WHY KYC IS SO IMPORTANT?
- Know your customer (KYC) practices are developed worldwide to prevent theft, financial fraud, money laundering and terrorist financing. The main KYC goal is to enable debt providers to know and better understand their borrowers, and therefore manage their risks providentially
- Whether an investor or a debt provider, all stakeholders you should ensure they know their your client’s identity, its previous and current financial situation, the purpose of the transaction and what the client aims to achieve from it
Since the 2009/2010 Global Credit Crisis (GCC) the real estate lending market has changed and one of the main lessons emerged is that a more rigorous due diligence (DD) is required among financial institutions. Even though there are a wide range of debt providers rather than simply banks nowadays, the basic of the DD process is very similar. A core part of the DD, defined as practice of factual and legal investigation, research and analysis of all the risks involved in a property transaction carried out prior to entering into it, is the so called Know Your Customer (KYC).
In the property lending market, KYC is a standard activity that ensures a debt provider knows its borrower’s identity, its financial dealings (including source of any funds to be used in the transaction), that it identifies the purpose of the transaction and what the borrower expects to achieve from the transaction.
As real estate transactions usually involve a chain of investors buying and selling properties, debt providers are more and more meticulous in defining their KYC requirements; they usually insist on further transaction information to ensure they know where their funds will ultimately go in order to better manage their risks.
Documentation requirements and other information are usually collected in respect of different types of borrowers depending on perceived risk and the legal structure to be put in place. Necessary checks are carried out before granting a new loan so as to ensure that the identity of the borrower does not match with any individual that has a known criminal background or previous bankruptcy issues. In the UK, these checks and enquires must be made to comply with laws such us The Money Laundering Regulations 2007, the Proceeds of Crime Act 2002, the Terrorism Act 2000 and the EU’s Money Laundering Directive. There are external services available checking all PEP (politically exposed person) lists, news and or news based on borrower’s name, etc.
KYC in bridging and development finance
Bridging and development finance providers are usually involved in more complicated or fast paced transactions and therefore their KYC assessments are quite strict due to the high risk they are dealing with. Even if the money provided for bridging purposes are often required with high level of urgency, the nature and speed of the transactions should not deter a lender from carrying a motive to carry out an in depth KYC process. In this regard, good internal practices, in depth property law knowledge and meticulous attention to detail are required. This analysis may be time consuming but is required in order to avoid unexpected surprises at a later stage of the transaction.
As reported in recent research carried out by the Commercial Real Estate Finance Council Europe (CREFC), a thorough KYC activity:
- should identify the borrower and enquire into its ownership and control structure (in particular, identification of the ultimate beneficial owner) and business, scope and location of operations and sources of funds;
- must be applied on a risk-sensitive basis, taking into account background information about the borrower and its business, as the requirements for one individual are not necessarily the same as those for another, similar entity;
- is a continuing obligation and should be renewed periodically (for example when a corporate entity changes its shareholders/members); and
- requires a risk assessment – it is not sufficient just to obtain the basic information and raise further enquires or undertake checks;
- identifies the beneficial owners (if not the borrower) and take adequate measures to verify identity (including, in the case of a corporate entity or trust, understanding its ownership and control structure); and
- should allow the lender to obtain information on the purpose and nature of the business relationship with the borrower. The practical implications for the above vary but often include (for individuals) reviewing passports and certified proof of address documents (e.g. bank statements and/or utility bills) and (for corporate entities) reviewing constitutional documents and certified directors and shareholder register.
Avamore Capital team carries out a thorough DD and KYC analysis of the borrower(s) / shareholders and its business in each transaction, regardless of loan size, term and complexity. It allows us to ensure that our loans do not involve any legal or credit risks that we are unaware of, and which may have a negative impact on the repayment of the loan. For instance, we recently closed our largest and most complex loan, a £5.7m facility, secured against two luxury properties in Hadley Wood, North London, which are near practical completion. The deal involved the borrower’s company (SPV), a JV formed the developer and a private equity house. There were a number of companies with different legal structures involved in the transaction, including borrower, shareholders and third party investors. In addition, there were a mezzanine finance provider and also a construction which was connected to the borrower.
Avamore Capital always requires the provision of certified constitutional documents, shareholders and directors register, and solicitor certified IDs and proof of address. Assets and liabilities statement is also required with full address of other properties and details of other assets owned by the borrower. Very often borrowers like to be transferred or to transfer back funds directly, but it should always be done through solicitors, and always at least two levels of confirmation for security reasons. Our key priority is avoidance of fraud and we are proud to be actively participating in industry events and sharing information in order to help with the prevention of fraudulent transactions.
About Avamore Capital:
Avamore Capital is a special situations lender that provides loans to property traders, property developers, property investors, and other property entrepreneurs. Loan sizes are between £0.5m and £5m with larger loans possible in conjunction with its partners. Avamore Capital provides a flexible approach, quick feedback and very fast drawdown, subject to due diligence.