Venture capital funds (VCs) play a vital role in the financial system by providing funding to startups and emerging companies. However, because they often work with high-risk investments it's essential that they have robust Anti-Money Laundering (AML) compliance programs in place to detect and prevent illegal activities.
The main AML obligation for a VC comes into play when a VC raises its own funds and onboards its limited partners (LPs): institutional investors such as pension funds, endowments, and high-net-worth individuals, as well as family offices and other investment vehicles.
In this blog post, we'll take a closer look at the AML process for venture capital funds and the importance of conducting due diligence on limited partners.
The first step in the AML process for VCs is to establish a comprehensive compliance program that includes policies and procedures to detect and prevent money laundering. This program should include customer due diligence (CDD) measures that help to identify the beneficial owners (UBOs) of the fund, as well as any potential red flags that may indicate money laundering activities.
Next, venture capital funds should implement monitoring and reporting systems that help to detect suspicious activities. This may include using software to analyze transactions for patterns of money laundering, as well as conducting regular audits to ensure that the fund is in compliance with AML regulations.
In addition to these internal measures, venture capital funds also have an obligation to report suspicious activities to the appropriate authorities. This includes filing Suspicious Activity Reports (SARs) with the Financial Crimes Enforcement Network (FinCEN) and cooperating with law enforcement investigations as necessary.
VC funds need to conduct due diligence on their limited partners when raising money. This is because limited partners (LPs) are the investors who provide capital to the fund, and the fund has a responsibility to ensure that these investors are not involved in any illegal activities.
The due diligence process typically involves conducting background checks on the LPs, as well as reviewing their financial records. It's also important to review the source of the funds from LPs, to make sure that the funds are not from illegal activities. The fund also should be aware of the regulations in the country where the LP is based, as AML laws vary from country to country and compliance is mandatory.
Venture capital funds not only have a legal obligation to verify their investors once, but they also need to conduct ongoing monitoring of the investors. This helps to ensure that the fund is not unknowingly supporting illegal activities, and is in compliance with the USA Bank Secrecy Act (BSA) and the USA PATRIOT Act, and/ or European 6AMLD and GDPR.
However, implementing the right AML controls is not only a legal obligation but also an ethical one. Ensuring that a venture capital fund's investments are clean and legitimate, can help to protect the fund's reputation and the integrity of the financial system as a whole.
The cost of becoming AML compliant for a venture capital fund can vary depending on several factors such as the size of the fund, the number of limited partners, the complexity of the fund's operations, and the level of AML control already in place.
On average, it could cost a venture capital fund anywhere from a few thousand to tens of thousands of dollars to implement an AML compliance program. Additionally, the cost of conducting due diligence on limited partners, which includes background checks and reviewing their financial records, should also be factored into the overall cost of AML compliance.
It is known that most of the cost associated with AML compliance comes from labor costs. Up to 75% of AML costs are for people doing manual CDD and analyzing cases.
Based on research, a VC onboarding and verifying a limited partner can end up costing 25+ hours of work for a team of 3-4 people. This, of course, is the number per case and doesn’t include the cost of setting up the AML compliance program and monitoring.
In general, a VC fund may have anywhere from a few to several hundred LPs. There can be 1-3+ connected entities, shareholders, UBOs, and representatives, per LP. When looking at a database of 100 LPs we can’t look at it as only having 100 one-time verifications.
Let’s calculate the real number of making sure you are fully AML compliant when having 100 LPs:
100 KYB checks (business register, UBOs)
400 PEP, sanctions, and adverse media checks (the legal entity and connected entities),
300 identity verifications of representatives/ UBOs
400 AML monitored entities (daily)
100 KYB monitored entities (weekly/ monthly/ quarterly/ yearly)
Compliance analysis, risk assessment, decision making
Easily $5,000 per month
Small and medium-sized VCs oftentimes don’t have a big dedicated compliance department and people doing AML are usually multitaskers. Another way of handling compliance is to outsource it to legal professionals. Read more about the true cost of compliance in our previous post here.
Vespia has generated a formula that will assure your full AML compliance 24/7.
We will take care of:
Remain compliant with AML regulations 24/7 with ease, concentrate on growing your business and let Vespia handle AML compliance.
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