The recent shift towards digitisation has pushed businesses to review their KYC processes, and implement new strategies to protect their customers online.
In this on demand webinar, Robert Evans Fintrail co-founder and Claire Galbois-Alcaix at Jumio will discuss:
- The impact of digitisation on businesses and their customers
- The latest risks and compliance challenges
- How to implement a successful eKYC
- Tech innovations that help organisations keep their customers engaged
- Changes to the regulatory landscape and the future of eKYC
As people spend more time online, they leave a digital trail of information that can be used against them if put in the wrong hands. The convergence of online and offline has opened up entire new pathways for fraudsters, money launderers, and identity thieves to assume another person’s identity.
KYC (Know Your Customer) refers to the process of verifying the identity of your customers, either before or during the time when they start doing business with your organisation. With eKYC, businesses are able to perform identity verification and due diligence electronically, but must ensure they have the correct end-to-end identity verification strategies in place.
Rob and Claire will share tips and best practices organisations can follow to simplify their eKYC.
Islamic FinTech and Financial Crime: A different risk profile?
With particular thanks to insha, Kestrl, MyAhmed and Niyah.
Just like every other sector of the global financial industry, Islamic finance is increasingly going digital. There is a growing number of start-ups positioning themselves to benefit from the rapid global development of the FinTech market, coupled with the booming growth of Islamic finance. Islamic finance is sometimes considered a niche area, but this ignores the actual size of the sector, with a consumer base of 1.8 billion Muslims globally and an estimated market value of $2.5 trillion in 2018, forecast to grow 40% by 2024. These start-ups sit at the convergence of these two growth areas, and believe that young Muslims in particular will be drawn to products designed to facilitate integrating their faith and ethics with all aspects of their daily life, plus the ease and superior design features of a digital product.
Most growth in Islamic finance in recent years has been rooted in traditional banking services, but change and dynamism in the sector is translating more and more into digital offerings and FinTech startups. In 2019 there were an estimated 93 Islamic FinTech startups globally, including challenger banks for retail and SMEs (e.g. Kestrl, MyAhmed and Niyah in the UK and insha in Germany) as well as wealth management (e.g. US-based Wahed Invest), crowdfunding (e.g. Ethis Ventures in Malaysia and Indonesia) and crypto (e.g. Dubai-based trading platform Huulk). P2P finance and InsureTech are cited as top sectors for growth in 2020. Existing Islamic banks have also jumped on the digital bandwagon, especially in the Gulf, such as Bahrain Islamic Bank which launched the first fully-fledged Islamic digital bank in 2019. The largest market for Islamic FinTech startups is Indonesia, followed by the US, the UAE and the UK.
It’s interesting to note that many shariah-compliant FinTechs are keen to reach out to potential customers beyond the Muslim population in recognition of many people’s dislike and distrust of conventional financial services and desire for a more ethical, partnership-based approach. To this end, many Europe-based FinTechs in particular notably focus on the ethical dimensions of their product rather than just guaranteeing shariah-compliance, and market themselves as ‘ethical’ or ‘values driven’ rather than explicitly as Islamic, halal or sharia-compliant. This is also reportedly popular with Muslim customers, especially the young, who are more interested in services that focus on ethical considerations rather than “tick-box” shariah compliance.
Islamic Finance and FinCrime
Islamic and conventional finance most obviously differ in terms of the products offered and the target client base. But what of the risks they face, specifically financial crime? Are there certain financial crime risks which Islamic finance institutions are more exposed to, or conversely where the specificities of Islamic finance help protect them? And are there particular things Islamic FinTechs should be thinking about as they design and build their financial crime programmes?
This piece isn’t going to get into the complexities of Islamic finance and how transactions are structured. However, there are a couple of key concepts that are useful to set out here. Firstly, Islamic finance prohibits earning or paying interest, with a focus instead of profit (and risk) sharing. This results in a model where banks and their customers act as ‘partners’, which differs from the usual client relationship. Islamic finance also prohibits business in sectors considered forbidden or haram, such as alcohol, gambling, pork or adult entertainment. And finally, Islamic finance does not condone excessive uncertainty or speculation.
On an academic level, relatively little attention has been paid to financial crime risks in relation to Islamic finance and there have been few, if any, studies on relevant money laundering/terrorist financing methods and trends. International standards for AML/CTF regimes (such as those issued by FATF) make no provisions for Islamic finance, and are adopted wholesale even by countries with sizeable Islamic finance sectors without any adjustments. The papers which have been published (e.g. by ACAMS) tend to conclude there’s no evidence the ML/TF risks in Islamic finance are different from those in conventional finance, or that it faces unique typologies or methods. If anything, they conclude certain features of Islamic finance are likely to lower the ML/TF risks, such as the ‘partnership’ relationship between the financial institution and the borrower/lender, and the fact transactions are structured around the purchase/sale of underlying assets, which ties them to real-world valuations and makes it harder to disguise illicit flows.
FinCrime for Islamic Fintechs
So what does this mean for Islamic FinTechs in particular? Given the relatively scant attention paid to the topic by regulators and external bodies, and the prevailing tendency of conventional Islamic banks to treat financial crime the same way as everyone else, it is hardly surprising we’ve yet to see Islamic FinTechs formulate a specific approach to financial crime. And nor is it clear that they need one, given the current state of the market and the product types that most existing Islamic FinTechs offer. Where the academic studies do identify differences between conventional and Islamic finance, it is generally in relation to complex products such as trade finance and investment banking. These are areas which have yet to be targeted by Islamic FinTechs, which so far are mostly focused on P2P lending / crowdfunding and retail banking. In these areas, it is hard to see many ways in which the shariah-compliant aspects of the products could affect the AML/CTF risks. The one concrete example is almost a coincidental positive for Islamic finance - several of the sectors considered prohibited are also ones recognised as high risk for financial crime, such as gambling, adult entertainment and arms/defence. However the lack of any other discernible differences is borne out by a number of Islamic FinTech start-ups consulted by FINTRAIL, who confirmed that they don’t approach financial crime risk differently to their conventional counterparts and aren’t aware of any nuances or differences in the risks they face. For instance, one European challenger bank confirmed it uses a banking-as-a-platform provider to manage compliance, meaning it is comfortable using an off-the-shelf solution designed initially for non-Islamic institutions.
So, looking at the products and business models of Islamic FinTechs on paper indicates no real distinction. However there is one real-world factor which does make a difference - customer base. One standout issue is the provision of services to mosques and religious charities, which collect huge amounts of zakat donations, and can find conventional financial institutions reluctant to deal with them (and often Islamic institutions too). Charities, especially religious charities, are recognised as a high risk sector for AML/CTF risks, and coupled with payment corridors to high-risk countries where Islamic charities are likely to operate, places them outside of risk appetite for many conventional banks. Specialist Islamic FinTechs may be more prepared to find ways to mitigate the risks and serve these clients, as part of their ethical mission.
