Due diligence for startups: check that cheque
Not all investors are who they say they are. With Themis, we share our insights on financial crime in fundraising and du...
Know Your Customer (KYC) and Anti Money Laundering (AML) are frameworks for verifying your customers, investors and third parties. You should comply with KYC requirements and AML regulation whenever you take an investment, and run the checks when you go into business with anyone new.
In this post, we explain what UK startup founders need to know about KYC and AML and how to carry out checks to verify your investors and customers.
As a startup founder, when you’re considering taking money from investors, you’ll need to be aware of the regulations and due diligence processes, including AML, KYC and KYI (Know Your Investor). These regulations and checks are in place to prevent financial crimes such as money laundering and terrorist financing and to make sure the funds being invested are legitimate.
Startups in certain sectors have more obligations, for example fintechs must run KYC checks to verify every new customer.
The AML framework is designed to combat money laundering, terrorist financing and threats to the integrity of the financial system.
The group of AML laws, regulations and processes help prevent illegally-obtained money from entering the financial system and other financial crimes from occurring.
Whereas AML checks are designed to ensure that money you receive hasn’t come from criminal or terrorist activity, KYC checks specifically verify the identity of your customers and investors, and their financial activities and any risks they might pose to people transacting with them.
If your company operates in any of the sectors below, you have an obligation under UK law to carry out AML and KYC checks:
If your business falls under one of these regulated categories, seek advice from the authority that regulates your sector.
For other companies, there’s no legal obligation to carry out AML and KYC checks, but you should carry out due diligence checks for money you receive to help protect your business from financial crime and other unethical business practices. We explain the risks of financial crime in more detail in our post about due diligence for startups.
Financial crime is a very real and evolving problem and the impact on businesses is immense. This is especially true for new startups that lack the financial and reputational safety nets often afforded to larger companies.
At Themis, we’ve seen first-hand how criminals try to exploit weaknesses in a company’s armour. KYC checks can provide a first line of defence against this exploitation to help keep new companies safe.
Before you receive an investment, ask the investor for:
When you have confirmed an individual’s identity and business activities, run checks for potential financial crime risks related to this person. This due diligence is an important element of managing your risks and protecting your business from bad actors. Screen all individuals and their network connections for financial crime exposure, including sanction exposure, PEPs status, adverse media and litigation history, and other factors that could increase an individual’s financial crime risks.
Before you receive an investment, you should ask for copies of:
When you’ve obtained this information from an organisation, run the same due diligence checks on the organisation and its senior leadership as you would on an individual investor. Screening for potential links to criminals and illicit activity helps you verify that an organisation has no hidden connections to financial crime.
A legitimate investor will not only understand that due diligence is a necessary part of compliance but should also appreciate that it indicates a commitment to protecting the company from potential harm, protecting their investment as well.
Due diligence helps foster a sense of trust between all parties, a key building block for a successful startup. If a potential investor seems hesitant to provide the information you request, stop to consider why and, if you decide to go ahead, how it could impact your business relationship.
If your startup needs to run KYC checks on customers and investors, you’ll need to ask for:
Check the customer’s identity against these lists and registers:
The calculation for this risk assessment is based on a range of factors, including how likely it is that the customer is involved in financial crime.
If the risk assessment determines the customer is high risk, you should carry out more intensive AML checks, including:
If the risk assessment determines the customer is low risk, the AML checks can be less intensive and you’ll be able to onboard the customer faster.
After onboarding, continually monitor your customer’s activity and review their risk rating.
Companies which need to carry out KYC checks automate the process, using specialist software such as Themis Search for KYC/AML.
We’ve found that companies often have to navigate between multiple systems to carry out proper due diligence and KYC checks, dealing with antiquated systems to monitor clients and manage financial crime risks.
Older systems require significantly more effort to use, and are often less accurate than tech-forward systems. In contrast, new systems open up whole new lines of discovery through smarter use of data, network mapping, and visualisation of hidden connections. With next generation tech, you can integrate due diligence into your work-streams with one click of a button.
To make it easier to protect your business, you can integrate KYC, AML and ongoing 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.
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.