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The hedge fund industry continues to face significant challenges in combating cybersecurity-related risks. Criminal actors are often sophisticated and continue to find new ways to attack a hedge fund’s cybersecurity wall.
One of the main risks under the cybersecurity umbrella is wire fraud. Given the large sums of money involved in hedge fund allocations and redemptions, and the often-complex nature of fund operations, hedge funds are particularly vulnerable to such attacks.
A fund administrator serves as a trusted partner to hedge funds, providing a range of essential services that can significantly enhance their ability to prevent wire fraud.
One of the most effective ways to prevent wire fraud is through rigorous due diligence. Fund administrators can conduct thorough background checks on potential investors, vendors, and counterparties. This involves verifying identities, assessing financial stability, and identifying any red flags that may indicate fraudulent activity. By performing these checks, fund administrators can help hedge funds avoid engaging with individuals or entities that may pose a risk.
Fund administrators can implement robust security protocols and procedures to protect against wire fraud. This includes using strong password policies, enabling two-factor authentication, and regularly updating security software. Additionally, they can establish clear guidelines for authorizing and processing wire transfers, ensuring that only authorized personnel have the necessary permissions.
Fund administrators can play a vital role in verifying the authenticity of wire transfer instructions. This can involve confirming the source of the funds, verifying the recipient’s identity, and ensuring that the transfer aligns with the fund’s investment strategy. By carefully reviewing and validating wire transfer requests, fund administrators can help prevent fraudulent transactions.
Fund administrators can provide education and training to hedge fund staff on wire fraud prevention. This includes raising awareness of common scams, teaching employees how to recognize and report suspicious activity, and providing guidance on best practices for safeguarding sensitive information. By empowering fund staff with the knowledge and skills to identify and prevent fraud, fund administrators can help create a more secure environment.
Despite the significant benefits that fund administrators can provide in the fight against wire fraud, there are some common misconceptions that hedge funds may have.
Some hedge funds may believe that the responsibility for preventing wire fraud lies solely with their fund administrators. While fund administrators can and do play a crucial role, it is essential for hedge funds to have their own internal controls and procedures in place.
No system is completely foolproof, and even the most diligent fund administrator cannot guarantee that wire fraud will never occur. However, by working together, hedge funds and their administrators can significantly reduce the risk of falling victim to these attacks.
Also, some hedge funds may be concerned about the cost of implementing wire fraud prevention measures. That is an understandable concern, especially as the costs of running a hedge fund management company are now higher than ever before. However, the potential financial losses associated with a successful wire fraud attack can far outweigh the cost of prevention.
Fortunately, these misconceptions are, over time, appearing less frequently during conversations that we at EFSI are having with firms and funds in the marketplace. Hedge fund managers continue to take this more seriously, which is, of course, a positive. But the risk will not go away. So, what to do?
First, always confirm the authenticity of the wire transfer instructions, always through phone calls as emails are inherently unsafe. Second, establish clear procedures and protocols for authorizing a wire transfer. Third, implement multi-factor authentication for accessing sensitive systems. And finally, use a cybersecurity firm and wire fraud technology to identify vulnerabilities and conduct assessments.
October is cybersecurity awareness month. Realistically, for the hedge fund industry, every month is cybersecurity awareness month, and your fund administrator can, and should, be an ally in your wire fraud prevention effort.
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Anthony D. Mascia is Managing Partner at EFSI. Connect with him on LinkedIn here.
EFSI is an independently owned, SOC-1 compliant, full-service fund administration firm. We provide accounting, reporting, administrative, and capital introduction services to a wide range of alternative investment funds including hedge funds, funds of funds, private equity funds, real estate funds, venture capital funds, and family offices. The center of EFSI’s service incorporates resilient technology and accomplished staff, providing clients a tailor-made service with exhaustive transparency. Give us a call today or reach out to our support team online. We look forward to hearing from you soon.