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Due diligence for startups: check that cheque

Published:  Aug 23, 2023
Eliza Thompson, Themis
Eliza Thompson

Research specialist at Themis

Suzanne Worthington
Suzanne Worthington

Senior Writer

There are many ways to obtain capital for your business, from grants and tax credits to angels to VCs. But not all money is equal, and not all companies and investors are who they say they are.

Whether you’re a fundraising startup or an investor, taking or giving money comes with responsibility. You might be alert for scams landing in your inbox or phone messages, but what anti-financial crime measures do you have in place for your fundraising?

We’ve partnered with anti-financial crime experts Themis to help you identify and assess your risk of exposure to financial crime. We’ll share our expert insights for startups covering the legal aspects of fundraising and the due diligence you must undertake on potential investors.

In this post and accompanying booklet, Eliza Thompson, Researcher at Themis explains the financial crime risks that founders and investors face when working together, and how due diligence helps keep your business safe from financial, legal or reputational damage.


Due diligence for startups - Download the booklet to read this post in full with extra content and case studies.

Financial crime is a real risk to fundraising startups

It sounds like stating the obvious but it’s essential you know where your funding is coming from. When you’re very busy, minimising the risk of financial crime might seem like a lower priority but if your company is left vulnerable to financial crime, the cost – in terms of penalties and reputation damage – could be very high.

Why are startups a target? Because criminals try to hide money via investments or gain an air of legitimacy by associating themselves with legitimate companies. You could be exposed to financial crime by receiving investment linked to crime or to sanctions, as well as through investors or shareholders who behave in ways that could damage your company’s reputation. For example:

  • Money laundering – You could be targeted by criminals aiming to launder proceeds of crime or corruption by investing in your business, including by using shell companies or offshore accounts to disguise the source of the funds.
  • Fraud and economic espionage – You could be vulnerable to fraudulent activities including data or trade secrets theft, and other forms of ‘economic espionage’ via investors gaining access to your company.
  • Corruption and sanctions – You must check investors don’t have a history of corruption, and that they and their associates aren’t sanctioned in jurisdictions in which your business operates.
  • Predicate crimes – You risk being linked to crimes such as modern slavery and human trafficking, environmental crimes and trade-based money laundering if you accept money from investors implicated in these crimes or networks.

Look for red flags

Even if you think you can trust a potential investor, get into the habit of checking every investor and doing more than just a cursory Google search. When you’re carrying out your due diligence on investors, here are red flags to look for:

🚩 Criminal or litigation history

🚩 Bad reputation

🚩 Disreputable or dubious network

🚩 Use of proxies

🚩 Unethical business practices

🚩 Financial instability

For more details about these red flags and what to look for, download the booklet to read this post in full.

Due diligence reveals fraudsters and scammers

The team at Themis have seen first hand how criminals try to exploit weaknesses in startups:

The invisible investor
In one case, a Themis client was offered a large but unsolicited investment. When Themis investigated the potential investor, they found they had no online presence – a massive red flag. The ‘investor’ turned out to be an insurance fraudster.

The shady exploiter
In another case, Themis found evidence that a potential investor for a client was running a fraud scheme taking advantage of young people looking to build a new life abroad. Under the scheme, individuals were charged €1,000 ‘deposits’ for trips that never happened – and the victims didn’t get back their money. Themis also discovered that the investor had been sentenced by a French court to 18 months in prison for fraud and breach of trust. Yikes. Clearly, the client didn’t go ahead to work with this investor.

The dodgy politician
Another Themis client was approached by someone who appeared to be wealthy and claimed to have served in the cabinet of the government of their country. The behaviour of the ‘investor’ became increasingly strange, including asking the company to pay a ‘legalisation’ process fee. The ‘investor’ turned out to be a scammer.

Everyone knows it’s foolish to rush into something simply because it looks good on paper. But as a cash-strapped startup, it can be tempting. Fortunately, these Themis clients were vigilant and did their due diligence properly. To protect the business you’ve built, it’s always worth taking the time to carry out thorough checks.

To read the following in-depth case studies, fill in the form to download the booklet 👇

Case study 1 The fintech startup and the Russian billionaire
Case study 2: The private equity firm misappropriating funds

SeedLegals Themis Due diligence for startups - booklet cover

Due diligence for startups

Download the booklet to read this post in full with extra content and case studies.

Do’s and don’ts of due diligence for startups

Due diligence shouldn’t be a blocker. Done right, it helps your business succeed and grow. Here are the top tips from Themis for integrating due diligence in your operating processes and team mindset:

  • Embed due diligence as a habit
    Always establish and verify the identity of investors, companies they own and their business associates. Build accurate risk profiles and spot potential red flags or suspicious activities.
  • Monitor regularly
    It isn’t enough to just check people once. Continuously monitor the business activity, relationships and risk profiles of people and companies you’re working with to make sure you detect unusual behaviour or changes.
  • Screen for sanctions and PEPs
    Check investors against lists of sanctions and PEPs from all jurisdictions in which you do business, as well as those produced by the UN.
  • Check for litigation and adverse media
    Check people and companies you’re working with to identify adverse media, reputational damage, and criminal or civil litigation history.

Stay on top of due diligence with Themis

To make it easier to protect your business, you can integrate due diligence as a standard business process with a tool such as Themis Search & Monitoring.

The Themis platform makes it easy for startups to check all investors for red flags and potential criminal behaviour. The software is a simple way to carry out screening, KYC onboarding, risk mapping, enhanced due diligence and automated monitoring.

With Themis Search, you get access to:
  • over 230 different jurisdictions covered
  • over 250 million company records and 280 million individual directors in over 200 jurisdictions worldwide
  • political exposure (PEP) status of over 1.5 millions PEPs
  • comprehensive sanctions data from over 70 different countries and OFAC, UN and EU, lists updated every 6 hours
  • over 25 million adverse media articles spanning 15 years in over 40 different languages
  • unique proprietary special interest list data covering convictions of specific crimes, from fraud, bribery and corruption, sanctions evasion or enablement and terrorist financing, through to more hidden crimes such as modern slavery and human trafficking, the illegal wildlife trade and other forms of environmental crime

💡 Find out more at the Themis website

Protect your startup

No-one should have their hard work undone by criminals or illegal behaviour. That’s why we’ve partnered with Themis. With our legaltech services and the powerful Themis Search & Monitoring platform, you can speed up investment deals and protect your company. With experts taking care of your legals and due diligence, you can maintain your focus on growing your business and achieving your goals.

Coming soon: listen to our CEO Anthony Rose and Dickon Johnstone, CEO of Themis, discuss financial crime and due diligence.

SeedLegals members: Get 15% off Themis Search for KYC/AML (T&Cs apply, new customers only). For more offers and discounts, visit our Perks page.
Eliza Thompson, Themis

Eliza Thompson

Eliza is a financial crime researcher at Themis, working on a variety of topics from sanction compliance to the financial crime risks of emerging technologies.
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