“We invest in people who know their markets, that reduces the risk. But we also do KYC [know your customer] checks.”
That was the response when I asked about the investment due diligence process. The fund specialises in high-risk markets, including ventures tied to resources in complex places like the Democratic Republic of Congo. When I probed further into their KYC process, the picture became clearer: they’d inherited a money-laundering-centric, box-ticking framework from a mega-aid agency and the foundation of an oil and gas firm. You know the type - running names through debarment and sanctions lists and calling it a day.
It’s a situation I’ve seen all too often. We tend to trust processes handed down by large organisations that ostensibly know what they’re doing. But this blind faith can lead us straight into the “fire safety conundrum.” Imagine you run a food cart on the roadside but inherit a skyscraper’s fire safety manual. Where do you attach the sprinkler system? What external staircase are they talking about? And foam for the server room—what server room?
This mismatch happens when a 20-person fund applies a multinational corporation’s compliance framework to early-stage startups in complex markets. Pumping the names of 20-something founders of a microgrid company in Ethiopia into the FBI’s most wanted list doesn’t constitute meaningful due diligence. And assuming that someone from a country inherently understands how to navigate that country ethically? Well, that’s just wishful thinking. Bernie Madoff was born in Brooklyn, and he knew (something about) New York markets, but it didn’t reduce the risk.
In my experience, funds often rely on informal due diligence when vetting potential deals. Investment teams ask around—a lot. And while this approach can yield valuable insights, it’s not enough. The trick to creating a due diligence framework that works for resource-constrained teams is making it relatable. Think about how we make decisions in our personal lives: vacations, big purchases, meals out, even dating. We do research—ask friends for recommendations, read reviews, stalk social media profiles—and use that information to inform further questions or rule out obvious red flags.
A good due diligence framework should work the same: simple enough to fit on a page, affordable enough for small teams, and robust enough to save millions. A flawed KYC framework might save millions, too—but at what hit rate? And at what cost to reputation or long-term growth?
So here’s my question: How do you connect people to the purpose of due diligence? What questions or examples help them see it as more than just a compliance exercise—as an essential tool for informed decision-making?
“Now, my sympathies are with the driver…”
Years ago, I went to a comedy night in London. The comedian parodied celebrities eulogising London after spending a few weeks on the West End stage. “Of course, London is amazing to you; you’re f***ng Rob Lowe. It’s less amazing on the night bus to Crouch End at 2 a.m.”
The comic then relayed an interaction between a mother with a large pram (buggy) fighting to get it onto the bus and imploring the driver to help. He didn’t. The mother made it on and started laying into the driver. The comic imagined the driver as a small boy speaking to his mum and saying, “When I grow up, I want to be a night bus driver on the Crouch End route, and I hope I get called a stinking fat c*** by a drunk lady with a pram.” The comic moved on to discuss the baby and their prospects. It was bleak but relatable. He described how initially his sympathies had been with the mother, who he went to help (get the pram onboard), but the verbal insults soon frayed that bond.
Last week, we talked about exploitation at the fraud conference, including the Myanmar border scam city It was a pause to reflect that the fraudsters can themselves be victims, as fraud becomes the world’s third or fourth biggest economy ($190k a second, by some estimates).
Each week, we get at least two calls on our landline. The person claims they’re calling from Sky (our broadband provider), but they’re not from Sky. My wife took the call last week and explained, “I’m not going to give you those details as we both know this is a scam…” Before she could finish, the scammer screamed, “Fk you, you f*g b**, die.”
Like the comic, our sympathies evaporated.
But it was a curious lesson. There is so much chat about integrity risks (including fraud) that it is so dull. Terms like “white-collar crime” make the topic even blander. But these risks are the gateway drugs to hell (human trafficking to any cause you care about). Tapping into emotions, even visceral ones, while not without danger, might create a greater connection between us trying to get people to care and our constituents. As I learned during investigative training, “You forget details, but you remember emotions.” Tap into emotions to connect on topics that can appear removed and disconnected.