In Europe, concentration risk and the makeup of the target client base may also pose particular challenges (but also opportunities) for Islamic FinTechs. Their customers will be particularly homogenous, which may make them more vulnerable if a fraudster can work out a successful way to target this group. This would involve knowing how to mimic real customers’ identities and activities, as well as frauds designed to exploit religious sentiment, e.g. by using fake charity appeals during Ramadan. Beyond fraud, while many customers will be UK/EEA nationals, those who are foreign nationals are more likely to come from countries deemed high risk for ML/TF, and popular payment corridors for cross-border payments are also likely to involve such countries. This will all result in a high level of declined applications, high-risk clients, and transaction monitoring alerts, especially if companies use generic risk appetites and customer risk assessments or off-the-shelf monitoring solutions, or outsource their compliance programmes to banking-as-a-platform companies.
Conventional indicators and methodologies may thus not enable Islamic FinTechs to assess their client bases intelligently, and to work out if there are ways to mitigate any inherent risks in line with their own risk appetites. If they choose to accept these risks, they’ll need to ensure they can identify the most high-risk activity on their books, and dedicate their attention and resources appropriately. And if done right, they are uniquely well-placed to do so - they can use their greater familiarity with these client groups and any existing data to benchmark usual, unconcerning behaviour vs. activity they deem suspicious. For instance, huge cash deposits from a mosque during the last ten days of Ramadan would be immediately understood and contextualised. And while a conventional retail bank may see all payments marked as ‘zakat’ as high risk, an Islamic FinTech can use their richer datasets and contextual understanding to refine their monitoring systems and investigate hits to identify the most high-risk of these payments, to make sure they are allocating their time and resources effectively. In doing so, they have the potential to play a positive social role by ensuring inclusion - enabling fair and affordable access to financial services to those frequently excluded or disadvantaged by conventional financial institutions.
So to summarise, the distinctive financial crime concerns of Islamic FinTechs lie not in the theoretical nature of how they operate or the mechanics of their product offering, but in the real-life nature of their client bases. This idea is not unique to Islamic entities; in the increasingly crowded FinTech sphere, more and more firms are seeking a niche and are catering to specific client groups that pose a heightened financial crime risk on paper, such as expatriates sending remittances to specific high-risk countries, or sectors such as gambling or crypto that struggle to open accounts with conventional banks. The lesson for all these companies is that, while they must recognise the inherent risks posed by their client bases, they can and should tailor their financial crime programmes to adopt a risk-based approach, identify their own top risks, and allocate their resources appropriately.
If you are interested in speaking to the FINTRAIL team about this or any other financial crime topic, or any other elements of building or refining a customised financial crime programme, please get in touch with contact@fintrail.co.uk or maya.braine@fintrail.co.uk.
There is also further guidance available on the FINTRAIL website, including on defining a risk appetite, using data to drive a financial crime programme, and promoting financial inclusion.
Remote Delivery: NuBank Financial Crime Compliance Project
In the current climate the notion of ‘working from home’ has become the new norm. This means that some businesses have had to rapidly adapt how they work, how they deliver their products and services to their clients, and how they remain top of their game. Whilst FINTRAIL do have physical offices in London, Singapore, the US, we operate flexible working for our employees, and have also conducted fully remote projects in the past. We feel that these projects and our working set up has allowed us to quickly adapt to this new normal and we thought we would share some of our insights with the wider community.
One of our most recent fully remote projects involved working with NuBank on a Financial Crime Compliance project. NuBank is a Latin American neobank and they have one of the largest customer bases in the region and sector, and in January 2020 confirmed they hit the 20 million customer target. NuBank was a completely new client for FINTRAIL, and also one of our largest projects where there would be no face-to-face, or in person element at all.
The project spanned three jurisdictions; Brazil, Mexico, and the UK. This involved assessing, and analysing regulation from Brazil and Mexico, as well as scheduling calls to accommodate for two quite different time zones! After the project had been completed, we had a feedback session with NuBank to discuss what worked, and maybe what didn’t, when conducting a remote project. NuBank was very pleased with our work. They commented that we were aligned with them as a business, and the project results were above and beyond what was expected. We are confident that our work can be delivered in a fully remote nature, and this project only helped to solidify that confidence.
Key learnings:
Get the basics right. This may sound simple, but the client should be clear on the project timelines and deliverables. Having this understanding at the start and throughout helps to ease both sides of any unnecessary stress, and improves time management and control of the project. When a project involves no face-to-face aspect, all communication becomes much more scheduled, and therefore understanding the scope and nature of the project is key. This extends to us as FINTRAIL too, we always ensure that we understand a company and its products to the best of our ability when conducting a project.
Communicate, communicate, communicate (with the relevant people). Ensuring that the correct people are involved in the conversation is very important, especially during a remote project. With often already packed diaries, no one wants to sit on a video call that they cannot contribute to, or that they are not needed for. By inviting the correct and relevant stakeholders only to meetings where they are needed prevents video call fatigue within the project, helping for each conversation to be meaningful and for people to remain engaged.
Leverage technology. Tools such as Slack can really help with interim communication between larger video meetings. Slack allowed for timely access to key pieces of information, and to lay the groundwork for more in depth meetings. It was also crucial to have this kind of communication due to multiple time zones. Emails felt a bit stiff and formal, and could get lost in a pile, whereas the Slack messages could be picked up whenever suited, and answered quickly and easily.
Get in Touch
If you are interested in speaking to the FINTRAIL team about the topics discussed here or how we are working remotely with clients globally today on all aspects of their financial crime programme, please feel free to get in touch with one of our team or at contact@fintrail.co.uk.
FINTRAIL joins Tide on the Jumio Webinar: Covid-19 Anti Financial Crime Best Practices
Gemma Rogers, Co Founder at FINTRAIL joined Rebecca Marriott and Matthew Tataryn of Tide and Sam Duggan of Jumio for a live panel discussion moderated by Claire Galbois-Alcaix. In the webinar they cover:
The financial crime impact COVID-19 has had on financial services providers
The main financial crime threat factors that businesses are having to adjust to
How the FCA's latest recommendations can help businesses in the short term
FINTRAIL’s Digital Anti-Financial Crime (AFC) Support
As a tech first company we have always used technology to serve our clients in the best possible way. As the global financial service industry embraces new digital and virtual working practices, FINTRAIL is uniquely positioned to support global customers. We want to ensure that we continue to enable organisations to thrive while managing their financial crime risk and meeting their regulatory requirements.
As such we have taken three of our offerings and fully digitised them to ensure that we are still delivering the same tailored approach and bespoke output without compromising on quality. Our products are designed to be outcomes-focused and immediately impactful.
On any audit or health check booked between now and the end of July 2020, that is completed by the end of the year, we are offering a 5% discount. Additionally to play our part in the fight against Covid-19, we will donate a further 5% to the World Health Organisation (WHO) Covid-19 Response Fund.
Get in touch today to discuss this and how we are working remotely with clients globally today on all aspects of their financial crime programme, or find out more here:
Digital AFC Support
Into the Tigers Den
*WARNING - Tiger King Spoilers Ahead*
Hey all you cool cats and kittens,
Most people reading this have probably seen or at least heard of the hit Netflix show, Tiger King, with its outstanding viewership of 34.3 million within its first 10 days of release. At first glance, the docuseries looks to focus on the captivity of big cats in the US; however the involvement of Joe Exotic soon pivots the focus to his love-life, rivalry with the owner of a non-profit animal sanctuary, Carole Baskin, and ultimately to the murder-for-hire plot of said sanctuary owner for which Joe Exotic is currently serving 22 years in prison. A $1 million lawsuit with Carole Baskin’s Big Cat Rescue Group is also ongoing.
Whilst watching the captivating series, we at FINTRAIL noticed a reoccuring theme outside of big cats and cowboy boots. Financial crime. Episode after episode, it became evident that owning a roadside zoo in America comes with its own ecosystem of problems and characters, lots of whom have had their fair share of interactions with the law. This gave us an idea - let's set up our own big cat park ourselves! In this blog post we use Tiger King as a reference point, and walk you through how to set up your own zoo step by step, and ensure that the zoo and your activities can stay clear of the law. Of course, this isn’t actually our goal. We’re aiming here to highlight how easy it is to do this, and the grey areas in the current US system. We take a look at:
The ease of obtaining a permit for a roadside zoo, making it a prime target for exploitation
The complex ownership structure hinted at in the Tiger King that could be used to hide beneficial ownership
How the trafficking of big cats can be used as part of a wider money laundering operation
Joe may seem exotic himself but some of the themes and activities highlighted on the show are a sad reality, and are an open door for criminal exploitation.
License to own big cats, but not buy or breed them. But obviously there are ways to get round this...
The first step of this process is to apply for a government permit which will allow you to own a roadside zoo to show off your cats. Luckily, in many states in the US this is easy to do.
If you claim to be displaying the animals as an ‘exhibitor’, you can easily obtain a licence from the United States Department of Agriculture (USDA) for as little as $40. As a criminal looking to exploit any system available for financial gain, this is a prime opportunity to use a cash heavy business to launder profits through:
purchasing exotic animals with funds gained illegally
faking the sale of exotic animals to justify the transfer of funds
inflating the number of visitors to account for the increase of funds on the accounts
inflating construction costs for the park itself
inflating costs of upkeep for the animals and park
When applying, not much is asked about the applicant; as long as you have a social security number, you are eligible to exhibit big cats. Multiple previous convictions? Not a problem. Jeff Lowe and Mario Tabraue had convictions, including jail time, but this did not raise any red flags when submitting their applications. Surely, in a trade such as exotic animals where there are easy ways to make illegal profit, deeper checks into applicants should be crucial. It seems like the USDA just want to check you can pay them, rather than recognising the risk that is created by this lax entry criteria.
Joe who?
Whilst there is nothing illicit or illegal about changing your name, it can make tracing ownership and finding records and media related to a person more difficult than for someone who has had one, or maybe two, registered names. The first thing to note about Joe Exotic is the multitude of names which he goes by. In court documents he is often referenced by upwards of five different names. Joe has been married three times, and has changed his name each time, sometimes making a double-barrelled name. He also has his ‘stage name’ of Joe Exotic, which he uses in everyday life. Information such as previous names, or aliases that an individual goes by can be crucial when assessing what risk an individual may pose. For example, adverse media checks conducted on only one of Joe’s many names may yield very different results compared to a search on a different alias.
Old zoo, new zoo
When trying to hide assets, or even evade taxes, you may consider shutting down an existing business, and opening a completely new and fresh one. All the assets of the old business can be moved to the new business, however they are now under a separate legal entity, and in the case of tax evasion that business is unlikely to have any taxable profits.
In legal records from the case between Joe Exotic and Big Cat Rescue, we found some interesting narration around the creation of a ‘new zoo’, and dissolution of the ‘old zoo’. The G.W. Exotic Animal Memorial Foundation, referenced as the ‘old zoo’, was created in 1999 by Joe Exotic and his parents, Shirley and Francis Schreibvogel. Shortly after the lawsuit in 2013 involving Carole Baskin and the $1 million judgement, a request was made to the Oklahoma Secretary of State by John Finlay (the old zoo’s vice president/director, and Joe Exotic’s husband at the time), to request a reservation of the name “The Garold Wayne Interactive Zoological Foundation", and a day later The Garold Wayne Interactive Zoological Foundation (‘new zoo’) was incorporated. The incorporation of the new zoo was paid for using the funds of the old zoo, the old zoo was then dissolved, and within this dissolution assets including vendor accounts and the gift shop inventory were transferred to the new zoo. However, the new zoo did not assume any of the old zoo’s liabilities.
On paper, the two companies are different. Different names, possibly different ownership/management hierarchy structures - however it is clear to see that these two companies are intended to do the same thing, benefit the same parties, and ultimately have been created to hide, disguise, and try to put assets out of reach. This is an age old trick, and not one unique to the big cat or roadside zoo industry. As a result, law enforcement and the courts are well aware of this tactic. The court case recognised the new company was just being used as a vehicle to move and hide assets, and ordered the newly created Garold Wayne Interactive Zoological Foundation to also be held accountable for the $1million judgement in the lawsuit. If you are trying to hide your assets, it would be wise not to try this while in the middle of a court case when you are already under scrutiny of the courts.
Keeping it in the family, and under the radar
Ultimate beneficial ownership (UBO) is a hot topic at the moment, particularly in the UK, where it is a legal requirement for all companies to disclose their ultimate owners to the corporate registrar. However in the US the landscape is wildly different. No state currently requires a company to declare the UBO, meaning it is easy to disguise the true beneficiary of a company. There is even talk at the moment within the US of relaxing the rules further in light of COVID-19
Complex ownership structures can be exploited to hide assets, and conceal individuals’ investments and involvements in business ventures. Joe Exotic made use of this tactic, and is even heard within the docuseries saying proudly to the camera, “Look around! I don’t own anything!” When we had a look at some of the court documents surrounding the Tiger King, Joe was indeed right. He didn’t appear to own any assets at the zoo, or the zoo itself.
As mentioned in the previous section, the original GW Zoo was founded in 1999 by Joe, under his original name of Joe Schreibvogel, and his parents Shirley and Francis. It is quite clear from the show that the zoo is Joe’s, legally or otherwise; he makes all the decisions and it is his responsibility to run it day to day.
The Big Cat Rescue Group settlement agreement outlined the continued involvement of Shirley in the zoo’s finances, without her having much actual involvement in the zoo itself. On paper, Shirley was the landowner and leased the land to the GW Zoo; however the settlement stated that these were not ‘arm’s length’ leases, and instead were used to transfer funds and assets to Shirley, so that they would remain out of reach of the ongoing lawsuit against GW Zoo/Joe Exotic.
