Can sustainable Fintech growth be supported by Anti-Money Laundering?

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Money laundering

In the complex digital world of today, the world of Fintech is ripe for growth. However, one of the concerns about growth for clients, investors, and staff is how it can be long-lasting and sustainable.

The segment has grown dramatically with Fintech firms showing some of the very popular growth stories within the innovation and start-up communities. Scaling Fintech compliance while developing appears to be the problem. While still managing to scale in a cost-effective manner, keep a clean, strong, reputation and do not give room for large fines. This will help you remain compliant.

What is Anti-Money Laundering?

Compliance to Anti-Money Laundering (AML), or a poor comprehension of this issue is one factor that often hinders start-ups from overcoming difficulties. The essential focus of supranational bodies and international governments is AML. This is to make it less attractive and harder for criminals to steal the proceeds of corruption activities and large organized crimes.

One of the toughest difficulties is to make sure that companies realize the risk involved when an ‘innocent’ customer visits their platform, and how their behaviour can they monitored? How can potentially suspicious activity patterns be detect? This challenge occurs because a lot of persons with limited or no risk management or compliance experience, see compliance issues as just ticking the box, i.e. “ I need to do X to be compliant”. However, compliance is more of a risk-based activity, similar to monitoring transactions, for instance, is not addressed (or checked off your list) just by taking 3 or 4 steps, it requires a comprehensive knowledge of your target customers, the business model, their financial behavior, etc.

Not only traditional banks are expected to monitor in this manner, instead the young developing, FX Exchanges, Cryptocurrency Exchanges, Fintechs and their likes are all expected to do the same. Sometimes, these requirements are misunderstood by Younger Fintechs until it is becomes too late. Many stories abound of companies like N26 or Revolut freezing thousands of accounts or off-boarding customers as a result of not grasping this simple ‘risk-based’ strategy.

While it is difficult to calculate the global cost of AML compliance it is estimated to be over $200B per annum.

Over the past few years, one of the fascinating developments is that compliance is no longer seen as just a strategically vital cost centre. A lot of young companies who want to provide cross-border payments and serve a vast range of clients now see it as a competitive advantage.

Know Your Customer

When it was gaining steam, a major issue with Fintech was how to comply with all the regulations, and for many firms, was to know which regulations pertained to them in the first place. A typical example of this is AML and Know Your Customer (KYC) compliance. So many persons in the industry do not know the distinction.

KYC compliance is having the ability to get the client on-board and comprehend a lot about them; to satisfy initial and continuous obligations to due diligence. While this process is ongoing, clients will also be checked against lists of politically exposed persons and sanctioned persons/entities.

Compliance with AML is a lot more involving than this, with Financial institutions like FX companies or money exchanges, banks, and investment platforms, being expected to monitor every transaction for likelihood of suspicious behaviour. A huge difference is made to the long-term scalability of the company when these processes are set up at the early stages with the correct provider. You will not only spend less time arguing with the authorities, but you will not commit expensive errors that may lead you to off-board customers, freeze accounts, suffer likely fatal damage to your reputation.

You will also avoid the huge fees of regularly increasing manpower in back-office activities, as setting up the right processes and systems in time enables you prevent the usually attitude observed in a lot of growth-stage Fintechs. Also, you will have a low probability of been threatened with a huge fine or loss of a license.

The full extent of AML compliance and how deep it permeates a company’s team, day-to-day life, and procedures, is difficult for a lot of persons to understand. Whether you reside in the US, EU, or UAE, there are a vast range of regulations you have to comply with. In the same vein, even cryptocurrency exchanges how to bow to the will of the IRS and SEC in the United States by complying with to stiffer AML standards.

Nowadays, frontier technologies, making use of Machine Learning and AI, Fintechs have the ability to leverage top solutions to aid them during their journey.

Expectations

A lot of Fintech business models, expect the team to raise funding for VC to enable them mature and achieve their plans. Also, VC’s will anticipate that their founding teams will have knowledge of the AML challenges and compliance surrounding their business model and have knowledge of the costs involved in avoiding the relevant risks.

To qualify for the VC funding, Fintech start-ups need to possess a strong framework for compliance with AML and KYC. Investors are not only going to work with guarantees, now they want to see that the right systems are put in place. Often times regulators all over the world are now issuing licenses as soon as the systems for monitoring AML transactions are put in place.

What are the roles of Fintechs?

  • Checking the lists of sanctioned entities/persons.
  • Screening of politically exposed person.
  • Comparing transactions with basic thresholds.

 

What a lot of Fintech’s forget to do

  • AML compliance reporting and Automating SARs (suspicious activity reports)
  • The use of machine learning to identify suspicious transaction activities (basic thresholds and rules are insufficient to find criminal activity).
  • Developing scenarios which are risk-based to identify criminal behaviorsin transactions (which is required to avoid multi-million-dollar penalties).
  • Replacing manual reviews and automating transaction monitoring to save money, reduce human error, and add scalability.

AML fines of over $8.4 billion were handed down in 2019, which is more than twice the preceding year. It’s in the best interest of Fintech to work with the best-in-breed solutions for their software from the onset to get the trust, funding, and sustainability needed.

The biggest compliance hurdle is the scalability of transaction monitoring in Fintech. Niche software solutions has made it accessible, possible, and simple to apply to small and medium institutions much affected by these compliance issues and to identify the real money launderers who might already be customer database of Fintech’s, abusing the product to transfer their criminal funds.

The increase in digital currencies further consolidates the need for Fintech’s in the global economy, as COVID-19 increases a trend of departure from physical cash.

A perfect pair

We need to deal with the fact that compliance with AML is not going away anytime soon, even in a cashless society. Transaction monitoring will become more of a necessity as the volume of transactions increase and the speed and a lot of regulators continue to watch these Regtech solutions.

To beat competition, give your customers a great experience, and increase VC funding, Fintech has to prove that it is up to the task and scalable from the first minute. Traditional banking cannot sustain the momentum. If they are making use of these AML solutions from the onset, Fintech will be the solution.

In situations such as these, a focus on sustainable growth is more vital than ever. For a business to be able to grow healthily, on a solid footing without constantly looming risk (e.g. potentially losing your reputation, license, or penalized with a large fine) would have to be a major focus for a lot of Fintechs.

Money laundering