor onboarding as it entails categorizing vendors based on the level of risk they pose to the organization. This allows organizations to effectively allocate and prioritize their efforts in managing vendor-related risks. Some of the approaches taken by organizations in the due diligence process include but not limited to:

• Background checks on the key decision-makers of the counterparty organization.
• Reputation of the vendor among the public and within the industry.
• Evidence of past work and past transactions to assess the vendor's potential to fulfil their contractual obligations.

2.      What are the duties of the Board of Directors, the Management Team, and the Process Owners in managing the relationship with counterparties?

• The Board of Directors is responsible for setting the overall direction and strategy of the organization.
• Senior Management is responsible for implementing these strategies and managing the day-to-day operations of the organization.
• The Process Owners work closely with Senior Management to ensure effective risk identification and management of vendor relationships.

3.      How can technology effectively improve the due diligence process?

Technology can be used in every step of vendor onboarding such as vendor screening, verifying the credibility of the vendor, and risk assessment. Also, the right to obtain information in the contracting stage is very important to analyse all information and analyse the risks that pose a threat to the organization.

4.      What are the key considerations in relation to the renewal of counterparty contracts?

In the renewal of contracts with counterparties, organizations should consider the following:

• The recent changes in the business world and potential effects on the company.
• Evaluation of the performance of the contractors and resultant contract updates.
• Inclusion and/or revision of contract clauses such as right-to-audit clauses, indemnity clauses and franchise clauses.

5.      What are the corporate failures that may arise from an organization neglecting to manage its counterparty relationships?

Organizations are encouraged to implement controls in the mitigation of risks with counterparties. However, failure to mitigate such risks may result in the following:

• Loss of license especially in the part of the franchise agreement
• Loss of customers
• Loss of reputation due to links with counterparties engaging in fraudulent activities, etc.

6.      How can a business ascertain the level of credibility of the source of information provided by the client?

• Obtain an independent and unbiased view of the vendor or supplier.
• Verification of the authenticity and accuracy of the documents provided by the third-party.

7.      How can organizations avoid the risk of bid tailoring?

Organizations can avoid the risk of bid tailoring through the following ways:

• Development and frequent updates of their procurement policy
• Segregation of duties
• Flexibility of the bid process to prevent the favouritism of certain participants.
• Incorporation of user departments input when formulating the procurement process.

8.      How can an organization deal with a vendor previously involved in a fraud case, especially money laundering?

• Ensure that all charges filed against the vendor have been dismissed by the court.
• An investigation of the circumstances surrounding the issue, as well as a proper risk analysis, should be conducted to determine whether the organization should be involved in engaging the vendor.
• Also, organizations should consider the moral and reputational risks in doing business with such counterparties.

Conclusion

In the uncertain, complex, and volatile environment like Nigeria, companies have an increased focus on counterparty risks arising from anti-bribery and corruption regulations, which present companies with a range of compliance issues. As a result of working with the wrong counterparties, companies have incurred increased costs due to fines, penalties and investigations, damage to their brand and in some cases debarment. Companies need to be on the lookout for red flags which might indicate such risks. However, Counterparty risk shall be managed through policies, guidelines, counterparty risk appetite. All counterparties that Bell Oil & Gas Limited transact with shall be approved through a well-defined approval process and due diligence framework which requires counterparties to be monitored on a daily basis as required.

Samuel Okoli (Compliance Officer)