Refinitiv last week acquired The Red Flag Group, a Hong Kong-based global integrity and compliance risk firm specializing in enhanced due diligence and onboarding technologies across a range of industries. Its addition should significantly expand Refinitiv’s suite of due diligence offerings to help its corporate compliance customers better evaluate money laundering, bribery and corruption, reputational and ESG risk, giving the firm greater access to a range of opportunities across a broader client base.
“The acquisition of The Red Flag Group comes at a time when our customers are wrestling with new and emerging challenges, including supply chain resilience and an increasing focus on ESG due diligence,” says Charles Minutella, Head of Due Diligence services at Refinitiv, speaking to RegTech Insight.
Even before the COVID pandemic, the firm expected there to be a significant increase in the industry’s interest in understanding more about corporate supply chains: especially given the increasing regulatory interest in how supply chains were structured. And in addition, from an investment perspective, there is a growing interest from both financial institutions and their customers around better understanding how ESG information can assist in meeting compliance standards and reporting requirements.
“We were trying to find a partner that would give us tools and approaches that would be best aligned to these issues, serving both the corporate supply chain side and the financial industry side,” explains Minutella. “Red Flag fits squarely in the middle of that. Their approach and their focus has been on global supply chain and distribution network analysis for global institutions; and they’ve built technologies to support that process in the form of workflow SaaS platforms that their customers use to manage both the supply chain and the third party risk assessment process.”
The acquisition should help Refinitiv to better serve its financial institution front office clients, in the connected areas of ESG and supply chain due diligence. “We think there’s a big opportunity to really drive greater accessibility to information in the ESG investing space, in particular,” reveals Minutella. “This is a very hot topic. Institutions want to be able to look at companies that are not only public and self-disclose, but companies that are private in less established jurisdictions, that might represent potential investment opportunities on the ESG side. Red Flag has built a core competency in evaluating these types of private companies and is able to assess them for a wide range of risk.”
Refinitiv believes there is an opportunity to take this assessment and turn it into a proposition to the investment community that gives them greater insight into ESG related factors, controversies, and qualities of those non-public companies. “We think there’s a massive opportunity there. To have the engine to be able to uncover non self-disclosed information on lesser known companies is a really great value proposition to our customers.”
From a regulatory perspective of course, this will also help the firm’s clients to meet regulatory imperatives such as the EU green taxonomy, and the upcoming EU Sustainable Disclosure Regime, which are placing increasing pressure on firms to understand just where their investments are going and what their target firms are doing. On the supply chain side, there is also growing scrutiny, that the new acquisition should help Refinitiv clients to assess and handle. “In the last several months, we’ve had the Department of Justice come out with additional guidance around corporate compliance programs and managing third parties, calling for more structured initial and ongoing assessment of those third parties,” notes Minutella. “In addition, there’s been a lot of dialogue in the EU, with the EU Commission coming out with guidance on due diligence and a proposed set of regulations. That will require companies of all sizes and industries to conduct due diligence for environmental and social factors on their supply chain. The regulatory environment is really primed for increased requirements for companies to report on their customers and third parties in a more effective way, and our customers are keenly aware of this.”
Red Flag has invested in customer facing workflow technologies that allow their customers to manage compliance activities, including third party and supplier onboarding with more ease. These platforms allow them to manage the process front to back, including doing the initial risk assessments, ongoing analysis, and issuing value-adds such as questionnaires that can bring more data in and manage the process more effectively.
“That gives us some really interesting capabilities that will allow us to deliver due diligence in a more automated way,” points out Minutella. “Given what Refinitiv has built in terms of automated data aggregation and contextualization, Red Flag has some products that would greatly benefit from our ability to incorporate more automated and AI driven due diligence. That allows customers to handle due diligence for greater scale in a more cost-effective way. But it also gives them more information that will allow them to tailor their more enhanced due diligence efforts by giving a snapshot view of that customer or third party.”
The partnership also has applications on the transactional side, with Refinitiv expecting it to contribute to meeting the growing need for non-financial due diligence in the pre-transactional space (especially in Asia, where this is often mandated by law), and within the wider global M&A space as firms look to boost their non-financial due diligence capabilities. “Pivoting this capability that we have to that side, I think will be of increasing value to our customers who might currently only use us on the KYC compliance side, but now can turn this capability on for a wider set of analyses,” notes Minutella.