KYC, AML & CDD – Be Prepared (Abbreviated Pain)

by | Mar 9, 2020

As capital providers in the development finance market, we see two fundamental parts to funding any deal:

  1. Do we like the deal?
  2. Do we like the team?

These two questions form the entire funding decision-making process. Whist each question will be significantly narrowed down throughout the due diligence, everything ultimately leads back to those two questions. Developers need to be prepared to be asked any question by a prospective financier or investor. More importantly, they need to have the answers to them. If they do not, both the process and their deal will be delayed. 

Looking at a development site, we can make a fairly accurate, objective decision as to whether we believe it to be a good investment by analysing readily available quantitative and qualitative data. This includes comparable transactions, the development team’s track record, or financial strength of the contractors, as well as project size, location, target audience, and financial margins. These are some of the key metrics which help us filter the projects that will work from those that won’t.

This is a relatively straightforward analysis as data is available from previous deals, experience, and public / private databases. 

The above assists us in answering the first question, but we still need to ask ourselves; do we like the team?

This is somewhat a more complicated question as we cannot rely on readily available data, numbers, or whether we like to go to the pub with the team. We must look into the individuals involved in the transaction, including their development track record, the management team, relationship amongst the team and appointed professional team.

However, in addition to ascertaining whether or not we like the team as developers, we also need to be sure we like the team as borrowers. Or rather, do we want to fund them? Not only is this crucial for our capital providers as it lays out the credit-quality of the Borrowers, but also it is a requirement under current financial crime regulation which aims to detect, prevent, and deter financial crime in our society.

These checks are often identified as Know-Your-Customer checks (“KYC”), Anti-Money Laundering checks (“AML”), or the all-encompassing; Customer Due Diligence (“CDD”).

Therefore, a funder such as Hilltop must gather the following information about every Borrower we deal with:

1 – Proof of Address and Identity

These need to be certified as true copies by your accountant or solicitor, who will need to see the original utility bill (dated within the past 6 months), passport, or driver’s license. When you are in the business of borrowing money to fund your developments, having these readily available at a moment notice will save you a lot of time and effort in the long run. 

2 – Customer Due Diligence Form

This provides confirmation of all the personal information we need to understand you and your involvement in the transaction. They are very simple questions about you and should be easy to complete. 

3 – Source of Wealth

Any funder requires the Source of Wealth questionnaire to gain comfort in your ability to support the investment you are about to make i.e your equity investment into your development project. This is for the funder to understand where your money comes from, how you started your career or business, how seed funding was generated, and how you have accumulated your wealth over the years.

The reason funders will need to know this is to ensure that they are comfortable with the individual and can clearly identify a logical connection between the type of investment, including the size, asset class, risk, and complexity, and the previous experience and business activities of the borrower.

This understanding is key to identify potential red flags. The more detailed it is, the easier it will be for the funder to get comfortable. If you have nothing to hide, there should not be any problems preparing this.

4 – Source of Funds

The Source of Funds questionnaire needs to explain where the funds raised for your equity contribution have derived from. A few words or a short sentence with no context will rarely suffice. The vaguer the description, the more ambiguity it raises. It is imperative to be able to share the full story of where your equity originates from. Obviously this must correspond with the information you have provided in your Source of Wealth-questionnaire.

5 – Statement of Assets and Liabilities

This supports the information provided in your Source of Wealth and Funds questionnaire. Additionally, it helps to determine your credit-quality and financial strength. This is essential to any funder to ascertain logical coherence between the equity investment, as well as mitigating credit risks.

While as a funder we require a certain level of detail, we are only interested in the big picture, such as the value of your property, investment portfolios, or savings. At the end of the day we are not the Taxman, so we only need to understand, and be comfortable with your current financial situation as a borrower.

6 – Credit and Background Checks

Fortunately, this is something that we will be doing and does not require your input. Once we have your approval to do so, we will carry out KYC using renowned credit checking firms, such as Experian or Equifax, as well as adverse media checks through the likes of Dow Jones or LexisNexis to ensure that there are no surprises from your past. In this case, no news is generally good news.

Once an indicative agreement to fund is made, the KYC process will begin and the above information is requested from the borrower. The reality is that the longer it takes to provide the information, the more the funding gets delayed. In an extreme case, the funder may decide against providing full terms and progressing any further, even despite the fact that they like the deal. As opposed to most other due diligence ascertaining whether we should invest, the KYC determines if we can invest.

It is also worth noting that if you are funding your equity via 3rd party equity providers owning more than 10% of the total equity, we will need the above KYC information from each of them too. 

Some borrowers tend to find the KYC part of the application arduous and even intrusive. A well-prepared borrower will, however, be forthcoming with this information and have anticipated the requirements. Partly because they have the experience and partly because they understand both its importance and relevance. 

Unfortunately, there is no way around this. Either you want the funding, or you do not. Sharing this information should generally be straightforward. This is personal information about you… and only you have that information. Be prepared and have it all readily available to ensure there are no delays in having your funding approved. 

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Updated April 2020 - UK Residential Real Estate Market Review 2020
Essential data for property developers and investors alike

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