Tuesday, January 23, 2024

STARTUPS REQUIRE ENHANCED DUE DILIGENCE ON BOTH SIDES OF THE COIN


I was recently solicited to become an advisor, outside director, and/or part-time executive, by a company that collects and offers suitable individuals for startups. I declined being involved, not because I disapprove of the work that such businesses engage in, but because although I am, by definition, eminently qualified to advise startups that are creating AML/CFT software, I am unqualified as being a person with a felony conviction, Racketeering, for money laundering, in my misspent youth as a bank lawyer-turned career criminal.

Why did the firm soliciting me ask me to participate in the first place, as any rudimentary due diligence inquiry would have revealed this fact in a New York minute? If I had accepted a position, somewhere down the road, such as when the startup acquired financial backing from a venture capital firm, or institutional investor, my background would have come out and I would be separated from the company, both for risk management, as well as PR purposes, irrespective of my talents, and any promised equity interest that I held options in would have lapsed or otherwise been disabled. All this because nobody has performed due diligence.

There is a well-known Florida case about an individual, who broke new ground in the fields of data mining and data fusion in the early 1990s, and founded the first company that provided valuable, relevant information to US law enforcement agencies before anyone else, but who was later forced out of the company by successor elements. The reason was that, although he has never been arrested, he once briefly engaged in narcotics smuggling abroad. Although his stellar work since then overshadowed this dark past, it was sufficient for risk management reasons for the company he built to cast him out.

On the other hand, what if one accepts funding for their own startup, and much later finds out the money indirectly originated from a source connected with a company that existed using the proceeds of crime? it appears that, no matter which way you slice it, due diligence is mandatory to check out every aspect of a startup company, whether you are creating it, or simply participating in its success. Enter the compliance officer.

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