How AI and Automation Strengthen Investor Due Diligence Through Fraud Prevention and Secure Document Management

October 31, 12:04 pm

Investor and business due diligence is becoming more important as regulations and financial systems become more complex. Traditional manual reviews did their job in the past, but it’s basically impossible for them to keep up with the speed and sophistication of modern platforms.

Various modern tools have brought a lot of advantages in terms of fraud prevention, but artificial intelligence and automation have taken it to another level. Through a combination of machine learning models and intelligent fraud detection, companies can make more secure systems.

This allows investors and fund managers to evaluate opportunities much more efficiently, as they can observe the transparency and efficiency of the companies.

In this article, we’ll explore how AI speeds up the due diligence process, improves its accuracy, and flags anomalies more quickly. Hopefully, this article will help you understand the latest trends in terms of due diligence and help you evaluate your efforts.

Core Challenges Today

Investor due diligence has largely depended on manual processes that were time-consuming and fragmented. It included analyzing spreadsheets, email threads, and PDFs in order to understand and manage critical financial data.

One of the main problems with this was struggling with visibility, which was due to documents and data being scattered across multiple systems. This has made the auditing process more complicated than it should be.

These documents were often stored in insecure formats, which significantly increased the chances of breaches or unauthorized access. (see AltIndex’s piece on alternative data and risk in investing). It’s hard to implement the right security measures if you’re unsure about the locations of different files and devices they’re on.

In the context of preventing problems before they lead to problematic outcomes for the businesses, many companies didn’t have the right fraud detection. This meant that fraudulent activity often went unnoticed before it was too late. One of the main reasons behind this was the time it took for compliance teams to review fraud attempts manually.

All of these problems are amplified due to the growing compliance pressure, which means that businessess could suffer significant fines and problems if they don’t find the right solutions fo them.

All of these challenges could increase internal costs and decision-making, which means that investors would have additional risks. This was especially true for companies that operate in the fintech or crypto industries.

How AI and Automation Enhance Fraud Prevention

AI and automation have transformed fraud prevention by offering proactive instead of reactive solutions. Instead of periodically checking transactions or reviewing them after they’ve been executed, automated monitoring tools can scan transactions and documents in real time.

Traditional fraud prevention relies on a set of rules and flags transactions based on them. On the other hand, machine learning models can understand previously unknown fraud by continuously seeking patterns that deviate from normal financial behavior.

Examples of suspicious activities would be unusual transaction volumes, unexpected transfers, or inconsistent identity information that doesn’t completely match the account. AI and automation also help with identity and document verification by streamlining the KYC process.

If you’ve ever made accounts on platforms like Binance, you’ve likely had to send a facial recognition and images of your personal identification documents. In such cases, AI can quickly scan and understand the visual information, allowing you to verify your account much more rapidly.

Options like SEON’s real-time monitoring tool are able to evaluate transactions and counterparty risks based on historical data and behavioral patterns. This allows companies to act before the fraudulent activity escalates.

At the end of the fraud prevention process, you’ll be able to quickly export audit-ready logs instead of manually gathering data. This helps companies and investors maintain compliance without the tedious manual steps.

Streamlining Investor Workflows with Smart File Handling

The process of investor due diligence involves a constant flow of sensitive documents that range from financial reports, legal agreements, and audits to communications between the parties. With these files scattered, workflows are slowed down, and errors can occur.

Smart file handling solves these pain points by automating how documents are stored, organized, accessed, and, most importantly, who has the permission to access them. Modern file handling systems rely on automation in order to tag and categorize documents.

Access permissions can then be set automatically, keeping the data secure without the need for manual input. This ensures both security and smooth collaboration. However, you should also pay attention to the file formats of the different documents.

You can store important documents that shouldn’t be edited in the PDF format, but files like templates in the .docx format. If you need to use one format instead of the other, you can use SmallPDF to convert PDF to PowerPoint documents.

Such tools allow you to make bulk conversions, allowing you to repurpose vast amounts of documents without any setbacks. In the context of smart file handling, you can find a lot of value in detailed audit trails, as this feature allows you to track who accessed what, when, and why.

Automated Transaction Monitoring for Investor Protection

Investor protection depends on spotting suspicious activity before it turns into a serious threat. Automated transaction monitoring solves the slowness of the manual monitoring processes by implementing AI.

It also helps the process of reviewing financial activity across accounts, investment platforms, and third parties. These systems analyze patterns, detect anomalies, and trigger alerts when they spot activity that falls outside the norm.

However, there are some situations in which it’s not 100% guaranteed that a transaction is a scam or isn’t. In those cases, the transaction monitoring platform will alert the team responsible for handling fraud.

This doesn’t mean that the system isn’t automated, but that the most important cases are best handled by the professionals who can take more aspects of the transactions into consideration.

Red flags in terms of transactions can be unusual transfer size, sudden changes in user behavior, sign-ins from multiple locations across the globe within hours, or repeated failed authentication attempts.

Automation is especially crucial in the know-your-customer process. Individuals who create accounts could potentially be politically exposed persons who aim to misuse the platform for illicit activities like money laundering or terrorism financing.

So instead of checking for each individual’s background manually, automated systems are able to cross-check multiple sanctions lists, blacklists, news reports, and other relevant sources to understand whether an individual is a PEP.

AI-Powered Secure Document Management

In the due diligence process, sensitive documents are shared, reviewed, and archived every day, providing hackers with a lot of attack surface. AI-powered document management systems provide a smarter, more secure way to handle all of this data.

These solutions use intelligent classification to detect each file's type and sensitivity and automatically apply the right access controls. This makes the process faster, with no room for anyone to tamper with the files.

One of the most valuable features of these systems is that they employ advanced encryption protocols, which ensure that the documents are secure at rest and in transit. Along with other security software, unauthorized access attempts or suspicious downloads are minimized.

In the worst-case scenario, if documents are already compromised, audit trails will allow forensics to track down the device and account used to perform these forbidden actions. Even if the person whose account was used isn’t responsible for the problem, this can be used for uncovering larger security problems.

AI as the New Standard for Smart Investing

With new regulations and technologies emerging yearly, companies shouldn’t allow the use of obsolete systems that have vulnerabilities. Furthermore, they should keep up with the latest fraud prevention and document management systems.

The scale, complexity, and speed of modern transactions have never been higher, which makes concepts like AI and automation valuable for staying on top of the latest frauds. The sooner you embrace innovative software and options for your business, the sooner you’ll be able to expect benefits.

Of course, the latest tools aren’t magical, and they won’t guarantee protection against 100% of the fraud and cyber threats. However, having any defense is better than having none, and it’s always crucial to do what you can in order to prevent unwanted problems.

Get More Insights

Sign up and get access to a personalized dashboard, deeper insights, AI stock picks, stock alerts, weekly newsletter and much more.