Why performing Crypto Due Diligence is a reliable fraud prevention tool.
Good financial crime compliance and anti-money laundering directives all require organisations to introduce a risk-based approach to enhanced due diligence and fraud prevention measures. When assessing the risks of money laundering and terrorist financing, organisations should check whether any high-risk factors apply.
The biggest risk currently facing investors and crypto currency platforms is the anonymity and ambiguity of customers as well as some of the individuals and developers that are behind the companies offering crypto currency services themselves.
Although, crypto currencies are not currently measured by Financial Action Task Force (“FATF”) as a high risk, they do recognise that compliance processes are required in relation to Virtual Assets (“VA”) and Virtual Asset Service Providers (“VASPs”), in particular with regard to:
- supervision or monitoring of VA, ICOs and their VASPs for anti-money laundering and counter finance terrorism purposes
- licensing or registration of VA, ICOs and VASPs
- fraud prevention measures, crypto due diligence, suspicious activity and transaction reporting
- enforcement and sanction measures for offenders
Customer Due Diligence – a risk based approach
Let’s start with customer due diligence. When dealing with individuals or investors established in high-risk jurisdictions, or are exposed to other cases of high risk, it is imperative that crypto companies identify the areas of risk and apply enhanced due diligence measures to manage and mitigate those risks appropriately. Specifically, to question:
- whether their customers are operating in geographical areas of higher risk, including areas of non AML/CTF legislation, significant levels of corruption, countries subject to UN sanctions and/or countries harbouring designated terrorist organisations
- are ownership structures of larger investors appear unusual or excessively complex given the nature of their business
- whether your organisation has received funds from unknown parties
- what information you collect from your customers? Can you demonstrate sound “KYC – know your customer” compliance? How do you verify the information gathered?
- whether any business relationships are conducted in unusual circumstances
ICOs, are they who they say they are?
Large and small investors will want to know who they are investing their assets with and the assurance that the ICOs are appropriate. Will talked earlier about ICO due diligence and although there is no required template for the ICO organisation to complete, investors can still perform background checks on the management and developers who are behind the ICO platform.
The fundamentals of background checks remain the same regardless of the industry, it is just applied differently. In the ICO example, our team would determine the ICO’s integrity, ability, reputation by performing open source intelligence and background checks on the senior management, board directors, relevant executives and shareholders of the ICO.
We would specifically be looking for adverse information and risk, including undisclosed red flags, conflicting findings, false or exaggerated statements and report these findings to the investor.
Background checks will include but not limited to verifying their qualifications and employment history, analysing their financial status, examining their record as a board director, identify whether there are any litigation, insolvency or court cases filed, as well as digging deeper via archived media and press articles, as well as possible exposure to sanctions lists and politically exposed persons.
If the required, an additional level of enhanced due diligence can be applied by providing investors with an independent analysis and assessment of the appropriateness of directors and developers’ professional background by speaking with former colleagues, clients and senior management that had previously worked with the individual.
All of these crypto due diligence measures, enhanced due diligence, industry insight interviews and regulatory references, allows investors to invest with more assurance, confidence and compliance.