The settlement also states the ownership status of many vehicles and trailers within the zoo, and surprise surprise, they are all owned or leased by Shirley. Once again, this is a ploy to move all of the assets out of Joe’s name, and therefore supposedly out of reach of the court case.
Lions and tigers and bears, oh my!
Arguably the most important aspect of establishing a zoo is the animals.
You may think that getting hold of exotic animals would be difficult, but in many states it is simpler to purchase a tiger than to adopt a puppy. The Endangered Species Act of 1973 makes it illegal to sell endangered wildlife interstate or through foreign commerce in the course of a commercial activity. However you can be exempt from this Act if you are a USDA licensee, which is relatively easy as shown at the beginning of this piece, or an accredited sanctuary.
If we look at how Joe Exotic accumulated more than 200 tigers within GW Zoo, this was primarily done through breeding at the zoo. To care for a tiger, the food cost alone is between $7,500 and $10,000 per year, therefore Joe was not able to keep the whole litter and would sell the cubs. With the price of a large cat ranging anywhere from $900 for a bobcat to $7500 for a tiger cub, you can see why this is an attractive business and why Joe Exotic sold 168 tigers between 2010 and 2018 (the below map shows the far-reaching transfers of tigers from GW Zoo). Before 2016, there were fewer restrictions on the sale of captive-bred tigers as they were not considered important to conservationists and therefore could be freely traded, making it easier to trade across state lines.
As you can see from the above, the amount of money that passes through a roadside zoo can be extensive, and this isn’t even including the admission and tour fees - some establishments charge nearly $400 per person for a tour.
Not only can a zoo be used to move funds from other illicit activities, but there is great opportunity to use the zoo to commit illegal acts:
Purchasing or selling endangered wildlife in a banned state or without the appropriate licence
Trading wildlife that has been illegally obtained
Laundering cash through inflating prices of wildlife sales
Storing illegal drugs, as allegedly done by Mario Tabraue, who appears in the docuseries, before his arrest in 1987.
The purchasing, breeding or exhibiting of exotic wildlife without the appropriate licence is illegal and therefore makes these animals criminal property. Profits from the subsequent trade of these animals are therefore the proceeds of specified unlawful activities (SUA), and money laundering is added to the long list of crimes that can be committed by these zoos.
So where do I sign up?
Absolutely do not set up a roadside zoo.
The opportunities to conduct financial crime from a roadside zoo are extensive. The process of constructing a zoo itself presents the perfect opportunity as you can deal with high amounts of invoices for builders/supplies and deal with cash intensive industries to move illicit money. The subsequent running of the zoo creates more opportunity from buying and selling exotic wildlife illegally, to moving illicit funds through the zoo with inflated ticket prices and upkeep of the park. And as with other business types, you can set up constantly changing complex ownership structures to hide your assets.
As we have shown throughout this analysis, things aren’t always as they seem. Something that from the outside may look like a legitimate business can be used in numerous illicit ways. For financial institutions that service corporate clients, it is vital to analyse the industry lists in the context of your product offering, jurisdictional coverage and client base and see if something that might generically pose a low risk of financial crime, could actually be used extensively for financial crime purposes. Hopefully this article has given you some red flags to watch out for, such as unnecessarily complex ownership structures, repeated changes in ownership, multiple name changes or aliases, or historic involvement in lawsuits or criminal prosecutions.
Get in Touch
If you are interested in speaking to the FINTRAIL team about the topics discussed here or any other anti-financial crime topics, please feel free to get in touch with one of our team or at contact@fintrail.co.uk.
FINTRAIL on the Sibylline Podcast: No Lockdown Here – Covid & Financial Crime
FINTRAIL’s APAC MD, Payal Patel, joins Sibylline COO Tamara Makarenko and Samantha Sheen for a conversation about the impact COVID is having on financial crime.
Their discussion covers why financial crime is ‘surviving’ lockdown, new financial crime trends, the regulatory response, and how companies can safeguard themselves. The podcast ultimately outlines a few ‘Golden Rules’ of how we can build our resilience to this unfolding financial crime environment.
FINTRAIL on the Captivated Audience - Season 1, Episode 26
In this episode, FINTRAIL’s James Nurse, joins hosts Sam Sheen and Marie Lundberg on the Captivated Audience podcast.
In this episode James offers insights from recent FINTRAIL papers on Social Media and Financial Crime, and the iterative risk approach to pre and post pandemic working for FinTech.
Relationship Management During Covid-19
We don’t really do the whole cold-calling thing at FINTRAIL. We are all pretty personable and we love to get out and chat to industry peers, whether over a coffee or a cheeky glass of wine. This is our best and most powerful way of building strong relationships with the community. So when Covid-19 emerged and we were all put on lockdown, naturally this put a spanner in the works for us at FINTRAIL. Remaining open minded and not being afraid of taking on the difficult challenges, we knew we still had to reach out to our network.
However, after week three of lockdown, as it dawned on everyone that we were in this for the long haul, the community remained strong. We found the majority of people were more than happy to have a 10 minute phone call/video chat. I can only put this down to a severe and sudden withdrawal of human interaction and a realisation that this was a long term predicament.
Below is a light-hearted summary of the reality of the effects of the lockdown:
No one has worn proper clothes for a while; changing out of yoga pants and hoodies to put on “real” clothes seems absurd now. Which ties in with point number 2..
There is a general worry that no one will fit into their “real” clothes again as the daily step count has gone from 10,000 down to 100.
Most people are binge watching Tiger King, except me who is binge watching Billions (in both cases, we’re classifying these shows as work-related “research”).
A home workout was attempted 3 weeks ago, but you forget how loud the music is in a gym class; it blocks out certain noises. I could very clearly hear myself gasping for breath which was enough to put me off trying that again.
I have found common ground with others, who like me, walk over to their fridge, open it, stare inside and sit back down again. We have a secret hope that a magical bar of chocolate (that we didn’t put in there) will appear. Leading onto number 5..
As that magical chocolate bar didn’t appear, some resorted to eating their Easter eggs a week before Easter.
We are all experiencing the same thing in varying degrees; whether that be trying to homeschool two kids while working from home, having your dog barking in the background just as it’s your turn to speak on a conference call or needing a banner that pops up at the start of every VC call saying “this is not my house, don’t judge me on my parents’ decor”.
If you fancy a break and a random chat, feel free to contact us at FINTRAIL; after all we are all human. There’s a time for business and a time to be human (who knows, we might even manage to have a productive conversation and do both)!
How Social Media is used to Further Financial Crime - Part 2
Similarly to most 18-year-olds, “Carlos” is glued to his phone, constantly refreshing his social media feeds and scrolling through friends’ pictures. In contrast with many other teenagers though, Carlos’ uploaded photographs illustrate a level of opulence and a life of excess. Carlos and his friends are pictured holding wads of cash, draped in designer clothes, Rolex watches on their wrists, and driving around London in a Mercedes. This seems quite implausible for an individual who left school after GCSEs and is now a junior employee at a central London restaurant (1).
