Digital Banking and Money Laundering: The Methods

Digital banks or traditional banks with online components are exposed to much greater risk. In online banking, customers connect to the bank’s web server without physically visiting a bank, completing forms or presenting an ID card. Financial criminals can access digital bank accounts without actually verifying their true identity from anywhere in the world. In addition, it’s much harder to determine the activities carried out with e-cash than with actual cash. The relative anonymity and convenience of digital banking open the door for money laundering transactions. 

The risk profiles for digital banks are similar to that of their traditional counterparts. Some of the most common money laundering schemes targeting digital banks include: 

  • Money mules, whereby individuals with legitimate bank accounts are recruited to open multiple accounts and move small amounts of money as part of a larger scam;
  • Smurfing, whereby criminals move large amounts of illicit money through the legitimate financial systems by making multiple smaller deposits to avoid reporting thresholds;
  • Fraudulent accounts are set up by blending legitimate and falsified information;
  • Identity theft and account takeovers;
  • Social engineering whereby legitimate customers are tricked into providing sensitive information to hijack their accounts and move funds.

Regulations For Digital Banking

Digital banking companies are subject to money laundering risks and emergent risks, like those associated with virtual currencies. Global authorities have introduced legislation focusing on digital banking services to address risks specific to the industry, including FinCEN’s guidance on crypto assets, the EU’s Fifth Anti-Money Laundering Directive (5AMLD) and the FATF’s guidance on digital identification and anti-money laundering frameworks. 

Some of the most notable regulations include: 

  • The Indonesian Financial Service Authority (OJK)’s digital bank regulatory compliance measures whereby digital banks are required to establish thorough risk management systems to identify possible criminal activities;
  • Financial Crimes Enforcement Network (FinCEN)’s currency transaction reporting requirements require digital banks to fulfill customer identity verification, the maintenance of customer reports, and suspicious transaction reporting requirements.
  • The Financial Transactions and Reports Analysis Center of Canada (FINTRAC) has also introduced enhanced standards and compliance requirements to curb money laundering using digital banks.

Digital Banking Compliance: What Is It?

Digital banks must ensure that they deliver services with the appropriate AML/CFT regulatory frameworks in place. Under FATF guidelines, these firms need to adopt a risk-based approach which includes: 

  • Customer due diligence measures that accurately verify the identities of digital banking customers and the beneficial ownership of customer firms. As a digital bank, digital ID systems that include biometric technology can be used to assist banks in creating more accurate and reliable CDD and monitoring measures throughout their relationship. 
  • Monitoring measures that detect suspicious or unusual customer activity during digital banking transactions, including unusual transaction patterns, transactions above the reporting thresholds or transactions with high-risk countries. AI technology can be used to streamline ongoing transaction monitoring and recognize high- and low-risk customers with ease. 
  • Screening and monitoring for PEPs (Politically Exposed Persons) and individuals/entities on Sanctions Lists, as well as searching for adverse media stories through negative news screening. 

Some countries, especially in Asia, require digital banks to obtain special licenses for digital services, including crypto trading or digital wallets. 

FATF policy also requires regular training for compliance employees, as well as the appointment of a compliance officer to oversee their AML framework.

Why Is an AML Solution Necessary for Digital Banks?

Digital banks around the world have already discovered the price of under preparation. In the UK, Monzo was investigated by the FCA for failure to comply with financial crime regulations, leading to financial losses. German digital bank N26 was fined €4.25 million and presented with a new customer limit following a BaFin investigation into AML failings, hampering their growth. 

Faced with these harsh consequences, digital banks have every reason to adopt robust AML processes to avoid money laundering (and legal penalties). As digital-first businesses, they can adopt technological tools that support anti-money laundering initiatives, including Know Your Customer and Sanctions Lists compliance checks and AI-powered transaction monitoring. These solutions are scalable and flexible, allowing firms to react to many legislative changes that will no doubt continue to arrive as regulators and governments scramble to catch up to emerging technologies.

Conclusion

The speed and convenience that digital banks can offer their customers shouldn’t be their downfall. As legislation changes and regulators turn their attention to digital banking and cryptocurrencies (often with serious repercussions for non-compliant businesses), it’s important for these institutions to adopt new techniques and tools that will help them achieve and maintain compliance. Companies like sanctions.io can assist digital banks with automated, smart technology that allows them to retain their agility without compromising on compliance requirements.