Why Financial Due Diligence Matters and How to Get it Right?

When due diligence fails, trust collapses even if it took centuries to earn. The German fintech Wirecard collapse is a perfect example of this. In late 2019, two Wirecard executives rubber-stamped a €40 million transaction within half an hour based on nothing more than a “meaningless” proposal sent by email. This was merely the tip of the iceberg, as the company had been falsifying its books for years, claiming to have €1.9 billion in cash that didn’t exist. When the fraud was exposed, Wirecard’s value and the trust it had built over decades vanished almost overnight.

Cases like Wirecard highlight why financial due diligence (FDD) comes first when connecting to a new business partner. However, the regulators are stepping up to take control, and for this, they are taking numerous enforcement actions on due diligence failures.

In the years 2024 and 2025, the Financial Conduct Authority (FCA) imposed fines of over €186 million in penalties and cancelled authorizations of over 1456 firms. The number of open enforcement cases fell from 188 to 130 during this time.

Alongside this, the demand for due diligence is also increasing over time, with its market valued at approximately $15.2 million in 2024 and expected to nearly triple by 2033. In this competitive marketplace, due diligence is not a choice; it’s a line between risk and protection.

What is Financial Due Diligence?

Financial Due Diligence meaning refers to an in-depth analysis of a company’s financial health, associated risks, and actual value. It goes beyond surface-level checks by analyzing historical and projected financial statements, revenue streams, assets, liabilities, and debt obligations. The main objective is to reveal whether they are involved in any hidden risks. It can be performed in purchasing a property, selling an asset, onboarding a client, or in any case where a counterparty’s financial history or dealings can have a material impact on businesses.

Financial due diligence can be of any kind:

• Buy-side due diligence
• Sell-side due diligence
• Vendor financial due diligence

This proactive approach helps maximize valuation and avoid delays by resolving red flags before negotiations.

Why is Financial Due Diligence a Necessity?

With the massive increase in fraud and money laundering, robust due diligence has become a necessity for both dealmakers and compliance officers. For investors, it means the difference between a successful merger and a costly write-off. For banks and financial institutions, it’s a frontline defence against fraud, money laundering, and regulatory penalties.

A strong financial due diligence process not only helps well-reputed businesses maintain trust and credibility but to also avoid legal issues and penalties. It ensures the client’s financial stability and that they are not hiding any illicit gains. By getting valuable details about their financial histories, companies can identify deal-breaking issues, such as discovering that the potential partner is involved in fraudulent statements, has links with sanctioned entities, or is under unrecorded debt.

How to Conduct Financial Due Diligence?

Financial due diligence process starts with defining the scope of the FDD, that depends on the purpose, sector or industry of the target company under review. At minimum processes like current cost base, balance sheet review, net debt, working capital, quality of earnings, cash generations and accounting policies are typically reviewed.

After defining the scope a written request is forwarded to the target company to collect the required information and management records. Once information is received, it’s thoroughly analyzed with the help of digital tools and techniques like “slice and dice” to process large datasets. This helps reviewers analyze deeper insights and performance trends categorized by customers, products and market.

Finally, a report is generated and presented to the client with conclusion and advice which will be then used in negotiations, price valuation or support decision making process in significant transactions.

In order to get a 360 view of associated risks,  it’s equally important that as part of the FDD process businesses conduct thorough risk assessment of the targeted company before executing significant transactions, acquisitions, mergers, financing or making large investments. This risk assessment includes screening against sanctions lists and processing publicly available information like any negative news, allegations, and past regulatory actions against the company.

Challenges in Financial Due Diligence

Performing proper due diligence is the biggest challenge for compliance officers and regulators when it comes to investigating their potential business partner or client. They face several roadblocks, such as:

• Fewer Resources to Handle Huge Data:  A comprehensive due diligence process can only be performed if the company has all the relevant data about its potential business partner. Gathering that huge amount of data, such as tax filings, negative news, financial statements, customer records, etc., is quite a challenging task for a limited number of resources.
• Hidden Risks Attached with Fragmented Information: Risk indicators are not always clearly visible. For example, if an individual is involved in fraud or other criminal activity, or if their name appears on the sanctions or watchlists. In that case, it might be possible that the business investigating does not have the updated information, so they have to check for negative news in media, articles, blogs, or local language sources.

