Compliance & the Private Investment Industry

Starting a business is a risk. Investing money and time into your business doesn’t guarantee results. As an entrepreneur, you will be expected to take risks, but not all risks are created equal. Consider the skydiver who maintains their rig, runs safety checks like clockwork, rehearses the jumps, and plans for contingencies. Proper risk mitigation decreases the possibility of catastrophe. 

Successful business owners don’t avoid risks; they manage them. The following information centers on common risks Private Investment (PI) Firms may face and how to limit their ability to harm the business.

Wrong Investor, Dirty Money

The amount of money an investor is willing to invest may sound great to the business growth. However with the wrong investor could be a critical error as taking someone’s money allows them to enter the business’s sphere.

In 2020 the Federal Bureau of Investigations (FBI) stated that they believe that nearly $10 trillion in private investment funds were being used as vehicles for laundering money.

A quick recap on the money laundering system: it consists of three key stages, placement, layering and integration.

Criminals use the private placement of funds, including investments offered by hedge funds and private equity firms, to reintegrate dirty money into the legitimate financial system.

Other weaknesses faced by the PI industry are in the layering stage. This stage helps criminals to make illegal funds difficult to be identified and traced.

Are Private Investment Firms prepared to detect Red Flags?

The U.S. government agency FinCen (Financial Crimes Enforcement Network) encourages firms to file SAR (Suspicious Activity Report) for any suspicious transactions or activities even if filing is not required.

Red flag is a warning of risk that comes from suspicious transactions or activities. Typically, red flags the PI industry has to be aware of are (but not limited to, there are several other suspicious behaviors):

  • Investors do not share the bigger picture of their business;
  • Investors are reluctant to share personal information.
  • Other investors’ account that has been blacklisted by another financial institution;
  • Funds that come from activities that show traces of illegality or seem to be part of a transaction designed to hide that they are from illegal activity;
  • Transactions that look to be structured in a way to avoid the reporting requirements of the BSA;
  • Inconsistent transfers without logical explanation;
  • Immediate withdrawals of funds from accounts;
  • Multiple accounts under the same client 
  • Source of money falls under a sanctioned jurisdiction;
  • Investors come from a high-risk countries;
  • Discrepancies in the identity verification process;
  • Small and frequent transactions from and to different accounts.

Are Private Investment Firms doing what they are supposed to do?

PI firms’ AML (Anti-Money Laundering) programs might not be adequately designed to prevent bad actors from using firms to clean the dirty money.

A responsible PI firm wants to have in place:

  • Internal policies, procedures and controls to meet BSA (Bank Secrecy Act);
  • Designated compliance officer;
  • Ongoing training program;
  • Independent audit.
  • Risk-based procedures (due diligence, background checking, monitoring systems)

PI firms that are not diligently doing their part are unprotected so criminals have been exploiting their vulnerability to integrate illicit proceeds into the financial system.

Long story short

If a business cannot detect the above red flags while dealing with potential or current investors, be aware, there are compliance deficiencies. Such business is not meeting its obligation to adopt and implement written policies and procedures designed to prevent violations.

A firm’s ineffective anti-money laundering (AML) system is contributing to increasing money laundering and terrorist financing activities inderictly.

Hey Private Investment Firms

Sustainable growth is only feasible if your compliance measures can keep pace. Effective ongoing compliance lessens risk and is also a competitive advantage, not just a regulatory checkbox activity. Establishing values and procedures that promote constant vigilance and respect for regulatory obligations help create a transparent organization with solid governance.

Will investors force you out of compliance? Your control measures need to be aptly applied to anyone who falls under your umbrella. Before taking investment money, know whether you can bring them without jeopardizing your business.

Prae Venire
Screening your investors is a critical compliance program element. At Prae Venire, we can help you, our goal is to minimize the risks you face by taking on and sustaining business opportunities and investments. For more information: