The importance of KYC and AML checks when fundraising for growth

Remote working means it has never been more important for all parties to carry out the necessary checks on who they are dealing with. For start-ups seeking funding, investor due diligence must go deeper than just the idea and the business plan, writes Geoff Dunnett.

It would have been easy to presume that the world of fundraising for business growth fell off a cliff as the uncertainty of the pandemic took hold. With the economy taking a hit, no one would have blamed investors for turning off the money taps and tightening up the purse strings to make it through a rocky few months. 

But it is not as simple as that. While many other areas of the economy shut down, start-ups have remained open for business and some have even benefitted from recent events. Set up to work flexibly, founders have arguably had more time to focus on the actual running of their business and securing funding. Gone are the hours travelling to and from meetings across the country. 

The same can be said for investors. More time at home has meant more time to look at potential investment opportunities, hold Zoom calls with founders or CEOs, interrogate business models and investigate the market opportunity. The UK government, with the Future Fund, has also helped stimulate investor’s and start-up’s appetites for funding.

Undoubtedly, there has been disruption to the funding market but like many industries, it’s going through a period of change and innovation. This will mark a permanent shift in how founders of start-ups and investors do business and that shift will be a virtual one. Who needs face-to-face, when everything can be done by Zoom? 

More negotiations will be handled remotely but while this has many benefits, it does come with risk for both sides. This means it has never been more important for all parties to carry out the necessary checks on who they are dealing with.

Investor due diligence must go deeper than just the idea and the business plan. Investors need to conduct detailed analysis of the founder, the company and the founding team. 

For founders, they need to find out if investors, be it people or institutions, will understand and support them through difficult times, if they are financially secure and will trust them to manage without constant oversight and micromanagement.

The relationship between an investor and start-up founder is a marriage of sorts. Both parties need to be 100% dedicated, willing to work through the tough times, face up to difficult conversations and be able to make decisions together.

But the founding principles of this marriage must go through rigorous checks. Think of it like living together before deciding to take the plunge and get married. These checks can be lengthy and time-consuming but are vitally important to the future success of the partnership. 

These vital checks are KYC (know your customer) and AML (anti-money laundering) and have never been more important than now. Despite what might be challenging economic times, the need for investment must never overshadow or circumvent these checks. Start-ups must never absorb funds of which the integrity can’t be verified. 

Founders need to know and verify the following before moving forward with any investor. Importantly, these need to be monitored on an ongoing basis as the relationship continues: 

  • Full investor background and identity 
  • The source of the funds being provided by the investor 
  • The source of the investor’s wealth 
  • If the investor appears on sanctions lists 
  • Or, any adverse media 

There are many pitfalls for founders and start-ups, but taking on investment funds that are fraudulent or from illegal sources can be avoided. It must be a key consideration in any fundraising process.  

A company builds its credibility and reputation in its earliest days, and lack of due diligence could be incredibly damaging. You do not want to be carrying baggage into your next funding round.

Geoff Dunnett is Professional Services Director at Shieldpay.

The views and opinions expressed in this Viewpoint article are solely those of the author(s) and do not reflect the views and opinions of Fintech Bulletin.