FinTechs are used to conducting enhanced due diligence (EDD) on customers as a matter of course - to meet their KYC obligations and to identify red flags. But what about their own business operations? How confident are they that they know who they’re partnering with, where their money is coming from, and who’s getting involved in their business?
There are several scenarios in which FinTechs should seriously consider conducting EDD investigations into investors or business associates. These include:
Why are enhanced due diligence investigations important?
What do we mean by EDD investigations? The kind of research called for in these cases goes a long way beyond standard watchlist and adverse media screening. We have seen countless cases of subjects with chequered histories that raise serious red flags sail through screening. When managing high-risk customers, screening is generally the most appropriate option - you can’t conduct bespoke investigations on each customer. But when you are embarking on a one-off acquisition or conducting a funding round worth millions of pounds, there is the opportunity and the expectation to go further.
Cautionary Tales: The need for Enhanced Due Diligence
UK EMIs
Transparency International UK published a report in December 2021 which found that more than one in three UK registered electronic money institutions (EMIs) had money laundering red flags relating to their owners, directors or activities. These included:
- Individuals named in money laundering allegations and investigations
- Individuals with close links to high-risk firms in Russia and Ukraine
- Individuals with question marks over their suitability to run an FCA-authorised firm
Money Laundering Arrest
In 2020, UK peer-to-peer lender Zopa found itself in the news when board member Kapil Wadhawan was arrested as part of a $420m money laundering investigation. Wadhawan had co-led a £32m investment in Zopa which secured him a seat on the company’s board in 2017. He was arrested in January 2020 in connection with a money laundering probe in India, and subsequently had to resign his position at Zopa.
Kremlin Connections
Israeli-Russian billionaire Yuri Milner has invested in numerous FinTech companies in the US and UK, often through venture capital firm Digital Sky Technologies. In February 2020 he led a funding round worth tens of millions of pounds into the British start-up online mortgage broker Habito.
In 2017, media coverage of the so-called Paradise Papers reported that Milner’s investments in Facebook and Twitter used funds from two Kremlin-owned and now sanctioned Russian firms, VTB Bank and Gazprom. The origins of the money was reportedly obscured by shell companies.
Takeaway: In the thrill of securing financing, it can be tempting not to scrutinise potential backers too closely. However, as these case studies show, this is a potentially risky area and companies mustn’t be afraid to ask questions. Investors with poor reputations can affect portfolio companies’ credibility and their ability to raise capital in the future. And in the worst case scenario, target companies could even find their investors or directors are involved in criminal proceedings, or discover that an investment consisted of illicit funds.
What Does an Enhanced Due Diligence Investigation Include?
EDD investigations provide a full picture of a subject, allowing firms to really know their counterparties and to understand their backgrounds and source of funds.
Background, track record, modus operandi and reputation of the counterparty
Thorough review of corporate records, seeking to confirm information presented and even complex ownership structures, and to reveal any undisclosed beneficiaries or hidden interests.
Details of civil or criminal litigation or other regulatory or legal proceedings, which are often publicly available but not discoverable through standard screening searches
Details of any business disputes, or improper or illegal conduct
Any political exposure or relations with government officials, beyond that captured in PEP screening lists
A full enhanced due diligence investigation involves in-depth research of both the surface and deep web (gated, subscription-only and database sources) ideally using a mix of advanced AI tools, including sophisticated natural language processing, and expert human analysis. It may require research in multiple languages, the manual retrieval of records in jurisdictions where these are not available online, or consultation with vetted human sources.
Unlike routine customer due diligence, such investigations should be bespoke and allowed to develop based on the findings - there is no one-size-fits-all approach, as the information required and the research conducted will be different in each case. This calls for experienced investigators who know how to appraise findings critically and when to follow a lead, pursue a hunch, discount information or revise a theory.
FINTRAIL conducted a series of EDD investigations on potential investors on behalf of a UK-based FinTech. One of these investors was a businessman from Zimbabwe who had built his career in the high-risk telecoms sector. Moreover, he was a former associate of a high-profile African billionaire with top-level business and political connections.
FINTRAIL confirmed that the subject had a credible track record in the telecoms sector and was likely to have the funds for investment due to his previous career. We identified no noteworthy allegations of corruption or criminal behaviour. The subject’s companies had undergone financial failures and civil lawsuits, but we assessed these were the result of mismanagement and poor commercial decisions at an early stage in the subject’s career, as well as bad fortune with macro-level economic issues. We also investigated the subject’s current relationship with the billionaire and the latter’s political status, and confirmed that he had a remarkably sound and unblemished track record and reputation.
FINTRAIL contextualised the high-risk nature of the telecoms sector and the African jurisdictions in which the subject operated, and analysed the negative media reports around his companies. With this information, the FinTech was able to be confident there were no credible reputational issues or indications of criminal or unethical behaviour, and that the subject was within its risk appetite as a potential investor.
FINTRAIL conducted open source analysis of a Russian venture capitalist looking to invest in a UK FinTech, focusing on his background and reputation, political connections, and links to known high-level scandals, including the Russian and Azeri Laundromats.
Our experts uncovered concerns about the subject’s source of wealth and modus operandi: he had political connections to the Kremlin, held business interests in opaque jurisdictions through apparent shell companies, and had unexplainable UK corporate interests. We used our in-depth expertise of Russia to contextualise the findings and profile the individual concerned, navigating the fact his media profile was limited as his political connections likely shielded him from overtly negative scrutiny in the Russian-language press.
While there was no evidence to show the subject was directly involved in criminal activities, the various red flags and reputational concerns convinced the FinTech to reject the investment - a disappointment in the short term, but likely a prudent decision in the long run.
A UK-based financial institution asked FINTRAIL to conduct an investigation into a group of high-risk customers named in an OFAC sanctions investigation. They needed additional information beyond their standard EDD process, and an independent assessment of their existing controls.
Working closely with the client, FINTRAIL provided:
- in-depth information on the state of the sanctions investigation and the customers’ role in the underlying transactions
- a review of the client’s existing due diligence measures, and suggestions for enhancements and additional measures
- a view on whether the firm could be comfortable continuing to do business with the customers.
FINTRAIL confirmed there was no reason the firm should have deduced that the customers were involved in illicit activity, specifically any complicity in sanctions evasion. We opined that the firm was taking appropriate measures to limit and manage its risks, but that it may ultimately decide the customers were outside its risk appetite given the threat of future investigations and the reputational risk and operational costs associated with these relationships.
How FINTRAIL Can Help
At FINTRAIL, we combine deep experience in financial crime risk management with proven due diligence capabilities to provide clear, actionable, risk-focused intelligence using advanced analytical skills and data discovery tools. We contextualise all findings using in-depth knowledge of the countries and sectors concerned, including geopolitical context. We keep you updated of our findings throughout, and deliver comprehensive final reports with network diagrams and visuals where appropriate.
What makes us unique and sets us apart from other intelligence and due diligence providers is that our team is drawn from the industries we support, and has extensive experience of risk management processes within financial institutions. We provide intelligence by compliance officers for compliance officers. We understand your needs and operational considerations, and can supply you with the targeted, relevant information you need alongside informed recommendations and advice to produce actionable outcomes, guided by your own risk appetite and decision-making framework.
To learn more about how we can help with your requirements - whether it’s a one-off report or outsourcing complex casework - please get in touch with our team.