Is the use of social media helping to fuel this problem? The HM Inspectorate of Probation’s report, ‘The Work of Youth Offending Teams to Protect the Public’, have described social media platforms as the “catalyst for some of the most serious and violent crime offences” (2). This is of no surprise as there has been a generational shift, with youngsters now living in a progressive online world which some adults just cannot get to grips with.
In Part 1 of this series, FINTRAIL used four basic money-mule associated search terms to pre-identify social media accounts of interest and those assessed to be associated with potential mule activity. These search terms were “Legit money UK”, “Easy Money UK”, “Flip Money” and “Instant Cash UK”. This investigation now seeks to focus on the initial phase of money mule recruitment and how by disrupting this critical stage it can disrupt the rest of the money mule value chain. However, it is important to first understand the money mule life cycle which looks like this:
Honing in on Step 1 i.e. contact over Social Media, FINTRAIL have identified a number of key indicators of which combined together likely indicate an attempt to lure someone into Money Muling; these fall into two categories, visuals and language.
Visuals: There are a combination of images used that show instant gratification; key features include cash, cars, watches and evidence that large sums have been transferred into bank accounts. Further to this, many of the pages had adverts in their “stories” asking people to DM them if they want to make money quickly and requested people with very specific bank accounts to get in touch.
Language: By doing a simple drag and drop of Facebook, Instagram and Twitter pages into a tag cloud generator, FINTRAIL identified the types of language used across all platforms; the more popular the word, the larger it appears. The language used on the accounts really highlighted three key areas; fraudsters would request a specific bank account whether Barclays, Lloyds etc, then offer free fast easy money and explain that this was only a DM or whatsapp message away.
High chance of money muling: The combination of these images linked with these words are likely to indicate and point to something unsavoury and potentially illicit. This combination of factors can be used by social platforms to limit the likelihood of false positives when monitoring behaviour on their platforms and if kept up to date with evolving typological information, would create a far more effective disruption to wholesale financial crime scams than the over reliance on the regulated financial sector, by which point the damage is already done and the act of money laundering has already occurred.
So What Next?
For FINTRAIL our money-mule journey on the social media platforms ended with the phrases “DM me for more info” or “whatsapp me”. However, in reality we know that this is only the beginning. We know that from here, behind the scenes, bank details are exchanged and money transfers are being made. This is where law enforcement has a critical role to play, coordinated with social media platforms, so that more can be done upstream to reduce the impact and have far more effect, reducing harm across the value chain of money mule activity.
Instagram as well as Facebook, use a new AI system Deep Text to essentially deal with and counteract major issues such as cyber bullying as well as malicious posts and comments. If the Instagram algorithm detects or finds provoking content, it’s discarded immediately. This demonstrates that technology already exists that can have an enormous impact on how social media platforms are abused (3).
A robust disruption of Step 1 of the money-mule cycle that is facilitated by social platforms will have a significant downstream impact where the end result would likely amount to a positive reduction in;
harm and exploitation of vulnerable people
costs to law enforcement effort (investigating money-mule cases)
the burden on the UK and global Suspicious Reporting Regimes
the burden placed on those operating in the regulated financial service sector
Very clearly, this needs to be an industry wide coordinated effort with law enforcement at the forefront and social media platforms on board. During the fifth Europol Money Mule Action (EMMA 5) week, 3883 money mules were identified alongside 386 money mule recruiters; 228 of these were arrested. As a major catalyst of money muling recruitment, social media platforms should share the burden and play their part in the deterrence of money muling by utilising technology they already have.
Get in Touch
If you are interested in speaking to the FINTRAIL team about the topics discussed here or any other anti-financial crime topics, please feel free to get in touch with one of our team or at contact@fintrail.co.uk
(1) How teenage money mules funnel millions from online fraud
(2) Monitor social media of young offenders to prevent crime says watchdog
Keep Calm and Keep Planning: Pandemic Planning for FinCrime
No business sector has been left unaffected by the outbreak of the coronavirus. The financial sector, including FinTechs, is no exception. In times like this, working together as a community is more important than ever.
This document collates examples of how COVID-19 has impacted the FinCrime operations of FinTech FinCrime Exchange (FFE) members and how the teams have responded as they pivot to almost exclusively remote operations, as well as presenting some best practice guidance for a business continuity plan (BCP) and remote anti-financial crime (AFC) compliance.
It looks at how international bodies, financial regulators and law enforcement agencies across the globe have responded so far to the ongoing coronavirus situation, highlighting specific areas FinTechs should focus their attention on.
The document also discusses differences between traditional business continuity planning and pandemic planning which may present unique challenges to Fintechs management teams. Finally, in its annex, the document collates information on COVID-19 related scams divided into four categories: imposter, product scams, investment scams, and insider trading.
This guidance is based on research conducted by FINTRAIL across the FFE community. This includes a survey sent to all global members, review of 31 responses, 15 follow-up interviews, and additional research and analysis conducted by FINTRAIL. The survey and interviews were conducted during the week commencing 16 March 2020.
With thanks to members of the FinTech FinCrime Exchange for sharing best practices.
FINTRAIL on the Captivated Audience - Season 1, Episode 12
In this episode, FINTRAIL’s Greg Wlodarczyk, joins hosts Sam Sheen and Marie Lundberg on the Captivated Audience podcast.
Listen as they discuss the importance of technology and people for FinTechs, the FinTech FinCrime Exchange (FFE), how changes in consumer behaviour affect AI and transaction monitoring and the inside track on FINTRAIL’s upcoming survey results on the business continuity activities of the FinTech community.
EUROMONEY - Regulation: For AML, FinTech is both problem and answer
Set against a number of high profile money laundering scandals in the sector, FINTRAIL Co Founder, Robert Evans was interviewed by Dominic O’Neill, EUROMONEY, along with some key industry leaders to discuss AML and FinTech and how technology, particularly RegTech, can help support financial institutions in upholding their regulatory requirements in the global fight against financial crime.
Rob discussing the negative press around FinTech:
“Because of the online nature of the communities they serve, they can be vulnerable to pressure applied by legitimate customers with legitimate complaints and vulnerable to misinformation,” says Evans, discussing the neobanks. “Fraudsters have learnt that applying pressure via social media is a way to release funds that have been frozen for good reasons.”
VIXIO PaymentsCompliance - Payment Firms Scramble To Counter Corona Fraud As Spending Shifts
As warnings abound over the frauds and scams taking advantage of the coronavirus crisis, the flexibility of financial institutions to react and adapt to the emerging threat is being tested.
Gemma Rogers, Co Founder at FINTRAIL was interviewed by Douglas Clarke-Williams, VIXIO PaymentsCompliance about how criminals are using the Covid-19 situation to their advantage to carry out financial crime related activity. Gemma also discusses some of the measures and adaptation an anti-financial team should think about to counter it.
"As you get into the detection methodology, reading up and being aware of these scams, and being aware of how they will manifest, is key," she told VIXIO PaymentsCompliance. "Then you can start to tune your transaction monitoring rules to look for the behaviours which might indicate that a customer has been scammed - or perhaps, worst case scenario, that a customer is perpetrating one of these scams."