• Changing Regulatory Expectations: The Compliance standards for due diligence are in a constant evolving phase, which makes it challenging for financial institutions to adhere to the updated expectations. For instance, the Financial Action Task Force (FATF)  continuously updates its rules to combat new threats, as seen with virtual assets. Initially unregulated, these assets became a concern for illicit finance. Consequently, the FATF Recommendation 15 updated in 2019, mandating that crypto service providers apply due diligence similar to traditional banks. This demonstrates how the global watchdogs like FATF and other regulatory bodies add new rules to their framework to address emerging risks and changing financial landscapes.

By understanding the hurdles such as data overload, scattered information, shifting rules, and high stakes, organizations can better strategize how to overcome them and ensure no stone is left unturned in their due diligence process.

Top 8 Best Practices for Effective Financial Due Diligence

To perform effective financial due diligence, FIs must follow these best practices:

1. Prioritize scrutiny for high-risk clients.
2. Conduct a comprehensive review of financial statements.
3. Screen against global watchlists for sanctions and politically exposed persons (PEPs).
4. Assess working capital and cash flow management.
5. Monitor transactions to flag suspicious financial activity.
6. Assess tax compliance and potential liabilities.
7. Audit the company’s debt structure and financial obligations.
8. Adverse Media and the international leaks database to uncover hidden connections and financial histories.

How AML Watcher Helps You Strengthen Your Financial Due Diligence?

In a marketplace filled with continuously changing regulatory requirements, data piling up, and illegal entities exploiting newbies in the finance industry, conducting due diligence for FIs and compliance professionals has become a necessity. To truly protect your company and meet the regulatory expectations, you need an all-rounder.

A key part of the process is to follow a comprehensive financial due diligence checklist. This verifies a partner’s financial health, scrutinizing everything from income statements to tax compliance. Since this process is so data-intensive, partnering with financial due diligence providers like AML Watcher is critical. They provide the technology and data needed to uncover hidden risks efficiently.

By possessing a proprietary database, AML Watcher fits in this role as it supports compliance teams in conducting effective due diligence.

That’s What You Get After Partnering with AML Watcher:

• Global Sanctions and Watchlist Coverage: AML Watcher offers extensive coverage against OFAC, UN, EU, and many regional and industry-specific lists, which means that their partners won’t miss a hit, whether they are doing buy-side deal diligence or checking a new client.
• AI-Powered Adverse Media Monitoring: To ensure no negative news goes unnoticed, AML Watcher’s adverse media screening scans over diverse credible news sources around the globe in real time. Early identification of bad news helps companies avoid onboarding risky partners or proceeding with a deal that could blow up later.
• Enhanced PEP Detection and Risk Scoring: Identifying politically exposed persons and other high-risk parties is effortless with AML Watcher’s PEP screening and customizable risk scoring. The platform has built-in intelligence to recognize PEPs (across levels 1–4, from heads of state down to local officials) and even their relatives and close associates, which ensures the due diligence process is always aligned with the internal risk appetite and regulatory obligations.
• Continuous Monitoring and Real-Time Alerts: With AML Watcher, due diligence has become an easy task. Whenever a new risk factor emerges, it will instantly trigger an alert to the teams depending on the current data, which requires teams to perform ongoing monitoring of clients, transactions, and counterparties.

All these capabilities are wrapped in an intuitive dashboard that simplifies case management and reporting. AML Watcher effectively acts as your due diligence co-pilot, handling the heavy lifting of data aggregation, screening, and initial risk assessment, so your compliance and diligence officers can apply their expertise more efficiently.

Get in touch with AML Watcher today to elevate your due diligence and protect your organization’s financial outlook.