Investor Verification – Safeguarding Investments from Fraudters’ Access

by Anvika aryaDecember 29, 2022,
Investor verification

Fraudsters and organized crime groups are leveraging several techniques to put their malicious intentions into practice. For the finance sector, this is an alarming situation as they facilitate billions of transactions every day. Similarly, fraudsters are posing as investors to avail free services, conceal their illicit funds, and escape regulatory checks. However, this can lead financial institutions to legal consequences as well as hefty losses. 

Investment fraud continues to make headlines despite strict regulations and authenticity checks in place. They are coming up with more sophisticated techniques helping them steer clear of the investor authentication processes. Therefore, it has become vital for financial institutions to integrate efficient Know Your Customer (KYC) procedures. This blog covers Know Your Investor (KYI) regulations to verify different types of entities.  

Table Of Contents

Diving Deep into Investment Scam Prevention Through Online Investor Verification 

Businesses of every nature require investors to help them ensure rapid growth. The finance sector is among the most potential entities providing funds for companies. Furthermore, in some cases, it also serves as an intermediary as it bridges investors to businesses. However, while dealing with potential entities, institutions should ensure they are not assisting risk-possessed individuals. 

Fraudsters hide their source of funds and indulge in huge investments to convert them into legitimate money. Therefore, financial institutions require robust investor verification services to identify individuals’ market profiles, backgrounds, past projects, and income methods. With around 59% increase in Ponzi schemes along with a rise of 57% in bond sale scams, integrating robust IDV solutions has become more crucial. 

Financial institutions should carry out real-time identification prior to investor onboarding to prevent account takeover fraud and other types of investment scams. Using forged documents, providing insufficient information, hiding sources of income, and impersonating legitimate entities are some of the most common techniques fraudsters use to perform illicit activities. However, with advanced Know Your Investor services in place, financial institutions can detect and deter these malicious attempts. 

Outlining Types of Investors

The Securities and Exchange Commission (SEC) allows individuals or companies with certain requirements to get licenses for indulging in investments. This legal registration enables potential entities to put their money in securities and high fundraising programs. For financial institutions, employing Know Your Investor (KYI) procedures is a liability to draw a line between fraudsters and legitimate individuals. Furthermore, there are certain requirements for different types of entities. Hence, investor verification solutions highlight and identify the following types of individuals:

Qualified Investors 

Depending on the jurisdiction, these entities fund companies under the respective legal Know Your Investor (KYI) requirements. They are individuals holding legitimate status and can become a part of hedge fundraising, placements, capital ventures, placements, or private securities but through a limited-time offer. Investment firms, private banks, credit card companies, and other such institutions fall under this category. However, the finance sector needs to carry out investor verification online to ensure these entities do not pose any risk.

Accredited Investors 

Individuals holding a gross income exceeding $200,000 qualify as accredited investors. These are the entities that can take part in private placements, crowdfunding, and hedge investments. Furthermore, accredited investors are the prime attraction for companies as they hold high net worth and increase their chance of rapid revenue generation. Hence, the finance sector needs to incorporate investor verification services for differentiating between non-accredited and these entities. 

Global Investor Authentication Regimes – Ensuring Secure Fundings 

In order to combat investment scams, regulatory watchdogs across the globe are obliging the finance sector to build efficient IDV mechanisms. Institutions should verify investors before they allow them to become a part of corporate or individual funding. While fraudsters target high-risk countries to conceal identities and hide regulatory checks, the finance sector requires more effective countermeasures. Read on to learn more about know your investor regimes from around the globe.

The Securities Industry and Financial Markets Association (SIFMA)’s Guidelines 

This agency has outlined several requirements for the finance sector including performing know your investor checks. Under Rule 506(c), identity verification is a liability and entities can advertise investment schemes after gaining permission from the authority. Furthermore, the finance sector should identify the type of investor and provide assistance accordingly. 

US Federal Advisers Act

According to SEC’s guidelines, the finance sector should ensure that individuals are qualified investors. They can either be general partners of trustees as mentioned in the 1940’s Investment Company Act’s section 2(a)(51)(A), directors, or other high-net-worth holding executives. However, institutions should integrate investor verification services to ensure entities actually complete the legal requirements.  

In the End

Integrating AI-powered online investor verification solutions are ideal ways for the finance sector to overcome fraud. Furthermore, with stringent regulatory requirements in place, institutions can not risk onboarding threat-possessed entities. Know your investor services and identify individuals, backgrounds, sources of funds, and other traits. Ultimately, the finance sector can ensure secure investments. 

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