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How Social Media is used to Further Financial Crime - Part 1
Introduction
Facebook, Instagram and other social media platforms have created simple methods of association. This in itself is both social media’s greatest strength and greatest weakness. You can share friendships globally but those with nefarious intent also have the mechanisms to create connections and identify vulnerable individuals that can be exploited to further their criminal activity.
Over the course of one week (pre-Covid-19 crisis) and as a follow up to our last article on this topic “The Role of Social Media in Furthering Financial Crime”, FINTRAIL conducted research on three key social media platforms, to assess the exposure of the platforms to financial crime activity - specifically money muling. This exercise should be considered a basic benchmark of the problem; our analysis suggests the scale is significant and likely to be systemic to the way money mule networks operate. This is further emphasised when you consider all the available social platforms likely to be used and private/DM functionality that keeps much of the content private.
Methodology
Research material was obtained through passive observation, some of the groups identified were joined but at no time was there any form of direct engagement. FINTRAIL used four basic money-mule associated search terms to pre-identify accounts of interest and those assessed to be associated with potential mule activity. These were then manually reviewed to assess the group activity.
For this benchmarking FINTRAIL focused on three platforms; Facebook, Twitter and Instagram. The below infographic depicts the findings. Note: there has been no formal network analysis done to identify any crossover between platforms.
Findings
Summary
Pre-Covid-19, many people were already anxious about their financial situation, making them vulnerable to exploitation by criminal gangs seeking to develop mule networks. Research completed by Barclays revealed 6 in 10 people (60%) of respondents were worried about their finances on a weekly basis.
Since Covid-19 started to bite globally, significantly more people have become financially vulnerable with more people out of work and in dire need of money to cover living costs. These factors create the ideal conditions for criminal gangs to target the vulnerable and there is likely to be a significant increase in the number of people who fall into the trap of money muling.
We will be investigating further into this topic in Part 2 looking to provide some practical information that social media platforms (and others) could use to help in identifying and preventing this kind of activity.
If you have any comments or would like to discuss the issues in this post, or wider anti-financial crime topics, please feel free to get in touch with one of our team or at contact@fintrail.co.uk
Stop. Collaborate and Listen
In our latest thought leadership piece we explore the idea of collaboration. This joint piece between FINTRAIL/FFE and RDC demonstrates the vital role that collaboration plays. We discuss the impact it has on the global fight against financial crime whilst highlighting some of the current collaborative efforts within both the public and private sector to date, showing their effectiveness within the FinTech and Banking industries.
Our ultimate conclusion is that the dispersal of information to a variety of individuals closely involved in the fight against financial crime is essential to any successful AML initiative.
The Impact of Coronavirus on Financial Crime is Bigger Than You Think
From war to pandemic, there is always a class of profiteers seeking to take advantage of a country or world in crisis. Unsurprisingly, the behaviour has emerged once more in response to the escalating international outbreak of COVID-19. US cyber security firms and news agencies have repeatedly warned about the rise in coronavirus phishing scams, where emails purporting to be from trusted authorities like the Center for Disease Control and Prevention (CDC) and World Health Organization (WHO) are being sent to unsuspected victims, tempting them into downloading malware onto their devices. Scam cures, such as colloidal silver and essential oils, are also on the rise. The Federal Trade Commission (FTC) and Food and Drug Administration (FDA) have even issued warning letters to several companies, who may be found to have violated federal law for selling unapproved products using false claims.
Unfortunately for financial crime compliance professionals, coronavirus risks go far beyond old scams targeting new fears. The landscape and scale of financial crime compliance risks are fundamentally changing, and without sound risk management, we might find ourselves among other overwhelmed, underprepared industries in the face of a pandemic.
It’s Not Just Fraud
While fraud has understandably received the most immediate financial crime-focused coverage, this is not the only financial crime area that we should analyse for potential spikes.
For example, we could see spikes in certain types of money laundering activity. Look at money mules - who are often recruited online through fake social media employment or romance scams. As individuals lose their jobs or have to find work from home, the prospect of being able to earn funds quickly through moving money from one account to another may become even more attractive. Some sites are even directly recruiting money mules in the name of supporting coronavirus victims.
It’s not all bad, however! Cash-based activity is on the decline in countries hard hit by coronavirus, and potentially cash-based money laundering along with it. Major international terrorist groups, such as the Islamic State, are advising their fighters not to travel to Western countries undergoing severe outbreaks of coronavirus, which could impact terrorist financing flows.
The best thing for financial crime professionals to do is to spend time thinking about how the pandemic may impact the specific financial crime risks they face as a business. They can then adapt their controls accordingly, to best mitigate the evolving threat landscape.
Investigation and Enforcement
Investigations are beginning to stall in the face of coronavirus as well, hindering the ability to meaningfully prosecute complex, cross-border cases involving bribery and corruption, organised crime and sanctions evasion. As the pandemic spreads across the globe, with travel bans, home working and quarantines being used as containment measures, compliance officers and lawyers investigating bribery and corruption have been forced to delay meetings and interviews, which could allow cases to drag on and bad behaviour to continue to proliferate.
In addition to stalling investigations potentially allowing for compliance risks to slip through the cracks, law enforcement is also facing pressure to keep up with demand. Police in the US are now shifting gears to enforce coronavirus rules and in some areas, have been urged to avoid “unnecessary arrests” as this could only lead to the virus spreading. Law enforcement priorities are fundamentally shifting, and financial crime is unlikely to get the focus or resources it needs.
Compliance Ops
Particularly in FinTech hubs like New York City and San Francisco, the latter of which is under a shelter-in-place order, employees are having to work from home in order to keep the business running smoothly, and this includes BSA/AML compliance operations staff and analysts. While FinTech workplaces generally encourage more working from home and may have better controls in place to ensure data security, the hasty transition can still generate problems if not managed effectively.
While internal fraud is often viewed as less of a concern in small and medium sized FinTechs, given the close and collaborative nature of their teams, this risk should still be fully mitigated. More than half of all frauds committed against business are done so either internally or by an internal actor colluding with an external one. And this is something we have increasingly begun to see in the FinTech sector. We have personally experienced cases where FinTechs have had to engage in trying internal fraud investigations, or where staff have been contacted by organised crime groups asking them to engage in fraud.
Generally speaking though, the vast majority of internal staff are team members trying their best for the company. Front line team members need to be supported now more than ever in the work that they complete. Staff may fall ill, leaving others having to balance heavier workloads. Staff may not find it as easy reaching out for help evaluating a new alert. And responding to crises can also detract from other important financial crime tasks, like filing SARs (if this is the case, make sure to contact FinCEN). In-person training and support that staff need in order to thrive, excel and finish work on time may not be readily available. By taking steps to ensure regular team communication, health, wellbeing, and safety, as well as access to educational resources, firms can build out more resilient teams.
Recession?
