Background Checks as Best Tool to Prevent Investment Fraud

Background Checks as Best Tool to Prevent Investment Fraud
By Ken Springer
Fraud hampers the success of private equity and venture capital firms. Sounds like a pretty well-known statement, right? Well, while we all know it to be true, our recent survey of CFOs of private equity and venture capital firms confirms it: 39% of those surveyed stated they had encountered fraud at some point within their own firms or at portfolio companies.

And, what did these CFOs say was the most proactive and beneficial way to avert these instances of fraud: background checks. Almost all of the CFOs surveyed (91%) rely on background checks to prevent fraud, and 64% said they believe more thorough background checks would assist in uncovering and preventing fraud in the future. Background checks are not only an ideal tool to safeguard your deals but also are appealing to investors during fundraising.

As business investigators, we already knew that background checks are the ultimate component in preventing investment fraud. Between the nuances of upcoming regulation and the changing tides in the investment landscape, investors of all sizes should take proper precautions to protect their interests. This means background checks—and not just the “he didn’t have a criminal record” kind. (Neither R. Allen Stanford nor Bernie Madoff had criminal records… until now.) Proper background checks should include everything from reviewing an individual’s business affiliations; involvement in civil lawsuits, criminal matters, judgments, liens, bankruptcies and regulatory actions; determining if the person has received any controversial media attention; and confirming undergraduate/graduate degrees and professional licenses. These steps will assist in avoiding conflicts of interest, embarrassment and being duped by an impressive CV and ultimately preclude any instance of fraud creeping into your deal.