Keeping Investment Platforms Free From Fraudsters

How can firms with global ambitions balance a smooth authentication process with rigorous AML efforts? In the inaugural edition of the AML/KYC Tracker, Anthony Couture, chief compliance officer for Canadian investment platform FrontFundr, explains how businesses are using new tech to ensure their operations and customers are trustworthy.

This month, police arrested 63-year-old George David George in relation to an investment scheme through which he allegedly defrauded investors of millions of dollars. George’s company, WellCity, marketed itself as a social media network for the health and wellness marketplace run out of Brentwood, Tennessee. The con man pleaded guilty to misrepresenting his company in 2016, then later withdrew his plea and disappeared while on pre-trial release.

George is now facing charges for lying to investors about his company’s assets and revenues, falsely claiming WellCity had “million-dollar proprietary software and million-dollar contracts with corporate sponsors,” according to assistant U.S. attorney Ryan Raybould.

Investing is rife with risks, and this is far from the only case in which an entrepreneur has looked good on paper but turned out to be a fraudster. These bad actors often make off with investment funds for personal benefit or funnel them into illegal operations. On the flip side, an interested party claiming to be a normal investor could be hiding a money laundering scheme.

Sure, not everyone involved is acting in good faith, but entrepreneurs and investors are still drawn together in hopes of mutual benefit. The former need cash infusions to get their business ideas off the ground or advance their latest projects. The latter want to put their money to work for them, reaping profits and boosting the companies that appear to be pursuing compelling endeavors.

Funding platforms seek to bridge the gap between these parties and make the processes as safe as possible. They’re on the hook with regulators should something go wrong, after all.

The threat of fraud forces fundraising platforms into a delicate balancing act, one in which they must comply with various region-specific regulatory rules while continually updating their client-safety approaches. At the same time, these entities cannot introduce so many steps and frictions that customers are turned off by using the services they provide.

Among the platforms facing this challenge is FrontFundr, an online investment portal operating in eight Canadian provinces that focuses on helping established and newer investors connect with early-stage companies. PYMNTS recently caught up with Anthony Couture, the firm’s chief compliance officer, to discuss how it balances keeping investors and entrepreneurs safe from fraud with a friction-free experience.

The stakes are high, Couture said. Things going wrong and bad actors running unchecked could harm not only a particular platform, investor or enterprise, but also damage faith in the system.

“The financial services industry is a trust industry,” he explained. “If you have too many instances [in which] that trust is damaged, it hurts the whole systemic nature of our economy.”

Staying a step ahead of criminals

Investment firms typically face more extensive oversight procedures than nonprofits or other organizations focused on donations-based fundraising. To stay on the right side of the law, investment platforms must be able to identify who is sending and receiving money and comply with anti-terrorist funding (ATF), AML and KYC guidelines, among others. That requires analyzing investment data and monitoring for inconsistencies that could indicate criminal involvement.

“We want to have consistent and reliable information on the individual who comes to the platform,” Couture said. “[This is] both to undertake our responsibilities and also to provide a modicum of protection for issuers that come to our platform, so that they know that the money and capital they’re receiving is coming from a place of good intention — not from bad actors within the marketplace.”

Such consistency can be difficult to achieve, though, especially for smaller operations. Partnering with a specialized third- party — in FrontFundr’s case, Trulioo — can help these players gain access to additional resources and a deeper data pool. Both help them remain vigilant in the fight against fraudsters.

“Bad actors within this area tend to move quickly,” Couture said. “Those providers that are helping companies like ours address these responsibilities must move quickly as well, and alter their products accordingly so that we can remain competitive.”

Retaining customers

Customers who wish to interact on the FrontFundr platform must register and undergo a KYC process, which is intended to help ensure they are who they claim. Identity verification can’t be too long or burdensome, however, or users might find it too painful and switch to a competitor.

“It’s a delicate dance,” Couture said. “Coming up with a program that allows clients to come to the process [and] give us what we need, but also allows for a very smooth onboarding experience — [that] is a challenge.”

Educating clients on why the platform asks for certain information can help, as those who know the value of providing such sensitive details are often more willing to do so. Investing platforms must strike the right balance between security and convenience for their customers if they want to keep money flowing. Potential investment gains are high, of course, but the damage from becoming entangled with bad actors can be quite severe.

“The risk for entrepreneurs can be significant, [particularly if they accidentally end up involved in] money laundering or nefarious activities,” Couture said.

The right security strategy and partners can make a significant difference.




The September 2020 Leveraging The Digital Banking Shift Study, PYMNTS examines consumers’ growing use of online and mobile tools to open and manage accounts as well as the factors that are paramount in building and maintaining trust in the current economic environment. The report is based on a survey of nearly 2,200 account-holding U.S. consumers.