Counterparty due diligence is the work of finding out who a business partner is, who owns and controls it and what risk it carries before you deal with it, then keeping that record current. It covers customers, suppliers, trading counterparties and intermediaries, and it ends in a decision a person can defend.
Any business that transacts with other businesses carries counterparty risk. The need is sharpest where a bad partner can create legal exposure: banks and credit unions onboarding business accounts, energy and commodity traders, metals and agricultural buyers, and manufacturers with long supplier chains.
The Office of Foreign Assets Control (OFAC) says an effective sanctions compliance program should include a risk assessment of an organization’s “customers, supply chain, intermediaries, and counter-parties”. It also lists improper due diligence on customers, including their ownership, geographic location and counter-parties, as a root cause of apparent sanctions violations.1
Know Your Customer (KYC) is the best-known form. For the rules that apply to customers of financial institutions, read what Know Your Customer (KYC) compliance requires. Counterparty due diligence takes the same checks to every business relationship, not only customers.
Counterparty due diligence is the umbrella. The other three apply it to a specific kind of relationship.
| Term | Who it covers | Typical trigger |
|---|---|---|
| Know Your Customer (KYC) | A customer, whether an individual or a business | Opening an account or starting a service |
| Know Your Business (KYB) | A company, including the individuals who own and control it | Onboarding a business account or client |
| Know Your Supplier (KYS) | A vendor or supplier in your supply chain | Approving a new supplier or renewing a contract |
| Counterparty due diligence | Any business you transact with, including trading counterparties, agents and intermediaries | Before a deal, a trade or a contract, and on every material change |
A clean name on a screening list does not clear a counterparty. OFAC’s 50 Percent Rule treats an entity as blocked when blocked persons own it, so the ownership chain has to be traced from documents.
OFAC also states that its 50 Percent Rule speaks only to ownership and not to control. An entity that is controlled, but not owned 50 percent or more, by blocked persons is not automatically blocked. OFAC urges caution with such entities and may designate them separately.2 A defensible file therefore records both who owns the counterparty and who controls it.
Not every counterparty earns the same review. OFAC describes a risk-based approach in which the risk assessment informs the extent of due diligence at various points in a relationship.1 In practice, that means three things:
A reviewer should be able to see what you knew, what you decided and why.
Each flag links to the document, list or article it came from.
The file shows who approved, held or conditioned the relationship, and when.
Re-screening results, comments and overrides are timestamped, not overwritten.
Compliable.ai is a compliance decision intelligence platform. Its AI agents read onboarding documents, resolve beneficial ownership, screen every owner and write a defensible decision record for Know Your Customer (KYC), Know Your Business (KYB), Know Your Supplier (KYS) and counterparty due diligence. A person makes every final decision.
See how this works for crude and refined products, natural gas and LNG and other industries. To judge any tool on this work, use the buyer’s guide to Know Your Customer (KYC) compliance software, or read about Know Your Customer (KYC) compliance software.
Counterparty due diligence is the work of finding out who a business partner is, who owns and controls it and what risk it brings before you deal with it, then keeping that record current. The partner can be a customer, supplier, trading counterparty, agent or intermediary.
Know Your Customer (KYC) covers customers. Counterparty due diligence covers every business you transact with, including suppliers, trading partners and intermediaries. It uses the same building blocks of identity, ownership, screening and a decision record, applied to a wider set of relationships.
At minimum: who the entity is, who owns and controls it, whether it or its owners appear on sanctions lists, what adverse media says about them, where it operates and whether its documents agree with each other. The depth of each check should follow the risk of the relationship.
Both matter, in different ways. The Office of Foreign Assets Control (OFAC) 50 Percent Rule speaks only to ownership, so an entity that is controlled but not owned 50 percent or more by blocked persons is not automatically blocked. OFAC still urges caution in that case, so record both.
On a schedule set by risk, and whenever something changes. Re-screen when a list updates, when ownership changes, when the relationship moves into a new jurisdiction or product, and at each renewal. A cleared name is only a snapshot of the day it was checked.
Software can read documents, trace ownership, run screening and draft the record much faster than a person. A person should still make the final decision, and the record should show the evidence behind it. See the buyer's guide for the questions to ask any vendor.
Bring a real counterparty. We will process it live and show each step, from the first document to the decision record.