Firstly, would you please briefly explain what Due Diligence is?

Due Diligence is a process that should be undertaken to better understand the person, organisation, or business you are considering transacting with. Think of it as a risk management activity. It is an essential element of business and for those companies regulated for the purposes of money laundering, is fundamental to their compliance with legislation and good governance.

In my opinion, Due Diligence is an investigatory function and should be treated as such. A failure to conduct it appropriately leaves the business exposed to a range of issues including regulatory intervention, reputational damage and has been seen in the media many times, including court action.

When is Due Diligence most commonly used?

Companies that work in the financial services industry are well acquainted with Due Diligence. It is an obligation that they must undertake to ensure that funds or other assets they are receiving are not tainted from any connection to money laundering, tax evasion, criminality, terrorism, weapons of mass destruction or anything that may cause their organisation harm. However, there are other applications for it, mergers and takeovers are good examples.

What does the process for Due Diligence typically look like?

I always say when I train compliance officers that the depth of information obtained from the client or business is fundamental. So, the first stage in the process is collecting data from the subject, this can be referred to as KYC, or ‘Know Your Customer’, and it should be thorough. What I mean by that is things like full names, previous names, physical and email addresses, a certified full-colour image of an identity document and proof of address, such as a utility bill are the minimum requirements.

At that point, an initial assessment should be undertaken to identify any obvious exposure or issues. It might be that the customer lives or operates in a high-risk jurisdiction, or their business offers products and services that are beyond the tolerance of the organisation that is considering onboarding them.

To fully understand those risks is where Due Diligence can assist, and where people like me come in. It tends to be the case that I will be contacted and engaged directly by a client. For reasons of confidentiality, I always suggest that we sign a Non-Disclosure Agreement (NDA). Once the objectives and terms are agreed upon, I commence a desktop investigation where I will exploit online sources to gather information. I analyse what I find and subsequently provide a written report. It is for the client to then decide whether they wish to continue with the proposed business relationship.

What factors commonly complicate Due Diligence?

Typically, not obtaining the right information from the subject of the Due Diligence enquiry or, not enough of it. A failure to do so will invariably lead to both ineffectiveness and inefficiencies because the first thing that must be done is to verify what you have. If you are not in possession of the right data, you may well be looking for something that doesn’t exist, or worse still, end up putting a lot of effort into researching what turns out to be a false positive.

There are of course other factors that complicate the process.

In most cases, Due Diligence is conducted online, be that via open sources, subscription databases or a combination of the two. The Internet is awash with information, it has been described as ‘drinking from a firehose’. So, the sheer volumes of data, and being able to differentiate between good, bad, malicious, and misleading information is a key skill.

In my opinion, Due Diligence is an investigatory function and should be treated as such. A failure to conduct it appropriately leaves the business exposed to a range of issues including regulatory intervention, reputational damage and has been seen in the media many times, including court action.

Language is an area that can also cause problems. If you are an English speaker then you are in luck because that is the most popular language on the World Wide Web. Chinese and Russian sites are becoming increasingly popular though, so if you want to delve deeper you need reliable tools, or people, to help.

Some of the most complex issues are the verification of the source of funds and source of wealth. This is where you often have to be ethically creative when identifying sources to achieve your objective, social media is a prime example.

I think I also must mention the expectations of managers, many of whom employ staff to conduct these types of investigations, with little or no training. Conducting a few Google searches is not Due Diligence and certainly would not be sufficient to satisfy a regulator in the event of an issue arising.

What role has Due Diligence played in the recent sanctions against Russia?

A thorough Due Diligence investigation should go as far as to identify links between companies and individuals. One of the issues for anyone conducting Due Diligence in relation to the sanctions and Russia is finding those links. As a former police officer, I have always found it helpful when investigating, to try and think like the person I am researching. If I was a wealthy Russian and wanted to avoid sanctions, then I would hide behind layers of companies, people, or complex structures to obfuscate my involvement.

A good investigator will be looking for the clues, the patterns and sometimes the absence of certain information to make those connections. This takes knowledge, skills, and time. I think it is difficult for me to judge what the role of Due Diligence has played in recent sanctions against Russia at a global level. I can however tell you that I conducted a recent investigation that found links to Russian individuals and companies that were not obvious or evident. It was arduous and time-consuming, my worry is that things may be getting missed and that has implications at several levels.

What are some of the most interesting or challenging investigations Intelect Group has worked on recently?

I consider myself very lucky to have been involved in all manner of investigations, many of which have their own individual challenges. When I joined the police service in the early 1980s there was no Internet and you had to get out and speak to people. The world is very different now, information is online, and it can be created and removed in seconds. We have social media and online identities that sometimes bear no resemblance to the person behind the persona.

From my office, I can reach across the world, and I can access all manner of sources that cannot be compared to when I started my investigative career. That helps me with my passion for investigations and I am able to continue doing what I do because of the Internet.

Much of my work now involves Enhanced Due Diligence for financial institutions and Citizenship by Investment (CBI) programmes. This mostly entails researching High Net Worth and Ultra High Net Worth Individuals, some of whom do not want to be found or do their utmost to protect their online profiles.

For reasons of confidentiality, I must limit what I can share but there are a couple of recent cases.

One of my most challenging investigations has not actually been connected to Due Diligence at all. For five years now I have been helping a family who is desperate to trace their adult son who we believe to be in South America. The person concerned has a minimal online footprint and doesn’t appear to want to be found. The trail hasn’t gone completely cold, and I am hoping for a positive result very soon.

Another interesting case involved an organisation that needed to be able to better understand an individual who appeared reluctant to share information. He had almost thrown down a challenge and had told them: “I want to see what you can find about me”. The case was difficult for a host of reasons and took time but eventually, I discovered links to several companies, technology, and cryptocurrency. The subject was very surprised.

