In today's rapidly evolving regulatory landscape, third-party due diligence has become a critical component of corporate compliance and Third-Party Risk Management (TPRM) programs. The increasing complexity of global supply chains, coupled with emerging risks such as environmental sustainability and human rights violations, demands a robust approach to managing third-party risks.
While AI-led due diligence tools are gaining popularity for their efficiency and ability to process vast amounts of data quickly, the question arises: Are human-led third-party due diligence investigations becoming obsolete? The answer is nuanced; human-led due diligence is not dead, but it is evolving. It needs to be supplemented with AI-driven tools to ensure accuracy and keep pace with the complex supplier risk landscape.
Importance of Third-Party Due Diligence
Third-party due diligence is essential for several reasons:
Regulatory Compliance:
Regulations, such as the Corporate Sustainability Due Diligence Directive (CSDDD) and Germany’s Supply Chain Due Diligence Act, require companies to conduct thorough due diligence on third parties to ensure compliance with anti-bribery, corruption, and environmental standards. While the regulatory landscape (such as the EU Omnibus Proposal) is ever-evolving, this necessitates a proactive approach to risk management, where AI can play a crucial role in identifying potential risks early on.
Risk Management:
Third-party relationships can expose organizations to significant risks, including financial, operational, and reputational risks. Effective due diligence helps identify and mitigate these risks proactively. GAN Integrity emphasizes the importance of adapting TPRM programs to internal and external changes, leveraging technology like AI to enhance risk management.
Business Continuity:
Ensuring that third-party vendors are reliable and compliant is crucial for maintaining business continuity and operational resilience. Continuous monitoring and real-time data feeds are essential for this purpose.
The Rise of AI-Led Due Diligence
The increasing popularity of AI technology in third-party due diligence can be attributed to several historical and contemporary factors. Historically, TPRM has been a cumbersome process, involving extensive manual assessments and paperwork, which were time-consuming and prone to human error. As global business landscapes evolved, the interconnected nature of markets highlighted the need for more efficient management of third-party relationships.
As the market continues to grow, with the due diligence investigation market projected to reach USD 16.7 billion by 2034, the number of AI solutions is likely to increase as well.
Benefits of AI-Led Due Diligence
The integration of AI in due diligence into programs offers several benefits:
Enhanced Efficiency: AI automates repetitive tasks, freeing human resources for strategic analysis and high-impact decision-making. This is particularly important in compliance automation, where AI and machine learning enhance operational efficiencies beyond human capabilities.
Improved Accuracy: AI minimizes human error by analyzing data with precision, reducing the risk of overlooking critical information. Automated solutions emphasize the importance of leveraging AI for actionable intelligence to inform risk mitigation efforts.
Predictive Insights: AI provides predictive analytics, enabling organizations to anticipate potential risks and opportunities. This proactive approach is essential in today's dynamic regulatory climate.
Scalability: AI tools can handle large volumes of data from diverse sources, making them ideal for managing complex supply chains with multiple third-party vendors. This scalability is crucial for expanding screening to the long tail of third parties and uncovering hidden risks.
Downsides of Solely Relying on AI-Led Due Diligence
While AI is revolutionizing due diligence, relying solely on AI-led processes has its limitations:
Need for Human Judgment and Governance:
AI systems require human oversight to verify the accuracy of findings and apply them effectively within compliance programs. Human judgment is essential for interpreting complex data and making strategic decisions, especially in nuanced supply chains where local knowledge is crucial. In addition, good AI governance ensures AI is being used ethically and safely.
Importance of Institutional Knowledge:
Another area AI cannot replace is institutional knowledge. For example, AI cannot perform inspection of third parties, and AI cannot replace the knowledge that relationship owners have over years of partnership. Therefore, augmenting AI with human intelligence is necessary to gain a full knowledge of, and manage third-party and other relationships.
Adjusting Risk Thresholds:
AI systems may not fully understand the nuances of risk thresholds or the specific context of a company's operations. Human intervention is necessary to adjust these thresholds based on organizational priorities and regulatory requirements.
Contextual Understanding:
AI lacks the contextual understanding and local knowledge that human investigators can provide, especially in complex supply chains where relationships between actors are nuanced. Enhanced due diligence, such as Level III, often requires on-site validations and primary evidence, which AI cannot replicate.
The Rebirth of Human-Led Due Diligence
Human-led due diligence is not becoming obsolete; rather, it is evolving to incorporate AI-driven tools. This evolution ensures that the strengths of both human judgment and AI efficiency are leveraged to create a robust due diligence process.
Hybrid Approach: A hybrid model combines AI's ability to process data quickly with human expertise for strategic analysis and decision-making. This approach enhances the accuracy and effectiveness of due diligence investigations. GAN Integrity's solutions integrate AI with human expertise to provide a comprehensive risk management framework.
AI as a Tool, Not a Replacement: AI should be seen as a tool that supports human-led due diligence, rather than replacing it. AI streamlines the process by identifying potential risks, while humans interpret these findings and apply them within the broader compliance framework. This collaboration is essential for maintaining business integrity and trust in third-party relationships.
Continuous Monitoring: AI can facilitate continuous monitoring of third-party risks, allowing compliance teams to respond promptly to changes in the regulatory landscape or new risk factors. GAN Integrity's TPRM software supports real-time monitoring and adaptation to risk profile changes.
No, They’re Not Dead; They’re Being Reborn
In conclusion, human-led third-party due diligence investigations are not dead; they are evolving to integrate AI-driven tools. While AI offers efficiency, speed, and accuracy, human judgment and oversight are essential for interpreting complex data, adjusting risk thresholds, and applying findings effectively within compliance programs.
The future of due diligence lies in a hybrid approach that leverages the strengths of both AI and human expertise to manage third-party risks effectively in an increasingly complex regulatory environment.
Miriam Konradsen Ayed is the VP of Product Marketing at GAN Integrity. With a track record of building and executing GTM strategies and growing pipeline for SaaS products, she brings products to life through value-driven positioning and messaging.