Finally, we get to the elephant in the room: it’s difficult to find an economist that doesn’t think the coronavirus pandemic will bring the global economy into recession, especially as we seemed to be nearing one prior to the outbreak. With transportation and hospitality industries suffering major blows, and with outbreak hotspots like Italy already facing a delicate economic balance, we should start looking at what impacts a recession could have on financial crime levels now.
Data from the last global recession indicates that financial crime and crime generally can go up during a recession. The first 6 months of 2009 for example had the highest fraud rate observed to that point in KPMG’s Fraud Barometer, and 36% of senior executives reported to Kroll that they believed fraud risks had increased due to the recession.
One report from the World Economic Forum indicated that, for young people struggling to find employment during a recession, the arrest rate increases by 10.2%. The difficulties in pursuing legitimate employment make criminal enterprise more attractive; what’s worse - once involved in criminal activity, it can be very difficult for these individuals to leave, making the level of recession-rooted crime increase further.
When thinking about financial crime contingency planning in the face of coronavirus, we need to think even bigger than just the short term impacts and start evaluating what our response will be in the face of possible recession. This also includes considering what typologies may evolve or proliferate, such as benefit fraud as more people apply for unemployment.
What You Can Do
There is a lot of uncertainty out there in the face of coronavirus, and we will benefit as an industry by working collaboratively to tackle financial crime challenges as they occur. The below are just a few tips and tricks for how to tackle coronavirus as a financial crime threat:
Reconsider your BSA/AML risk assessment. Which inherent risks are more or less impactful in the face of coronavirus? Which controls might be weakened?
Evaluate whether your second line controls can provide the same level assurance in the current situation. For where external expertise is needed, work with digitally-focused consultancies who can easily support you remotely.
Check up on your internal fraud procedures, to ensure strong whistleblowing protocols are in place, as well as appropriate access rights and 4 eyes checks.
Increase staff engagement through financial crime catch ups, remote training and clear lines of communication.
Don’t stop contingency planning, and add a potential recession to the list of events you’re planning for.
We are working hard with the FinTech FinCrime Exchange community to learn more about what specific steps the international FinTech sector is taking in response to coronavirus as part of their contingency planning. Stay tuned for future insights.
If you have questions about how your business should proactively take on financial crime in the context of coronavirus, reach out to Megan Millard or Meredith Beeston.
The Role of Social Media in Furthering Financial Crime
Content warning: discussion of topics linked to suicide and child exploitation
Recently in the UK we’ve seen the suicide of a reality TV presenter, and in March 2019, the father of Molly Russell urged the government to introduce regulation on social media platforms in response to his 14-year-old daughter taking her own life. She was found to have viewed content related to depression and suicide on Instagram before her death. While neither of these tragic instances can be solely attributed to social media, many are discussing the arguably significant role that online media played in both cases.
Following on from these instances, in early 2020 the government announced that Ofcom - the communications regulator - was to be given the power to fine social media companies in a bid to protect children from harmful online content. Ofcom will not only be able to fine companies that fail to remove illegal content - such as the promotion of terrorism or child pornography - but online platforms will also be required to stipulate what behaviour and content is acceptable on their sites, and enforce those rules consistently and transparently.
Clearly, the priority for Ofcom and social media firms has to be removing the most immediately harmful content - that which promotes suicide and child exploitation being critical. However, there is also an argument for Ofcom and the social media firms to ensure that other types of content are correctly classified as illegal and are therefore removed. The other types of content that we at FINTRAIL believed should be more heavily moderated and removed pertains to financial crime.
From our consulting experience in the FinTech sector, we have seen a multitude of financial crime cases where the schemes start on social media. In fact many of the low level criminal activities are facilitated and can only be effective due to social media. A few examples include:
Promoting the sale of goods on social media platforms; victims agree to purchase the goods, transfer the money to an account (often in the scammer’s own name, using their real identity) and the goods never materialise. These are also known as advanced fee fraud.
Money launderers recruit people - and pay them for access to their bank accounts - via social media profiles. The launderers use the access to the recruits’ accounts to wash the proceeds of crime. This is known as money muling, and is worryingly common, even among young people.
Scammers can further advertise purported investments schemes online, attracting potentially thousands of users and defrauding them of large sums of money, sometimes even their life savings.
Images from social media used to entice individuals into money muling and other get rich quick scams.
Even in isolation, the results of these scams and schemes are incredibly harmful to the individuals involved; in some cases causing them to be blacklisted from banks (for having perpetrated money laundering through their accounts in the case of money mules), or in others to lose significant amounts of money. However, it is also important to recognise the wider harm that such behaviour has on the rest of society.
Firstly, not only do many of the fraud and laundering schemes detailed above connect back into wider organised crime, involving the predicate offences of illegal drugs sales, human trafficking, corruption, arms trafficking, kidnapping and extortion (inter alia), all of which have an enormous human cost; secondly, the estimated cost of financial crime to global economy is conservatively estimated at between USD 1.6 trillion and USD 2.2 trillion. A Global Financial Integrity report from 2017 underscores how transnational crime undermines economies, societies, and governments, particularly in developing countries, often preventing those who are most vulnerable from getting the support they need, ironically, increasing the chances that they too become embroiled in a life of crime.
So, it’s with these huge human, societal and economic costs in mind that Ofcom needs to work closely not only with the social media firms themselves, but also with financial services firms, financial services regulators and law enforcement to best determine what content should be categorised as illegal and harmful, and seek to include this in their regulatory scope.
In the same way that financial services firms are heavily regulated - because of the harm the provision of their services can cause - social media firms should also be required to take more proactive steps to prevent, deter and detect illegal and harmful content pertaining to financial crime from appearing on their sites.
Practical steps social media firms can take mimic those applied in the financial services sector, such as Knowing Your Customer (KYC) processes - including identity verification such that they can more effectively block repeat offenders - and more intelligent activity (transaction) monitoring, such that they can proactively identify higher risk profiles that should be subject to enhanced monitoring. This doesn’t have to be an arduous process: the FinTech sector has demonstrated that frictionless processes can exist, whilst maintaining compliance and gathering an appropriate level of customer due diligence in the process.
Clearly, any of these processes will have to be implemented proportionately, particularly to ensure the continued freedom of expression and speech. However, considering the harm that social media appears to be, if not causing then at least amplifying, spending time, effort and money combating these issues and working to ensure proportionality is key for the ongoing success and safe utilisation of social media platforms in today’s society.
Get in Touch
If you are interested in speaking to the FINTRAIL team about the topics discussed here or any other anti-financial crime topics in an increasingly digital FinTech world, please feel free to get in touch with one of our team or at contact@fintrail.co.uk
Celebrating International Women's Day at FINTRAIL
International Women's Day (8th March) is a global day celebrating the social, economic, cultural and political achievements of women. The day also marks a call to action for accelerating women's equality. At FINTRAIL we are committed to equality and wanted to join in celebrating the women that contribute to making FINTRAIL a great place to work.
Gemma Rogers
I co-founded FINTRAIL in 2016.