What elements of your job do you find the most rewarding? 

Providing answers for my clients has to be at the top of the list. When you get feedback that tells you your report was ‘insightful’, ‘really helpful’ or they tell you the service they got was ‘first class’ then you know you are adding value.

There are of course times when an investigation results in more questions than answers, but that, in my humble opinion, is a good thing, it shows that the enquiry has integrity and is not there just to tick boxes.

I do get out from behind my desk from time to time and train people in the techniques I use, something I really enjoy. I have been fortunate enough to travel all over the world to deliver Due Diligence Investigations training. Only today I had an email from a delegate asking a query about an online search string. She had attended a course in 2019 and added: ‘I still remember your course. Hand on heart it’s one of the best I ever had and definitely the most interactive.

For me, doing what I do is helping businesses protect themselves and ultimately keeping the world a safer place.

About Colin Tansley 

Colin Tansley is the Managing Director and founder of Intelect. He has an enviable background in investigations and intelligence from his work in the police service and private industry. A former senior police officer, he lives on the Isle of Man and works all over the world. 

He helps compliance officers and their companies with the provision of Due Diligence training, investigations, and risk management. His client base is broad but is predominantly in the financial services, legal and wealth management sectors. 

He is also a published author. His book ‘Mastering the Wolf’ charts his experiences in the armed forces, police, and private industry.

Website: www.intelect-group.com

Facebook:  https://www.facebook.com/IntelectG

Finance Monthly hears from Lynne Darcey-Quigley, founder and CEO of Know-It, on the problem of fraud plaguing UK firms and how they can protect themselves from it.

Throughout the 1960s, Frank Abagnale famously faked eight different identities, including a pilot, lawyer and a physician, to gain free flights and defraud banks. There was subsequently a film titled ‘Catch me if you can’, starring Leonardo DiCaprio, made about his life and how he conned people. Arguably his most ingenious (or in fact worrying) tactic was his ability to write personal cheques on his own overdrawn account. This, however, would work for only a limited time before the bank demanded payment, so he moved on to opening other accounts at different banks, eventually creating new identities to sustain this charade and continue to defraud financial institutions.

Although time has passed and technologies and systems have been put in place to weed out the Frank Abegnales, the issue of fraud and financial crime continues to linger. This has been made plainly obvious throughout the COVID-19 pandemic, where the Coronavirus Bounce Back Loan (BBLS) scheme has been plagued by fraudulent applications.

As a result, the National Audit Office (NAO) has estimated that taxpayers could lose as much as £26 billion from fraud, organised crime or default, as up to 60% of the loans may never be repaid.

An all too familiar story

For businesses across the UK, this may not be a surprise. Even before the pandemic, a study from PwC found that half of all UK companies had been the victim of fraud or economic crime between 2016 and 2018. The research found that for more than half of the organisations affected, criminal activity resulted in losses of around £72,000.

Fraud and financial crime, therefore, has clearly not been born as a result of the ongoing COVID-19 pandemic, nor will it diminish once the virus has passed. The case of COVID-19 loan fraud should, therefore, provide businesses, government and other stakeholders with a wake-up call and a chance to reflect on how they can reduce the risks of falling victim to financial fraud. But what lessons can these stakeholders learn and what needs to change?

Even before the pandemic, a study from PwC found that half of all UK companies had been the victim of fraud or economic crime between 2016 and 2018.

Always do your homework

We understand that the issuing of COVID-19 loan schemes was a unique situation. Lenders have been under huge amounts of pressure to approve loans quickly and help support struggling businesses. Unfortunately, this simply doesn’t give them the time they need to conduct the checks that are needed to protect themselves from fraud and financial crime. Yet this echoes similar findings from PwC’s research from a few years ago: UK organisations are generally not doing enough to prevent fraud, with only half carrying out a fraud risk assessment in the last two years.

Regardless of whether your organisation is an SME, a large enterprise or a national government, basic and thorough credit checks must be in place as part of the process of protecting your business. Through establishing the validity of a customer your business is looking to establish a working relationship with, you are immediately reducing the risk of exposing yourself to fraud or financial crime. But why stop there? Compiling credit reports and verifying a business’ status on Companies House before committing to a commercial arrangement are also effective measures that can help protect your business.

These checks go a long way for business owners, particularly SMEs, as late payments and of course, fraud, can cause disruptions to business cash flow. Cash flow issues can prove fatal for smaller business owners, which is why credit checking, building credit reports and validating other businesses and its financial status is key to survival.

Ensuring a smooth recovery

When it comes to government support loans, businesses do not have to begin paying back the money from May 2021 onwards. However, this time large time period isn’t a luxury when it comes to collecting payment from customers. Consequently, implementing a responsive and robust debt recovery process is essential to minimising the risk of non and late payment issues, helping business protect their cash flow and minimise risk.

Agreeing and making a record of credit terms in advance ensures that no business transactions can be disputed, which could later lead to businesses losing out on payment from customers Under the BBLS, the government provided lenders with a 100% guarantee for the loan. For SMEs in particular, this approach simply cannot be taken, especially if debt recovery steps, such as ensuring credit terms between businesses, are not agreed and recorded beforehand.

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Chasing owed payments is far easier after the checks to validate a business have been made. Businesses can take measures which include; credit holding, which involves pausing services to a client until they have paid. Issuing final notices is also essential to the debt recovery process, the final correspondence before taking up legal proceedings usually resolves any delayed payment issues. The problem facing the government is that fraudsters applying for support loans will do so illegitimately, therefore remaining anonymous and slipping through the debt recovery net. This reiterates the importance of verifying and checking recipients during the early stages of a business agreement, as this eases the rest of the debt recovery process.

A final word on SMEs

However, it is not just the initial checks before the first commercial transaction that must be invested in. To truly protect themselves, infrastructure must be put in place to continually monitor and chase customers. In larger businesses it is common to have a designated department or employee who will handle this process – usually this person will be known as a ‘credit controller’. Yet, we understand that many – particularly smaller businesses – do not have the resources readily available to continuously check the credit status of their customers and conduct due diligence.

Fortunately, this is where advancement in technology play a critical role. For example, by using technology to automate the credit control process, this can help businesses streamline this process so they can credit check and monitor and conduct due diligence, all from one place. Automating this process, firms can collate the information and identify areas of concern, without expending huge amounts of time and precious resources, ultimately helping them to limit risk and reduce fraud.

These tips can help you get the funding you need even if your credit is not the best.

Self-Funding

The best way to fund your business is using your own money, a process known as bootstrapping. You can turn to family and friends or tap into savings. You can even borrow against a 401k to get the funding you need. In fact, more than half of all business owners say that they received financing help from friends and family.

This type of financing is not based on your credit score and, in some cases, borrowing from family may help you increase your credit score if you use the funds to catch up late payments as well as funding your business.

Venture Capital

Another method for funding your business is seeking venture capital from investors. This type of investment is normally provided with a share of ownership in the company. The investor may also want to take an active role in your business. There are differences between traditional financing and venture capital which include:

• Focuses on companies with high growth
• Investments have longer terms
• Investments are in return for equity and are not considered debt
• Higher risk for investor but potential for higher return
• Loss of some control and ownership

There are many venture capital firms who offer funding to business owners. You will need a solid business plan, and there will be a due diligence review. If the investors are interested, you will agree on terms and the funding is provided.

Normally, venture capital is provided as you meet milestones which means you may not get the full amount up front. You will have to meet certain goals included in the terms to receive percentages of the investment over time.

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Crowdfunding

Websites like Kickstarter and GoFundMe allow you to seek investments from a large number of people. The process, known as crowdfunding, lets people donate small amounts to your business to see you succeed. In some cases, you may have to give them a gift or reward as a thanks for the donation, usually a free product, acknowledgement of their contribution or other benefit.

This type of funding is best for companies that produce creative works like art or film as well as those who have created a unique product, such as a high-tech vacuum. There is very little risk to your business and, if your business fails, you are not required to repay the investors. The crowdfunding sites do take a percentage of anything you raise, however.

Traditional Financing

Loans are another popular method for funding a business. However, if there are obstacles to getting a traditional business loan, the Small Business Administration partners with banks to offer loans that are guaranteed by the organisation.

This type of loan is especially designed for those who may have difficulty obtaining a traditional loan, like those with poor credit. There are special requirements and stipulations you must meet in order to qualify, but your lender should have information about the Small Business Loans that will work for your company.

Grants and Gifts

There are many grants and gifts available to help small businesses, but it is important to be careful. Companies that offer to locate a government grant for a fee are often fraudulent and can lead to excessive costs that you will not be able to recover.

There are grants available for specific types of industries, such as technology or retail, but you will need to search in order to find one that works for you. Also keep in mind that grants are very competitive, so you may need to fill out quite a few applications before you are successful.

Gift financing may also be non-cash benefits such as free office space or free services from businesses who want you to succeed.

Further information on business loans is available if you would like to learn more about your options.

Wayne Johnson, CEO of Encompass Corporation, offers Finance Monthly his thoughts on where responsibility lies in the case of the FinCEN Files and how better tech can prevent money laundering from going unnoticed.

On 20 September, it was globally publicised that the FinCEN Files had been leaked to BuzzFeed News. Said files exposed some of the world’s largest banks, suggesting that they had been aware of cases of money laundering, corruption and fraudulent activity, contained in up to $2 trillion worth of transactions over an 18 year period between 1999 and 2017.

As a result, global banking shares plummeted by up to 8% on 21 September, and public outrage was aimed at those caught up in the scandal. News editors and agenda setters were quick to pin the blame on the banks, but is it that clear-cut?

The leaked FinCEN Files refer to approximately 2,100 Suspicious Activity Reports (SARs) filed by banks with the US Department of Treasury’s Financial Crime Enforcement Network (FinCEN). These files refer to suspicious and potentially illicit activity reported by financial institutions in the private sector, to financial intelligence units.

Reporting these findings is required by law and, as soon as a SAR is filed, it becomes the responsibility of regulators to investigate these leads, in order to stop any money laundering in its tracks. Reporting to a customer that a SAR has been filed is illegal and can compromise substantial investigations or impact national security.

Of course, suggesting that the banks are entirely blameless in the context of the money laundering exposed by the FinCEN Files leak would be false. The fact that criminals have even signed up to a bank successfully is an indictment on a bank’s initial customer due diligence and onboarding processes.

It is therefore clear that improved money laundering prevention methods are required by the banks themselves to stop instances like this from ever occurring again. However, the extensive and comprehensive Know Your Customer (KYC) processes that are required to identify risk at the point of onboarding a new customer have placed such a burden on resources that banks are struggling to maintain the quality of KYC. ICIJ’s analysis of the FinCEN Files leak found that in 160 SARs banks actively sought more information about the corporate vehicles behind the transaction without response. These gaps in initial KYC expose banks to significant risks down the line, as the FinCEN leaks have made clear.

The fact that criminals have even signed up to a bank successfully is an indictment on a bank’s initial customer due diligence and onboarding processes.

Acknowledging that existing processes are unsustainable, and that RegTech offers the only way forward, these once novel solutions are now seen as critical tools to be incorporated in a bank’s initial due diligence policy when onboarding and evaluating all customers. These solutions can collect, analyse and integrate critical KYC information far more quickly and accurately than humans, making it far easier for banks to determine beneficial ownership and other information needed for sound onboarding decisions.

The use of RegTech allows banks to truly unlock the potential of their data for KYC purposes. This improves a bank’s ability to detect and fend off risk at the earliest possible opportunity and throughout the entire customer lifecycle. And in the event of risks emerging further down the line, a complete customer profile allows a bank to craft SARs that provide meaningful information that help regulators prioritise and maximise the success of investigations.

The financial sector has made strides in implementing technology to address their regulatory challenges - there is more to be done for sure, but we are seeing banks globally incorporating RegTech and the pace of digital transformation accelerating.

In the case of the FinCEN Files, the issue resides across the entire ecosystem of the regulatory process. It is understood that a severe backlog of SARs, and a lack of adequate funding, has meant that regulators have not had the means to address or thoroughly investigate each and every case. Emboldened criminals are taking full advantage to launder money and expand their empires, and regulators now have no choice but to look at their own processes and make the improvements needed to get through the backlog of SARs and improve responsiveness to new ones.

Fortunately, solutions are available and able to support the SARs programme by helping to improve the reporting policy, both in terms of allowing banks to measure anomalies and ‘suspicious’ activity more accurately, and allowing regulators to prioritise certain cases and conduct efficient investigations.

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SupTech (supervisory technology) is a category adjacent to fintech and RegTech and refers to technology used by regulators to improve their ability to supervise the implementation of and adherence to Anti-Money Laundering (AML) and other regulation. This approach could help further sift out irrelevant information, so that regulators and law enforcement agencies aren’t overloaded when investigating leads, and are able to focus on what they really need to.

Furthermore, RegTech, especially in the case of automation, is an increasingly important part of a bank’s technology stack. As previously mentioned, a robust KYC process that generates and maintains accurate and complete digital KYC files will ensure that subsequent activities, such as transaction screening and monitoring, are as precise and effective as possible.

Regardless of who, or what, is to blame for the gross abundance of money laundered through some of the world’s leading banks since 1999 (which, incidentally, is only a tiny fraction of the total amount of money laundered in this period), the fact remains that processes across the landscape are outdated, and the SARs reporting and investigation system must be changed if it is to effectively diagnose and eradicate the more sophisticated methods of criminal activity that have emerged. Solving this issue with RegTech and SupTech is key to improving the effectiveness of compliance at all points, and is essential to stamping out the financial crime that will continue to affect the world’s leading financial institutions.

Alpa Bhakta, CEO of Butterfield Mortgages Limited, explores how large and small banks have responded to the disruption caused by the pandemic and how it is likely to shape the future of the sector.

No business or sector is immune to the impact COVID-19 has been having on society. Not only are there the immediate health implications to deal with; the introduction of lockdown measures and social distancing has completely transformed the way businesses, investors and consumers interact with one another.

There is a general acceptance that, regardless of how or when the COVID-19 pandemic is effectively contained, the changes brought about by the virus will be permanent. From flexible working patterns to the adoption of digital processes that reduce the need for physical interactions, businesses are slowly transitioning to what is now being termed as the “new normal”.

Of all the sectors adapting to the new normal, one could argue the financial services sector faces some of the biggest obstacles. Historically, large financial institutions have naturally relied on traditional practices and have been slow to embrace change. This is partly due to their size and the natural time it takes to reorganise teams, install new systems and pass the necessary due diligence checks.

Adapting to lockdown: how did banks perform?

The sudden rise of COVID-19 cases caught many of these organisations by surprise. When lockdown measures were announced by the UK Government back in March 2020, these companies were faced with the following challenges.

The first was overcoming the logistical hurdles involved in managing a company when the vast majority of employees were working from home. Unlike small, specialised businesses who were able to adapt to this new environment, big banks had to ensure the necessary systems and protocols were in place in order to continue operating whilst managing risks appropriately.

The second challenge was reviewing the current products and services on offer and deciding which needed to be temporarily withdrawn from the market. If we look at mortgages, the majority of high street banks decided to stop offering high LTV products. Others refused to process new applications, with stringent application checks put in place.

Unlike small, specialised businesses who were able to adapt to this new environment, big banks had to ensure the necessary systems and protocols were in place in order to continue operating whilst managing risks appropriately.

The decision to pull certain mortgage products from the market makes sense, particularly at a time when it was not known when social distancing would be eased. However, this also had a significant impact on homebuyers.

A survey of 1,300 homeowners and prospective homebuyers by Butterfield Mortgages Limited (BML) in late May revealed that over half of homebuyers had been denied a mortgage this year. This is despite having agreements in principle. Of those we surveyed, three in ten, or 31%, said they had lost their deposit due to delays in securing a mortgage as a result of the coronavirus.

These statistics are startling and bring me to the third and final challenge banks are indeed continuing to face. That is effectively engaging and supporting their clients so that these customers are in a position to confidently manage their finances and make significant investment decisions.

Responding to the changing needs of the market

Banks cannot afford to overlook the importance of effective customer engagement. After all, it is in these uncertain times that people are eagerly looking for advice and support. And based on separate research conducted by BML in the summer, it is apparent that some are not satisfied with their banks handling of the pandemic.

Indeed, some 19% of homeowners have lost faith in their banks this year because of the lack of financial support available during the pandemic. This is a concerning statistic and could signal the beginning of a bigger confidence crisis if not effectively addressed. What’s more, just under a third (31%) of customers said they were frustrated by their banks’ dependence on chatbots and automated services.

This is an interesting finding. At a time when people are more inclined to use digital services, it shows that banks cannot simply rely on a chatbot to meet demands for financial advice. In other words, banks need to see technology as an instrument that can be creatively leveraged to engage with their clients and networks. It is not a solution in of itself; rather a tool that will only be effective if part of a larger communication strategy.

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Customer engagement is key

Over six months since lockdown measures were first introduced, it looks as though the country could be facing a new wave of social distancing regulations. This is without doubt a frustrating development. The UK Government has been actively trying to encourage spending and investment activity through targeted policies, and banks have been slowly putting products back on the market.

Regardless of what lies on the horizon, banks need to ensure they are doing everything possible to engage with their clients. This means creatively adapting to the new normal and not letting the other challenges they face overshadow their customer engagement. Failing this, they could risk losing customers in the long-term.

Having both been incorporated in 2018, Prevail Partners and Intelligent Sanctuary are relative newcomers to the financial services sector – but the teams behind them certainly aren’t. Their new partnership combines military and international crime agency asset tracing, due diligence, fraud and money-laundering capability that could set a new standard in the civilian market.

Rather than limiting investigations to scouring social media or publicly available records, the partners utilise investigative tradecraft and cyber forensics, supplemented with fintech-based data collection tools, to pursue evidential trails across international borders. Intelligent Sanctuary CEO Jonathan Benton and Prevail Partners CEO Damian Huntingford discussed this unconventional approach to due diligence and asset tracing during an interview with Finance Monthly.

Both chief executives came from high-ranking jobs in what they called their ‘previous lives’. Jonathan is a former senior police officer and Head of the UK’s International Corruption Unit, while Damian is a former Special Mission Unit Commanding Officer and OBE recipient. Both are able to draw upon more than 20 years of experience in their fields, and their teams are just as capable; Prevail Partners staff have backgrounds in UK Special Forces, and Intelligent Sanctuary team members have each spent more than a decade in financial investigation or litigation.

It is this unique kind of professionalism that has set the partners apart from the traditional firms and made them less prone to misconduct, according to Jonathan. “There's been parliamentary enquiries into the way investigators conduct themselves in the private sector,” he said. “There's been untold cases overturned because of the way people have conducted themselves. But I was a former senior police officer. Damian's a former senior military officer. And we have genuinely operated at the top of our game and have reputations and understand risk and how reputation can be lost -- not just for us but our client as well. And therefore, there is a very strong core value about what we do and how we do it.”

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For the two firms, the partnership was a natural fit. Both company heads knew of each other as highly regarded professionals in their past careers, and the character of both organisations blended effectively. “We both know from our previous careers that there's often a difference between what might be legally permissable and what you're actually comfortable doing,” Damian said. “I think, as leaders, that’s something we’ve wrestled with numerous times at the pointy end.”

Already, their methods have been exceptionally effective. Between them, the two companies have traced, frozen or secured over $8 billion of misappropriated funds from business leaders and heads of state alike.

Damian credited the success of their ventures to their already-existing network of international connections and their ability to ‘command the cyberspace’. “That can involve, for us, other techniques around social media monitoring, and on occasion in the right instance there could be components of human intelligence, and even a physical dimension to that, providing it's appropriate to that particular jurisdiction,” he explained.

This multi-source intelligence has allowed Prevail Partners to pursue the fraudulent activities of a litany of high-profile individuals – among them Jan Marsalek, former COO of now-collapsed fintech firm Wirecard, who came to the company’s attention while conducting an enhanced due diligence investigation into the firm on behalf of a FTSE 250 company. “There were several red flags raised on that individual,” Damian said, “specifically pertaining to financial and reputational risk around him and his association with Wirecard.”

Through their investigations, Prevail Partners uncovered several transactions made by Marsalek using an avatar in the video game Second Life, which has in the past been used as a tool for financial fraud. This prompted a follow-up investigation, which uncovered further transactions between Marsalek and individuals in Russia, China and other nations that raised yet more flags. Though Prevail Partners’ warnings were not ultimately heeded, they were aware of Wirecard’s dubious financial activities long before news of its fraudulent operation emerged and Marsalek went into hiding.

“We both know from our previous careers that there's often a difference between what might be legally permissable and what you're actually comfortable doing.”

Fintech executives are far from the only subjects of Prevail Partners’ and Intelligent Sanctuary’s investigative work. Their teams have also tracked former Libyan Prime Minister Gaddafi’s looting of his state’s wealth, leading to $2 billion worth of funds being frozen through sanctions, and identified a global network of illicit assets in excess of $1 billion used by former Egyptian President Mubarak and his confidants. Dismantling complex financial fraud is a challenging and morally rewarding endeavour, which both CEOs identified as a key motivator in their decision to re-establish themselves in the private sector.

“My old world was about chasing down corruption and trying to uncover the pernicious side of it and recover the money that is laundered through the UK,” Jonathan said. “Well, we can still do the same thing through the private sector. In fact, I'd go as far to say in many ways probably more efficiently, because civil litigation is swifter, it can provide opportunity for early settlement, it's not conviction-based – requiring the conviction first and then recovery. So it's also about the ability to still do good, but in a commercial space.”

With both companies’ capabilities now working in tandem, we can expect to see Prevail Partners and Intelligent Sanctuary continuing to set new standards in asset tracing and due diligence going forward.

BlackLine commissioned independent global research firm Censuswide to survey over 760 institutional investors across the world to establish their attitudes to financial risk, due diligence and reporting. The findings reveal the financial practices that raise red flags for investors, as well as the factors they rely on to make informed investment decisions.

According to the survey, creative accounting, where companies exploit financial loopholes to present figures in a legal though misleadingly favourable light, was identified as a major concern for the global investor community. Not only do the majority of investors believe that these tactics are commonplace at their portfolio companies, but 91% believe that more large companies will resort to these techniques over the next 12 to 18 months.

