Do you Know Your Borrower? Investor? A Private Lender’s Guide to AML and Red Flags

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Private lenders are probably familiar with the Patriot Act, which was implemented in the aftermath of 9/11. However, they may not be aware that this law has been consistently expanded over the past 20 years as the government looks to crack down on financing enemies of the US. Thus, private lenders may be caught unaware that besides the myriad of state laws and other regulatory compliance frameworks, the Anti-Money Laundering Act is overlaid on the traditional Know Your Borrower and Investor framework.

Add that to more private lenders doing more and more business online (and not meeting their private lender), and you have a recipe fraught with risk. The money laundering risks to private lenders service providers include those conventional risks inherent in the industry but also criminals that exploit online anonymity and regulatory disparity to evade AML.

In this article, we will explore several compliance risks and issues private lenders face and how to deal with them.

Do you Know Your Borrower and Investor’s Identities?

With lenders turning more and more to digital solutions, some of the AML laws may seem archaic or difficult to comply with. 

Borrower and/or Investor’s Identity:  Conventional AML measures with brick-and-mortar private lenders allow for the verification of customer identities in person. Online, criminals are better at concealing their identities when using online services or use proxies to apply for loans on their behalf. Online loan applications with insufficient identity verification may be used to thwart due diligence checks and allow criminals to evade other AML lending safeguards.

Solution: Ensure you document and obtain identification that verifies your borrower or investor. Build a relationship with them and look for telltale signs that this transaction does not “make sense.” Examples of this could be nervousness, numerous incomplete answers, delays, inability to reach them during normal hours of where they say they live, etc.

Are they the beneficial owner of the company who is applying for the loan or investing with you?

Private lenders need to establish to a reasonable extent that the people they are dealing with are the beneficial owners of the entities requesting the loan or investing with them. Money launderers may seek to further exploit the anonymity of online applications by applying for a loan through a firm that they control and concealing their ownership to avoid AML identity verification measures and the scrutiny of authorities.

Solution:  Always get the underlying documents of a company. Most companies must file a Statement of Information with the state they are incorporated or organized in identifying the owners or managers of an entity. Have a copy for your records.

Let Us Get You Compliant with Knowing Your Borrower and Investor (AML Laws)

When it comes to AML, private lenders must abide by a range of rules and regulations designed to ensure that they spot suspicious activity and report it to the authorities promptly. You are required to implement AML laws as a private lender, and you must implement AML lending programs. Below is my recommendation of what to implement:

  • Borrower and Investor Due Diligence: Private lenders should ensure that they obtain due diligence to determine that the borrower and/or investor are who they say they are. This means collecting enough verifiable information to have relative certainty they are who they say they are.
  • Digital Prevention.  Borrowers are especially able to adopt a pattern and practice of concealing their identity as they try to obtain money through either fraudulent means or at least by laundering.  Private lenders should develop processes and procedures to verify the identity of any transaction that originates solely online.

Red Flags: Certain AML lending “red flags” may indicate that customers of digital lending platforms are involved in money laundering. These red flags include:

  • Transactions above reporting thresholds.
  • Suspicious transactions patterns or transactions with high-risk countries.
  • Customers making multiple online loan transactions in a manner that indicates structuring.
  • Customers attempting to conceal their identity in online loan applications.
  • Frequent overpayment of loan repayments.
  • Transactions involving sanctioned customers, PEPs, or customers that are the subject of adverse media.

Conclusion: Be Safe, Be Vigilant and When in Doubt, Report

Private lenders should develop processes to comply with the above. If they do not, they can bet that their bank’s Bank Secrecy Officer (BSO) will be inquiring about the above. Should you have any questions, contact Geraci, and we can answer any of the above questions and guide you to compliance (and also help you not lose money).

Questions about this article? Reach out to our team below.