Institutional Investors to Funds: Your KYC is Broken, Please Fix It

Know your customer (KYC) may not be a new concept, but it remains a persistent point of contention in fund operations, especially for institutional investors. As a cornerstone of global anti-money laundering (AML) and counter-terrorism financing (CTF) regulations, KYC is designed to ensure that financial institutions and regulated entities are not conducting business with fraudulent or high-risk clients.
‍

In the fund space, a robust KYC program is essential to managing operational, legal, financial and reputational risk. Yet many funds still fall short, whether due to outdated practices, inconsistent application or lack of transparency. As a result, institutional investors are now sounding the alarm.
‍

With pressure mounting from both regulators and allocators, fund managers shouldn’t view KYC as a check-the-box task. Those who embrace it as a competitive business advantage and an opportunity to strengthen operations and investor confidence will be best positioned to succeed.
‍

The Stakes Are Higher Than Ever
‍

The risks of ineffective KYC are growing by the day. In the past year alone, multiple global financial institutions have faced significant fines for KYC failures.
‍

The regulatory landscape continues to evolve rapidly, with increasing enforcement from the Financial Action Task Force (FATF), U.S. Securities and Exchange Commission (SEC) and U.K. Financial Conduct Authority (FCA) and others. Meanwhile, institutional investors are demanding greater accountability and real-time risk management, particularly considering emerging threats such as AI-generated identity fraud and complex ownership structures.
‍

For investors, KYC has become a litmus test for a fund’s governance maturity. Sloppy or outdated practices raise red flags, not only about compliance, but also about the firm’s overall operational rigor. While monetary penalties hurt in the short-term, the reputational damage from non-compliance can linger for years.
‍

Where Funds Get It Wrong
‍

1.    Inconsistent KYC standards across jurisdictions. Global funds often adopt a patchwork approach to KYC. Different teams in different regions apply disparate rules, which can lead to confusion, delays and gaps in compliance. LP onboarding is particularly vulnerable to inconsistency, especially when KYC requirements are not harmonized across entities. The process for this activity should be streamlined across all jurisdictions, even when regulatory standards vary. A unified KYC approach that accommodates local nuances while maintaining global consistency is required.
‍

2. Static due diligence that stops after onboarding. KYC is not a one-and-done exercise. With ownership structures and risk profiles shifting, real-time monitoring is increasingly essential. Funds that don’t continuously update KYC data miss critical changes and expose themselves to silent ownership shifts, adverse media and reputational risk. Ongoing due diligence is not optional. It's the baseline to spot reputational and regulatory risks early on.
‍

3. Over-reliance on manual processes. Manual spreadsheets, PDFs shared via email and handwritten signatures are still far too common. These antiquated tools are prone to human error, lack version control and slow down investor onboarding. Fund managers may resist change, but “we’ve always done it this way” is no longer defensible especially under increasing scrutiny.
‍
4. KYC that’s out of step with the risk profile. When it comes to KYC, one-size-fits-all is not sufficient to meet current compliance expectations. To prioritize and scale effectively, a sophisticated KYC framework should be risk-based, tailoring the depth of review to investor type, geography and other risk indicators. Failure to implement a risk-based framework will only raise red flags with regulators and investors alike.

5. Lack of communication with investors. Poor communication can undo even technically sound compliance. LPs often have little visibility into how a fund’s KYC program operates or how issues are remediated. The lack of transparency erodes trust and causes friction during capital calls, audits and secondary transactions. Remember: In today’s environment, silence signals risk.
‍

Unspoken Expectations of Institutional Investors
‍

Institutional investors may be sounding the alarm, but they may not spell out their KYC expectations. Yet they are keeping a close watch over fund managers. Some of the most important considerations for investors include:
‍

1. Institutional grade governance. Investors want to see robust, documented KYC/AML policies and procedures that are reviewed regularly. They expect real oversight, not a “set it and forget it” model. Frameworks that map to current regulatory standards are key. This requires consistent effort and continual updates by those familiar with the latest compliance developments.
‍

2. Scalable, tech-enabled processes. Speed and security work hand-in-hand. Modern funds are adopting secure digital platforms, e-signature tools, integrated verification systems and interoperable recordkeeping to streamline onboarding and ensure compliance. These tools also make it easier to demonstrate a commitment to compliance to investors and auditors.
‍

3. Risk-based decision making, not box-ticking. Funds that use discernment will satisfy investors’ expectations. That means tailoring KYC to different investor profiles, using intelligent thresholds and establishing clear escalation procedures for high-risk scenarios.
‍

4. Speed without sloppiness. Institutional investors value efficiency. But speed should never trump compliance. Funds that are both fast and thorough stand out. Demonstrating responsiveness during capital calls, liquidity events and secondary trades is necessary to allay any investor concerns.
‍

The ALSP Advantage: Bridge the Gap Without Breaking the Bank
‍

Fund managers don’t have to go it alone. Alternative Legal Service Providers (ALSPs) like Agile Legal offer a cost-effective way to modernize and scale KYC processes.
‍

By combining legal expertise with tech-forward process design and implementation, ALSPs can help fund managers:
‍

• Establish consistent, jurisdiction-aware KYC frameworks
• Implement secure digital onboarding and documentation
• Conduct ongoing monitoring and remediation efficiently
  ‍

Outsourcing to an ALSP offers access to dedicated compliance professionals without the cost or complexity of building an in-house team. It’s a strategic way to scale compliance and investor confidence simultaneously.
‍

Conclusion
‍

KYC is no longer about ticking regulatory boxes. It’s about safeguarding your reputation, proving operational maturity and earning investor trust.
‍

Funds that continue to neglect KYC risk far more than compliance penalties; they risk losing the confidence of the very institutions they’re trying to attract.
‍

Don’t let KYC be your Achilles’ heel. Agile Legal helps fund managers close critical KYC gaps with scalable, risk-based solutions that meet institutional investor expectations and global regulatory demands. From streamlined digital onboarding to ongoing due diligence and remediation, our AML/KYC services are designed to strengthen compliance and build investor confidence—without overwhelming your internal team.
‍

Let’s transform your KYC process. Click here to learn more about our AML/KYC services.

Ready to get started? Contact us to learn how we can support your fund.