Worryingly, 83% of investors surveyed also agreed on the likelihood of a global recession in the next 12 to 18 months, meaning businesses will need to work even harder to outstrip the competition. However, companies should think twice before trying to manipulate their figures; a quarter (25%) of investors singled out evidence of creative accounting as the factor that would make them least likely to invest in a company.

“In many ways the international business landscape is more complex, uncertain and challenging than it was a year ago. Companies are therefore under increasing pressure to perform and retain a competitive edge,” said BlackLine CEO Therese Tucker. “However, businesses cannot afford to have the integrity of their financial data questioned at a time when investors are evidently becoming more stringent about unnecessary and unwarranted financial risks.”

In fact, inaccurate reporting and poor financial controls raise alarm bells for a large number of global investors. Less than 1% of those surveyed say they will invest in a company with poor financial controls without taking some form of corrective action first, such as imposing changes on the company or its management team.

A third of investors (33%) say risk of internal financial fraud or financial non-compliance make them less likely to invest. Meanwhile, a quarter (25%) are put off by consistently late filings, with a slightly higher portion less likely to invest in companies that make adjustments post reporting (29%).

These red flags are encouraging investors to take a much closer look at the numbers, highlighting the importance of accurate and transparent financial data. When asked what the most important considerations were when deciding whether to invest, a company’s financial growth forecasts (46%), access to real-time snapshots of company finances (42%) and key metrics within financial reports (46%) came out on top. This suggests that while investors are forward-looking, they also need a clear and realistic view of current financial data in order to make informed decisions.

“It’s likely that investors will increasingly want to look ‘under the hood’ of their portfolio companies, to ensure they are getting a transparent and accurate view of their finances,” continued Tucker. “The ability to access, and more importantly analyze, data in real time will not only be vital for driving business competitiveness, but also for maintaining investor trust.”

The full findings are outlined in ‘The New Age of Increased Investor Due Diligence’.

Zac Cohen, General Manager at Trulioo, discusses the key considerations for businesses before engaging in commerce in high-risk countries.

Doing business internationally is a complicated undertaking. Aside from the standard logistical challenges associated with doing business globally, organisations have to factor in considerations specific to different regions and countries. These considerations may include factors such as legislative, political, currency and transparency challenges.

Nevertheless, globalisation is storming ahead and businesses must be prepared to look beyond their domestic surroundings if they are to remain competitive in our global marketplace. International trade secretary Liam Fox has endorsed a move for UK-based businesses to adopt a more international focus, highlighting the importance of global competitiveness. Consequently, UK businesses are feeling the pressure to ramp up their efforts to target a more international consumer base. As if this wasn’t enough for international businesses and investors to grapple with, further complications and difficulties are liable to arise when doing business with “high risk” countries.

1. Fraud and Corruption

A recent study by the World Bank estimated that an extra 10 per cent is added to the cost of doing business internationally as a direct result of bribery and corruption.¹ Considering the immense amount of international trade, this figure is significant. The danger of doing business with countries considered to be “high risk” – defined by the Financial Action Task Force (FATF) as any country with weak measures to combat money laundering and terrorist financing – is the heightened potential of inviting transactions that are either fraudulent or otherwise corrupt.¹ The following considerations should be carefully observed before entering into any commercial dealings with a country considered to be high-risk.

2. Enhanced Due Diligence

As a result of the 4^th Anti Money Laundering (AMLD4) directive, developed by the European Union, businesses have to adopt a risk-based outlook. The AMLD4 specifies that EU-based businesses must collect relevant official documents directly from official sources like government registers and public documents, rather than from the organisation in question. If a potential trading partner is located in a high-risk country, or serves an industry that has a higher than normal risk of money laundering, then that partner must conduct Enhanced Due Diligence (EDD) on the business entity. This Enhanced Due Diligence process involves additional searches that must be carried out by any firm seeking to do business with this kind of organisation. These searches may include parameters such as the location of the organisation, the purpose of the transaction, the payment method and the expected origin of the payment.

3. Ultimate Beneficial Owners

AMLD4 also outlines the need to discover the ultimate beneficial owner of a business, whether they are customers, partners, suppliers or connected to you in another business relationship.

According to the Financial Action Task Force (FATF),

Beneficial owner refers to the natural person(s) who ultimately owns or controls a customer and/or the natural person on whose behalf a transaction is being conducted. It also includes those persons who exercise ultimate effective control over a legal person or arrangement.

This is important as businesses need to understand who they are dealing with when physical verification is not a practical option. Difficulties could arise when verifying UBOs in high-risk countries as some national jurisdictions impose secrecy policies which block access to verification documentation. This problem is compounded when checking UBOs against international sanction and watch lists as there are more than 200 lists, which vary in scale and uniformity.

4. Virtual Identification

However, verification can still be successful. Many are now turning to software that helps businesses to perform the necessary diligence checks. We gave a lot of consideration to the specific complexities of working with high-risk countries when developing our Global Gateway platform. Programmes such as these are designed to allow companies to perform the Enhanced Due Diligence, Know Your Business and Know your Customer checks that are required when doing business internationally, particularly with high-risk countries. Compliance with the various pieces of legislation on this topic should be at the forefront when implementing the necessary verification checks.

Across the world, markets are becoming increasingly more open, paving the way to a truly global economy. If companies can get to grips with the key due diligence requirements, this is a move that will ultimately benefit the global consumer and customers alike.

To learn about Environmental Due Diligence, Finance Monthly talks to Alex Ferguson, Managing Director for Delta-Simons Environmental Consultants – a company specialising in Environment, Health & Safety and Sustainability, providing support and advice within the property development, asset management, corporate and industrial markets. One of the firm’s specialisms is providing environmental due diligence services to investment and pension funds, commercial property developers and banks for UK and international transactions. It also supports clients with the environmental aspects for the sale, purchase and development of potentially contaminated land and property.