“My FINTRAIL highlight so far was realising that we had achieved gender parity among our leadership team. 💪”
Maya Braine
I’m the newest member of FINTRAIL, and joined the team two months ago.
“I joined FINTRAIL because I wanted to work in a dynamic, growing team where I could challenge myself, take the initiative, and feel my contributions make a real difference.”
Payal Patel
I have been part of the FINTRAIL team for almost a year.
“My plans for FINTRAIL Asia this year are to continue to work with the most innovative and exciting FinTech companies in the region and to expand the rapidly growing FFE network.”
Lauren Vincent
I have been part of the FINTRAIL team for 8 months.
“The best part of my job is how much knowledge I am able to gain from my colleagues on a day to day basis.’'
Danielle Jukes
I have been part of the FINTRAIL team for 4 months.
“If I had to sum up the FINTRAIL team I would say that we’re a diverse team and all share a passion for our work.”
Meredith Beeston
I have been part of the FINTRAIL team for 2 and a half years.
“I chose to work in FinTech FinCrime because I wanted to work alongside a growing industry and help find innovative ways to use technology in the fight against financial crime.”
Ishima Romain
I have been part of the FINTRAIL team for almost 3 years.
“The top 3 things I've learned during my time at FINTRAIL: Personal - a traditional background isn’t required to be part of FINTRAIL. Technical - many processes that businesses conduct independently, as they usually align to wider controls, should be done collectively. General - to be adaptable in this ever evolving disruptive industry.”
Rachel Clark
I have been part of the FINTRAIL team for 6 months.
“This year I am most excited about hearing the new FFE Podcast which will give interesting insights into individuals experiences with FinCrime in the FinTech sector.”
Investor Due Diligence: A Two Way Street
Zopa: Scandal in the Boardroom
Last week, UK peer-to-peer lending firm Zopa found itself in the news when board member Kapil Wadhawan was forced to resign following his arrest in India over money laundering allegations. Wadhawan, the chairman of Wadhawan Global Capital and the owner of a large property finance group in India, co-led a £32m investment in Zopa which secured him a seat on the company’s board. He was arrested by the Enforcement Directorate, an Indian government agency responsible for policing financial crime, in late January in connection with a money laundering probe.
This incident highlights the importance of knowing who you’re doing business with - not only employees, partners, and vendors but also investors. In the thrill of securing financing, it can be tempting not to scrutinise your potential backers too closely, but as the Zopa case shows this is a potentially risky area. This is the start of a long term partnership, so both sides need confidence in who they’re dealing with. “Investor due diligence” should cut both ways, and target companies should be prepared to conduct “know your investor” research. Investors with poor reputations can have a knock-on effect on portfolio companies’ credibility, and their ability to raise future funds. And in a worse case scenario, these companies could even find their investors or directors involved in criminal proceedings, as in the Zopa case, or discover that the investment consisted of illicit funds.
Doing your Homework: Reputational and Integrity Due Diligence
Reputational and integrity due diligence should form part of the wider due diligence process alongside financial, commercial and legal diligence, and is vital for understanding financial crime risks. It can be relatively straightforward to ascertain the track record and reputation of well-established investors, but for more niche investors, those based overseas, or new figures in the market, this may not be so straightforward.
The obvious questions for an investee to ask are whether the investors are well-established figures with a good track record and a logical interest in investing in the company in question. How long has their firm been incorporated, has it made successful investments in the past, and does it have discernible experience in the sector? Does it seem to be in good financial standing? Are there any indications the investors have been involved in any previous scandals or legal or regulatory issues? It’s also important to understand their modus operandi and if they have ever been involved in dubious or aggressive business practices, or disputes with partners, competitors or other investees. This may involve determining if they are the subject of any inquiries by regulators or law enforcement agencies which haven’t yet reached the stage of formal proceedings.
In addition to the above, there are further issues to consider for investors from overseas jurisdictions with lower standards of transparency and higher levels of financial crime. What is the source of funds - how did the investor initially make their money? In some countries, analysing this information may require understanding of the country and its history - for example, anyone who established their fortune in Russia and the former USSR in the privatisation programmes of the 1990s. In many countries, it will be important to understand political patronage - whether your investors have political influence or connections, whether this could have helped them make money illegally or unethically or to avoid legal actions, and whether their position may be threatened by changes to the current political regime.
Sources of Information
In practical terms, where can investees find the answers to these questions? They will likely start gathering information in-house through basic steps like online research - sources like the investor’s own website, news reports, and Google searches. Speaking to others in the marketplace will help provide a sense of the investor’s track record and general reputation. To ensure consistency and transparency, investees can implement an ‘investor due diligence’ process (a project which FINTRAIL is ideally placed to facilitate), which in many ways mirrors a customer onboarding process. It will allow the investee to make sound, defendable decisions by establishing a methodology to collect consistent information from defined sources, analyse it in line with clear criteria and parameters, and establish transparent escalation and decision-making processes.
In some cases, it will be advisable to seek expert help in conducting this due diligence research, especially if early red flags are identified or if there are discernible high-risk factors such as the investor’s main country of operations. Expert due diligence research will look at the online sources mentioned above plus specialist media databases, local and overseas litigation and corporate records, regulatory watch lists, foreign language media reports, and cached online materials. If required, researchers can also conduct enquiries with human sources operating in the relevant sector and country, to help explain the investor’s history, modus operandi, other business interests, perceived probity and general reputation. This is particularly useful in countries with undeveloped media landscapes, poor press freedom, or limited public records. Appropriate sources may include founders or employees of existing portfolio companies, other investors or business figures operating in the sector, journalists, and former partners or employees. Conducting successful enquiries requires an excellent network of contacts, as well as understanding the specificities of the investor’s operations, in terms of the sector, type of business, and jurisdiction.
FINTRAIL’s Experience
The FINTRAIL team has extensive experience in both designing due diligence processes and conducting reputational and integrity due diligence. We have lately finished building and implementing an investor due diligence process for a UK-based FinTech. We have also recently worked with a client to conduct research on a potential investor, in a case which showed clearly how important it is for growing FinTechs to identify the right partners. FINTRAIL investigated a venture capitalist from Russia looking to invest in a UK-based FinTech, using our expert country knowledge and language skills; searches in Russian, US and EU litigation and bankruptcy records, criminal records and regulatory agency checks; and adverse media research in English and Russian. This uncovered concerns about the investor’s source of wealth and modus operandi including political connections to the Kremlin, business interests in opaque jurisdictions held through apparent shell companies, and UK corporate interests which bore similarities to those of the Hajiyev family, the subject of the UK’s first Unexplained Wealth Order (UWO). These concerns ultimately led to the FinTech deciding not to accept the investment - a potential disappointment in the short term, but an important decision to head off major issues in the future.
Get in Touch
If you are interested in speaking to the FINTRAIL team about due diligence or any other anti-financial crime topics in an increasingly digital FinTech world, please feel free to get in touch with one of our team or at contact@fintrail.co.uk