Know Your Investor | Sophisticated Investor Verification in Real-Time

In today’s data-driven digital world, organized crime groups and fraudsters have developed more sophisticated means and methods to defraud investment companies and businesses. Illegitimate investors are a red flag for financial institutions as they intend to exploit services to take over accounts, avail free services, and wash their illicit gains. In a digital-first business ecosystem, financial and non-financial sectors need to know who they are dealing with before getting them on board. This goes both for individuals and corporate investors. Carrying out Know Your Investor checks to authenticate investors’ identities, source of income, and market profiles is crucial – to overcome the risk of money laundering, financial losses, and regulatory sanctions.

Despite rigid laws and regulations, investment fraud is becoming the most common crime worldwide, making businesses lose millions of dollars to illegitimate investors, fines, and reputational damages. To overcome these issues – KYI Solutions is becoming a growing topic of interest across the business landscape.

A Short Overview of Sophisticated Investors

Investors are considered sophisticated if they hold significant amounts of funds, have high net worth, and experience participating in more complex investment affairs. If the investor meets the eligibility criteria of sophisticated investors, they are in a superior position, open to broader opportunities and certain benefits, including:

• Confidential investment opportunities (ex. pre-IPO securities and hedge funds);
• private offerings and other deals that “ordinary” investors never see;
• wholesale or institutional offers;
• securities offerings without the common product disclosure conditions that apply to ordinary investors.

Looking for a generic definition of a sophisticated investor? Explicitly speaking, it doesn’t exist. The criteria and standards of becoming sophisticated investors vary country-wise or in specific circumstances.

The Foundation of Trust

Like the financial industry, the investment sector relies on trust. It’s the key to any successful investor-business relationship. To do so, Know Your Investor Solutions plays a significant role in developing and maintaining trust throughout the investor onboarding journey by conducting background checks to verify their authenticity and credibility. By using enhanced due diligence processes, businesses can gather detailed information of investors, further determining risks they pose while creating risk profiles for making informed decisions and mitigating money laundering attempts.

In addition to fraud prevention, know your investor helps companies assess the financial stability of implicit investors – ensuring that their goals are aligned with the businesses’ values. Secure investor onboarding not only protects businesses from being exposed to investment fraud but also fosters a sense of transparency and trust.

Sophisticated Investor Verification: Why Businesses Need to Take Precautions

As the investment sector becomes the primary target of money launderers, companies must take steps to restrict criminals at the bay. While the broad access to investment opportunities that come with the status of sophisticated investors grows, the fraud prevention level should also increase. To ensure legitimate access to title-specific services, investors’ status needs to be verified before letting them avail such opportunities. However, investors can get certifications before working with a particular business, the companies don’t have to rely upon such claims – made by a third party. Instead, companies need to make efforts to authenticate the status of investors along with their identity before developing a relationship.

Here are three that need to be practiced to verify a sophisticated investor before getting them on board:

1. Investor Due Diligence

Businesses need to gather investors’ personal information, including name, address, date of birth, email, permanent residency country, etc. 

2. Identity Verification

To confirm the authenticity and ensure that the investors are legitimate who they claim to be, businesses present them with a series of questions that help them verify their status. For instance, companies might ask them about their occupation, business title if applicable, educational history, net worth, total number of assets, source of funds, and partners’ capital.

3. Appropriate Evidence Submission

Due to the increased risk of investment fraud, document forgery, money laundering, and identity theft, depending on the status of the investor, individuals need to submit proof of wealth to the partnering entities, including: 

1. One or more copies of the brokerage, bank, and current asset statements.
2. A letter from the investor’s attorney, CPA, registered investment adviser, or registered broker that can state the individual’s qualifications.
3. One or more copies of tax returns, W2s, and government filings that support income qualification for over 2 years.

Top 3 Key Considerations in Verifying Sophisticated Investors

While verifying investors’ identities, businesses must ensure that the information they collect must be processed and managed securely. One data breach can lead to severe consequences, including regulatory fines, sanctions, and reputational damages.

Here are some crucial considerations businesses need to practice:

Confidentiality and Data Protection: Companies must understand the importance of data confidentiality and privacy while verifying an investor. In addition to this, staying put with data protection and consumer privacy laws while integrating state-of-the-art security checks is vital to drive trust across the online investment ecosystem.

Regulatory Compliance: to secure consumer data privacy rights, regulatory authorities have legislated multiple laws and standards that should be aligned with the investor verification procedures. Understanding and complying with such laws ensures your business takes investors’ data privacy rights seriously and commits to offering secure services.

Ongoing Monitoring: Companies must review their investors’ status and monitor their activities periodically.  This helps businesses ensure compliance with ever-evolving regulations while eliminating the risk of getting defrauded.

A Short Guide to Sophisticated Investors in Different Countries

Australia

According to the Australian Corporate Act, a sophisticated investor is one who owns:

1. assets of over $2.5 million;
2. past two years of gross income over $250,000 per year.

In addition to this, to prove a status of professional status, the investors need to provide AFSL number of proof of assets, including:

1. Hold an Australian Financial Services License (AFSL);
2. Have or control gross assets of more than $10m;

Hong Kong 

Under the country’s Cap. 571D Securities and Futures (Professional Investor) Rules, an investor is said to be sophisticated if:

1. Assets are estimated at more than HK$8 million.
2. Corporations, partnerships, and trustee companies with a total of HK$40 million.
3. Corporations that are investment holding companies and property of a sophisticated investor.

United Kingdom

According to the FCA Handbook, an investor is qualified for a sophisticated status if they have the following:

1. A high net worth and income of more than 100,000 GBP per year.
2. Net assets over 250,000 GBP disregarding primary residence, money raised using property, pension policies, and insurance.

Verify Sophisticated Investor with Shufti

Despite various regulations and efforts made by regulatory bodies as well as the investment industry, investment fraud, money laundering, and terrorist financing remains the prevailing issue. Financial institutions and investment firms need to verify sophisticated investors’ status as they hold the potential to initiate or become part of syndicate crimes. To do so, know your investor verification solutions are becoming the new norm, as they are capable of carrying out enhanced due diligence checks, verify identities, validate proof of documents and assets while ensuring compliance with international laws and regulations

Shufti, a leading identity verification service provider, offers state-of-the-art KYI services that help businesses assess, verify, and onboard sophisticated investors while accelerating trust worldwide. The company’s solution backs investment companies in mastering the art of verification and compliance while mitigating the risk of emerging crimes.

With Shufti, your business can:

1. Simplify investor screening with Shufti’s cutting-edge technology
2. Issuers can upload on behalf of investors or ask investors to provide completed models
3. Integrate our simple SDKs and APIs for quick and easy model creation
4. Ensure compliance with Rule 506(b), 506(c) and robust KYC/AML features
5. Detect true identities, authenticate documents, and identify risks with Shufti’s advanced solution
6. Verify authenticity and detect fraud with our advanced technology

Want to secure your business against investment fraud?