Environmental due diligence is a now an important part of a broader due diligence process – what makes environmental due diligence so important? In what ways does it increase the value of portfolios/real estate investments?

Environmental liabilities have the potential to manifest in significant costs in both M&A and Real Estate transactions. Costs can take the form of both immediate financial impacts to address liabilities and also in terms of longer-term reputational issues. A programme of targeted environmental due diligence can manage risks and avoid liabilities.

Traditional environmental due diligence is the process that assesses assets for potential risk associated with environmental issues such as: soil and groundwater contamination; flood risk; and permitting and compliance issues.

We are also recognising that there are other emerging issues to be considered as part of corporate M&A and real estate due diligence. At the forefront of these is the concept of Responsible Investment. Responsible Investment explicitly acknowledges the relevance to the investor of environmental, social and governance (ESG) factors and addresses the key elements of value, risk and compliance associated with ESG.

Investors and asset owners are increasingly looking at due diligence that incorporates ESG. We are seeing more investors integrating ESG into their acquisitions – 60% of assets managed for EU investors now incorporate sustainable investment strategies.

Can you detail your typical environmental due diligence process? Which strategies do you employ?

We work with both vendors and purchasers to inform them on potential environmental risk/liability and impact on receipt/purchase price. This is a staged process commencing with a Phase I report but may also include assessment of environmental conditions through ground investigations and other surveys such as flood, asbestos or ecology. We also provide environmental advice to Development Planning professionals on development feasibility and abnormal cost appraisals. ESG advice focusses on reviewing corporate level ESG commitments and advising on the impacts the asset under consideration will have on the wider portfolio performance against ESG criteria.

An important part of the due diligence process is the monetisation of environmental risks. We work with our clients to advise early on potential opportunities to add value.

At Delta-Simons, what are the common challenges you face when trying to obtain information for an environmental due diligence process? How do you overcome these challenges?

M&A deals present a unique set of environmental, health & safety and sustainability risks and liabilities which require rapid and rigorous quantification as part of the transaction process. On average, the due diligence window lasts two to eight weeks (according to the number of people involved and the scale of the deal) and, therefore, a structured process is critical to ensure that effective and focused due diligence is delivered. The key challenge on the acquisition side of the deal is obtaining rapid access to the key data. When working with vendors, we pull together a clear and robust vendor pack to smooth the due diligence process and minimise uncertainty.

Going forward, the challenge is translating Corporate ESG commitments into standard format for investment committees or other decision makers. Working with our clients to ensure that we capture risks and opportunities around corporate stated environmental goals.

More investors are looking to create sustainable properties as investments – why do you think that is?

Strong performance in ESG means better stakeholder engagement, greater operational-savings and higher asset values. The aim for many is now investment in assets that are truly sustainable over the investment period, both in terms of the environment and in terms of business longevity. Our global alliance, Inogen, is a partner of Global Real Estate Sustainability Benchmark (GRESB) so we work closely with GRESB’s objective to provide real estate investors and managers with the tools they need to accurately monitor and manage sustainability performance to prepare for increasingly rigorous environmental, social and governance obligations.

GRESB is an investor-driven organisation committed to assessing the ESG performance of real assets globally. More than 250 members, of which more than 60 are pension funds and their fiduciaries, use GRESB data in their investment management and engagement process, with a clear goal to optimise the risk/return profile of their investments.

Website: https://www.deltasimons.com/

The European real estate sector continues to flourish but competition for deals is fierce and speed is often of the essence: so much so that, according to recent Drooms research¹ over 50% of real estate professionals in Europe are compromising on the quality of their due diligence to complete transactions quickly.

However, modern technology has a solution for those seeking to complete real estate deals more efficiently. Where time pressures have led to a potential decrease in the quality of due diligence, parties to a transaction have found a solution in technology enabled with artificial intelligence (AI), such as virtual data rooms.¹

Real Estate is big business

According to a Real Capital Analytics (RCA) report published in February 2018, Europe’s commercial property investment market returned to growth in 2017² as deals of more than €500 million in value accounted for almost one quarter of the year’s acquisition volume. The UK also regained its title as Europe’s largest market after its investment volume increased by 12% thanks to several large transactions such as CC Land’s purchase of the landmark Cheesegrater building for £1.15 billion.

Successful transactions like this depend ultimately on high quality and detailed due diligence but despite the high volumes of information that need to be processed, the real estate sector is still behind the curve in terms of technology and a significant number of important processes are still conducted manually.

The volume of documentation involved in real estate due diligence continues to grow exponentially and it is becoming increasingly important for key stakeholders to quickly and efficiently navigate their way through the mass of information involved and to focus on the key points.

Our survey¹ clearly shows that over the past two years there has been an overall increased focus on due diligence and 73% of real estate professionals believe this focus will increase further over the coming year. For this reason, AI is increasingly being regarded as a solution for today and not technology for the future.

A closer look at the benefits

More than half (54%) of real estate professionals say that they use AI to improve the keyword search process when working on transactions. However, this figure rises to 69% of respondents who say they will be using AI for keyword searches in five years’ time. Other processes that will become more widely used include foreign language translation, identifying red flags, routing documents to the right decision-makers and topic-modelling.

The majority of real estate professionals believe that AI already benefits their firms’ and provides a competitive advantage by enabling a much higher volume and variety of documents to be searched at high speed. Almost the same number say that AI speeds up the due diligence process, while a third believe it improves the accuracy of decision-making. Other benefits of AI include minimising risks and liabilities in an overall deal, reduced reliance on legal services, the ability to automatically create contracts and reports and securing the best deals before other professionals.

