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How due diligence can decrease management risk in the exempt market

By Charles Richer, MBA, CFE

The exempt market has the potential to provide spectacular returns for investors, and recent regulatory changes have opened the door for the exempt market industry to fill a growing need for alternate investments for your clients. However, coupled with that profit potential are the usual array of risks including management fraud.

At face value, a company selling securities may look like a promising business partner and a sound investment. However, after you make the investment, you could possibly discover that the management team behind the investment were fraudsters. As a dealer, you are left to explain to your clients that the investment you were promoting was a very cleverly hidden fraud executed by sophisticated criminals that have done this before and have never suffered any consequence for their malfeasance. These serial fraudsters have learned how to cover their tracks and through the use of corporate misdirection and useful pawns, they seem too often to be able to get away with their deceptions with little or no punishment.

In a recent case, we conducted a full investigation into the background of a group of promoters only to find they were recently banned from selling securities and were being chased by Canadian tax authorities for a variety of nefarious acts. On the surface, they appeared pure, but, with advanced technology tools combined with old fashion investigative methods, the truth came to the surface after only a few days of research. The dealer and clients backed away from the investment and the investment fraud was exposed by authorities a few months later. Due diligence by the management and promoters of the investment saved the clients’ money and the dealer’s reputation.

A company’s most valuable asset is the people associated with that business. Tracing company personnel and their associates through the sea of social network posts can assist in identifying with whom you are investing. Using various search engines (both foreign and domestic), people search engines, and custom search topics can frequently provide surprising results and uncover information that can prevent disaster. Though the mass of information available seems daunting, ‘targeted’ searches go a long way in verifying the recent and historical structure of a company, the people associated with that business and most importantly, links between dishonest principles and promoters.

How can investors be expected to keep pace with the complex intricacies involved in tracking and identifying fraudulent entities? The answer lies in engaging professionals who specialize in completing these tasks; experts who conduct the necessary research, background checks, and build a digital profile that can grant the investor confidence. In a market where risk cannot be eliminated, it is important that all investors take a look at how vulnerable they are to fraud and ensure proper prevention. Once a fraud is perpetrated, it is often impossible to obtain a fair and affordable resolution.

Professional seasoned investigators with the right technology tools and an understanding of commercial and investment fraud are allies in your battle against these parasites that prey on your clients. Taking the time to scrutinise the people behind a business investment opportunity is the best things you could do for your clients and your reputation

Charles Richer, MBA, CFE is a Partner at Inquisit Solutions. Charles led major business transformation initiatives that modernized operations, intelligence sharing and interoperability affecting all of law enforcement in Canada. He directed all types of fraud related investigations domestically and abroad. Charles also led computer crime investigations and analyses, and he is a Certified Fraud Examiner (CFE). After leaving the RCMP as a senior executive, Charles was the Chief Information Officer (CIO) at Passport Canada where he carried out executive oversight of international Information Management/Information Technology (IM/IT) initiatives.