Investor Due Diligence Process – Latest Insights for Fraud Prevention

In modern times, it is critical that companies implement a strong customer onboarding process to provide services to only legitimate clients. A robust client onboarding process develops a strong bond with the clients and ensures financial revenue for the company. When it comes to onboarding investors in the company, there is a lack of a proper investor due diligence process. This loophole in the verification process can attract fake investors to the investment industry. In the long run, it can be highly disruptive to business operations. The application of an AI-backed investor due diligence process can support investment firms in avoiding regulatory fines and onboarding only legitimate investors. 

Crime Prevalence Update 2022: Motivation behind Investor Due Diligence Process

During the pandemic, the investment sector faced a number of challenges because of unpredictability in the market. The investment sector faces the same issues in the year 2022. According to the statistics, clients suffered from a financial loss of around $6 billion in 2021. It was a 70% increase from 2020. Experts predicted that if robust security measures are not taken, the number of victims will keep increasing. Additionally, according to surveys, the number of Ponzi schemes has decreased by 26% in 2021 but the scenario is not looking good for the year 2022. In light of this, FinTech companies have started opting for advanced digital solutions because the global regulatory guidelines have become more strict. The latest KYI verification solution can facilitate the investment industry in streamlining its daily business operations. Thus, investment firms can stand firm against investment fraud while avoiding financial penalties. 

Investment Fraud Cases: Highlighting the Importance of an Investor Accreditation Program

  • An Organized Fraud Crime Group impersonating FINRA

In the first case, the group of cybercriminals stole around $50 million from 69 victims. They were able to fool so many people because they designed multiple fake websites that were meticulously formulated to look like the original sites. Additionally, the group of fraudsters copied the style of FINRA broker-dealers and showed association with government-supported financial institutions. Through the fake digital platforms, the perpetrators ran investment scheme ads with higher returns to attract investors from different regions. They ran their advertisement schemes on famous search engines of Google and Bing with attractive keywords (higher returns, small initial investments). The perpetrators hid their identities using multiple encrypted applications to maintain a positive image in their minds. If they had a robust investor due diligence process, they could have protected themselves against fraud

  • Euro 10 Million Fraud Case in Bulgaria

The law enforcement in Bulgaria was able to catch a group of criminals who stole around 10 million from the victims. They got support from Eurojust and Europol. The target of the hackers were German and Greek investors. After the investigation, police reported that they searched around 24 locations and interviewed around 66 witnesses to finalize the investigation. They confiscated anything that could help them in concluding the investigation effectively. Victims were not able to suspect anything because the call operators were from diverse language backgrounds (German, Greek and English). Greed blinded the victims and they did not try to investigate further. Criminals took advantage of human nature and stole millions of euros from them

Security Initiatives for Strengthening the Investor Due Diligence Process

The following security measures facilitated the implementation of the investor due diligence process. 

The SEC Act of 1934

  • According to the SEA of 1934, the US Congress legislated the commissions. In light of this, SEC got authority over all the functions of the security industry. The staff members got the power to register, manage and monitor broker-dealers. It gained the authority to allow certain behaviors and restrict others. It demanded that investment businesses report their information to SEC 

MiFID 2 (Markets in Financial Instruments Directive 2)

  • MiFID 2 is a legal conceptual framework that the EU legislated to manage all financial institutions. This was a critical step to attract genuine investors to investment firms. It restricted the cash flow of banks and broker-dealers because they charged an extra fee for research and financial transactions. Moreover, it bound the investment companies to share their data (e.g. phone records). It asked the investment firms to conduct their trading operations in a digital format because it makes record tracking easier to manage

Final Remarks

Finally, a number of regulations have legal support and the investment sector is also making an active contribution to combating digital crimes. All of this is important so that financial companies and investment firms only deal with genuine investors. The implementation of KYI (Know Your Investor) solution as part of the Client identity verification process facilitates early fraud detection, business operation security, and safeguarding the investments. 

The advanced investor due diligence process is an ideal service for the investment sector if they are struggling to show compliance with standard investor regulations. The investor due diligence process will safeguard them against financial penalties. The service is backed up by artificial intelligence which elevates the accuracy and reduces the turnaround time of the investor identity authentication procedure. 

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