The barriers facing AI

Despite these benefits, there are still perceived barriers preventing the uptake and use of AI in the real estate industry. The biggest of these is lack of confidence in AI’s ability to match human intelligence and decision-making (cited by 53%), followed by a lack of skills available to implement relevant AI technology (51%), technology being too difficult to use (41%), a lack of trust by senior management in AI (19%) and concern that AI will replace investment professionals’ roles (17%). Only 9% say the main barrier is a ‘lack of demand’.

What does the future hold?

As a pioneer in the digitisation of due diligence in real estate, Drooms’ technology is helping to change existing processes by integrating AI into its virtual data room (VDR). The aim when building AI into our VDR technology is to enable real estate professionals to reduce the amount of manual review work, eliminate unnecessary errors and reduce reliance on expensive third-party costs. We are just one example of the application of AI, but a very good one.

Crucially, this is not a battle of technology versus humans. Despite its ability to automate a tremendous number of processes, AI will always work best in conjunction with human skills and intelligence. AI needs to learn from human behaviour and there is no substitute for years of experience, instinct and knowledge. However, AI complements those elements and adds huge value by making real estate processes much more automated, efficient and cost-effective.

Website: https://drooms.com/

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¹Source: Drooms, April 2018 - The future of artificial intelligence in real estate transactions April 2018

²Source: Real Capital Analytics February 2018 - 2017 Year in Review edition of Europe Capital Trends.

To hear about taxation in India, this month Finance Monthly reached out to Shipra Walia – Managing Partner at W S & Co. With her experience in Corporate Taxation & Advisory spanning over 12 years, Shipra is experienced in opining on international tax issues, valuations, ICDS, FATCA, interpretation of treaties, group reorganization options, transfer pricing issues, due diligence, inbound/outbound options and expat taxation. Her tax compliance work includes representation before the tax authorities, including settlement commission.

International organisations continue to spend more time and resources managing tax liabilities in both their local and overseas markets. What tax efficient structures are available in India to businesses with international interests?

There are many forms of incorporation in India as per which a person can enter into Indian market:

• Branch Office
• Project Office
• Company
• Partnership Firm
• Joint Venture
• Association of Persons or
• A foreign company can incorporate a subsidiary in India.

All of these structures have their different tax forms. Further, India has recently laid down rules and framework for the foreign tax credit adjustments as per which the person doing business in India or with India or Indian entity doing business in other parts of the world will be able to claim hassle free credit / setoff[1] of the taxes paid in other different countries.

Is the India’s tax regime more suited to particular types of business? If so what are they and what makes them suited to India?

India is already a hub for the Services Industry. Currently, with the focus of the Indian Government on the concept “Make in India” and with the various time-to-time relaxations provided in the Foreign Direct Investment norms, all businesses have a scope in India.

How do you help your clients mitigate their tax liability whilst remaining fully compliant with tax laws?

Planning from the initiation of the transaction is key. It is our foremost intention to keep our clients updated of the new events, news or any changes happening which helps them with planning their business strategy.

Can tax saving initiatives be kept up-to-date, especially in light of changing legislation? What happens if a current tax plan is no longer viable because of legislative changes?

Yes, any legislative change gives you enough time to act and adjust accordingly.

However, there may be times when certain changes are made without room for profitable amendments in the on-going initiatives. In such cases, we make sure to help clients with understanding the most profitable option or finding the best way possible.

If you could, what would you change about the tax legislation in India?

India’s tax legislation is 60 years old and in my opinion, there are numerous major issues which are either settled by the Apex court or are being amended. However, as India is pacing with the world’s economy, as well as the laws and legislations prescribed by various international authorities, thankfully, the legislation itself keeps on changing almost every year.

Website: www.wsco.in

www.shiprawalia.in

[1] Subject to the conditions provided and Double Taxation Avoidance Agreement between countries

The Wall Street Fraud Watchdog is now offering an unsurpassed due diligence service for EB-5 Visa applicants that is designed to ensure the investment is not a get rich quick scheme on the part of a regional center. At the same time, they are offering to work directly with the EB-5 Visa applicant to make certain they do not overpay for legal services associated with the EB-5 Visa program.

According to the Wall Street Fraud Watchdog: “It is very possible a regional center promoting an investment opportunity to a EB-5 Visa investment to a person from China, India, Korea, Eastern Europe, the Middle East or South/Central America will not be completely honest with the investor. In many instances, it is likely the regional center will embellish to make it sound like their investment is too good to be true, or it will produce a significant return on investment. Furthermore-why pay a $50,000 'finders-fee' or 'broker fee' when the investment and broker are all one in the same?

"If a EB-5 Visa applicant or applicants care about the quality of the investment they are being offered please call us anytime at 866-714-6466 and let's talk about the goal and or expectation for the investment. We do not work for a regional center nor are we captive to a law firm. Our due diligence service is designed to protect EB-5 Visa applicants and their money."

Note from the Wall Street Fraud Watchdog - "If the apartment building industry uses the word 'moderate' in a forecast for 2017, investors should pause."

For information about a recent settlement involving EB-5 Visa investor fraud please refer to a news article titled Raymond James Settles For $145.5 Million With Jay Peak Receiver.

The Wall Street Fraud Watchdog is concerned US based law firms with offices in China, Central America, the Middle East or in Europe could be more interested in legal fee generation for the law firm-than a high quality outcome for a EB-5 Visa applicant. At the same time, they are not confident all regional centers have a make sense investment product for the EB-5 Visa applicant. Their initiative is all about protecting the EB-5 Visa program applicant and their money with their affordable due diligence services. "Why settle for less?"

(Source: Wall Street Fraud Watchdog)