24 Nov 2023

Investor Verification and KYC for Blockchain Companies

Investor Verification: What You Need to Know

With financial fraud and crimes such as money laundering being constantly on the rise across the world, businesses need to be increasingly cautious and critical of the investors and investments they accept. 

One of the most critical aspects that businesses need to take into account is verifying the legitimacy of an investor before accepting funds that may have been generated through financial crimes. Unfortunately, laundering illicitly obtained funds is often carried out through investments in unsuspecting businesses, which then become unknowingly complicit in financial crime. This is where investor verification comes into play.

Investor verification is the process of confirming and verifying the identity of an investor to ensure that they are who they claim to be. This verification process helps companies protect themselves from fraudulent activities and ensures that their investors are legitimate.

One of the most reliable ways to conduct investor verification is through a third-party identity verification service provider, such as KYC-Chain. Automated Identity Verification (IDV) services use advanced technology like artificial intelligence (AI) and machine learning to verify the identity of an investor quickly and accurately. Most commonly referred to as Know Your Customer (KYC) due these processes and systems being used to ascertain and verify the identities of customers who use financial services, KYC / IDV for investors carries out many of the same checks – in addition to some other, more specialized steps. 

Investor verification has become a necessary step in the investment process, mainly due to the rise in online investments. With more people turning to digital platforms for investing, it has become easier for scammers to create fake identities and defraud unsuspecting investors. Because of these developments, companies and projects seeking funding must take proactive measures to verify their investors' identities to prevent fraudulent activities and protect their reputation.

This is especially true in the blockchain and crypto space, where sources of funds can be opaque. Regulators around the world are expanding and tightening their legal regimes while clamping down on businesses that fail to adequately vet their sources of wealth.

Investor verification for compliance

Investor verification is also crucial for companies in maintaining compliance with regulatory standards. Global regulators like the Financial Action Task Force (FATF) require financial institutions to implement customer due diligence measures, including investor verification, to combat money laundering and terrorist financing.

The FATF’s Recommendations are to be taken seriously, as they go on to inform the AML legislation and rules of most developed and developing economies, including the US, EU and many others. Put simply, carrying out IDV and KYC on investors is either required by law or highly recommended in most global jurisdictions. We discuss global AML/KYC regulations in further detail in our Regulatory Series

What does investor verification involve?

Investor verification typically involves verifying an individual's identity through ID document verification and biometric authentication. 

ID document verification involves verifying the authenticity of government-issued identification documents such as passports, driver's licenses, or national ID cards.

Biometric authentication, on the other hand, uses unique physical characteristics like facial recognition, fingerprints, or voice recognition to verify an individual's identity. This method is more secure than traditional methods like knowledge-based authentication, where an individual has to answer personal questions based on their credit history. Biometric authentication can now be carried out using advanced technology such as Liveness, which is used to determine whether a submitted selfie is a real person that matches the documents submitted.

Document and biometric verification are two processes that are integral to broader KYC processes. But for investors, there are added checks that need to be carried out due to investors’ unique status as sources of capital — often in large amounts. 

Enhanced Due Diligence for Investors

As the investment space is considered high risk from an anti-money laundering  (AML) and counter-terror financing (CTF) perspective, many global regulators have established rules that oblige firms to carry out enhanced due diligence (EDD) — due diligence that does more than simply authenticate identity and address. 

EDD generally refers to a series of different checks that can be carried out on prospective investors or clients. These include:

Sanctions / PEP / Watchlist Screening — Automated EDD checks can be carried out that check an investors name against databases that compile lists of individuals who are featured on global sanctions lists, politically exposed person (PEP) lists and other watchlists. 

Adverse Media checks — Proprietary software is used to run prospective investors’ names and business associations for negative news references. By using powerful and comprehensive screening tools, references to individuals or their business interests in adverse media can indicate whether they have previously been involved in problematic or illegal issues. 

Wallet ScreeningWallet screening is an essential EDD process for projects and businesses accepting investments in crypto. It essentially involves scanning a wallet address against various databases and values in order to identify whether the address has been suspected of being used in financial crimes. 

KYC-Chain’s Enhanced Platform

KYC-Chain released some exciting updates in our V6 upgrade that will further enhance the KYC process, bringing greater security as well as improving the user experience of both the onboarding manager as well as prospective investors/clients.

Manager Permissions

Administrators can now fine-tune the application's access permissions for each manager, specifying the exact parts and features that are available to them.

Managers with the appropriate permissions have the flexibility to create and delete an unlimited number of unique API Keys. Each key inherits the permissions of the respective manager, thereby enhancing security and control.

Other new features that will be integrated in KYC-Chain’s V6 include:

  • Language Switcher: Clients can establish a secondary language for the frontend applicant portal, affording applicants the convenience of switching between English and the selected second language.
  • External Redirection Option: Clients can redirect applicants to their external website after application submission, offering a seamless user experience.
  • OCR Fill: ID Document Verification checks now automatically pre-fill relevant requirements for applicants, such as date of birth, nationality, and more.
  • Wallet Screening Improvements: the wallet screening infrastructure has been refined, enabling managers to track and review previously run reports for an applicant, regardless of any future changes to their information.
  • Expanded Blockchain Coverage: An additional 19 blockchains and all the associated tokens listed in those blockchains have been added, allowing for greater usage and more user addresses to be screened.

Conclusion

Investor verification is a crucial step in the investment process for both companies and investors. It not only helps protect companies from fraudulent activities but also ensures that legitimate investors are safeguarded. 

With the rise of online investments, third-party identity verification and EDD have become essential in conducting accurate and efficient investor verification. Using a market-leading platform such as KYC-Chain allows our clients to seamlessly and effectively authenticate the identity and vet their potential investors. By using KYC-Chain, our clients can rest assured that they are in compliance with national and global regulations — while helping reduce the threat of money laundering and other financial crimes to their business and the broader economy. 

Interested in using KYC-Chain for your investor verification processes? Get in touch and we’ll be happy to arrange a demo.

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