Investment decisions of firms must make economic sense
Provide appropriate returns to debt and equity capital providers
Return on assets must minimally be above the return on debt
Financing of transactions must be in support of true economic activities
Not fabricated by borrowers through related party transactions
This comes with an understanding of who the ultimate third party buyers and suppliers are
Identifying Potential KYC Issues
Ensure that borrowers’ requests are compatible with its financial profile and business operations (a small IT firm like Apple Tech is unlikely to require to operate in a $3m property especially since the TNW is marginal at $333k).
Trace down to UBOs of the borrowing entity and conduct a “reasonable banker” due diligence on the UBOs
Internet searches in mandarin for Chinese shareholders
Conduct reference checks with overseas branches or friendly banks, regulators, 3rd party agencies.
Identify red flags in the case
Eg. Key shareholder is from a triad background and is linked to casinos business which is prone to potential AML issues
Ultimate Economic Activity
Every joint in the value chain should be accounted for:
