Risky Business For FinTechs

The burgeoning FinTech space covers various financial products and services, from mobile payment solutions and online lending platforms to digital asset management and blockchain-based applications. 

We won't be exploring the crypto and blockchain space in this article, as they both have complicated, unique money laundering risks that require a dedicated report (please follow sanctions.io on LinkedIn to receive our latest blog post updates).

However, everything in this article is important for all niches of FinTech - including crypto and blockchain services.

And before diving into the specific money laundering risks, we must first understand how the risk is segmented. For FinTechs, as with the traditional financial institutions that began life in bricks and mortar, there are two sides to the coin regarding the risks associated with money laundering to their business:

  • The risk of being targeted by money launderers
  • The risk of failing to comply with anti-money laundering (AML) regulations 

Let's expand on both points:

Number 1: Risk of Money Laundering

Although the honeypot analogy in the introduction is apt - let's now deal with facts. Here is an astonishing statistic: As much as $2 trillion is laundered globally every year. That's according to the United Nations. And it's something all FinTechs should take very seriously. 

It's not only illegal to allow (knowingly or unknowingly) ill-gotten money to infiltrate and flow through the accounts; it's also something all companies committed to ethical behavior should make all efforts to avoid. Money laundering involves cleaning dirty money - the illicit profits of some of the most heinous crimes, such as drug trafficking, corruption, terrorism, and fraud. 

You can understand better how money laundering works in sanctions.io's guides to the placementlayering, and integration stages of money laundering.

Number 2: Risk of Failing to Comply with AML Regulations

FinTechs operate in a rapidly changing and evolving regulatory environment. 

It's different than, for example, a group of startup founders opening up a food delivery app, where regulation is nothing on the scale seen in regulated financial sectors. And the reality is this: Because financial technology is transforming fast, regulators worldwide are on the back foot. 

The situation creates a lot of uncertainty. It's also a headache for compliance officers managing regulatory risk for their employers. The Financial Action Task Force (FATF), the global organization combating money laundering and terrorist financing, has its position on FinTechs. And jurisdictions worldwide follow the FATFs standards - but of course, to varying levels. 

Overall, the uncertain nature of FinTech AML regulation, especially for companies operating in multiple jurisdictions, is a risk that needs managing. 

Today, it's a problem du jour. Why? Because regulators increasingly penalize FinTechs for failure to comply. Crypto startups are especially in the crosshairs, with numerous penalties dished out in the last 24 months. But all sectors in the FinTech space have high regulatory risk. 

For example, in 2022, the regulator of Abu Dhabi's free zone financial center fined Wise, formerly known as TransferWise, $360,000. The local subsidiary of Wise breached AML obligations by neglecting to identify and authenticate the origin of funds or the wealth possessed by high-risk customers.

Now that we have a broad understanding of how money laundering dangers manifest themselves for FinTechs, we can now examine the specific, tangible risks in detail.

Common FinTech Money Laundering Risks

Digital banking is a significant and rapidly growing part of the FinTech industry. As with traditional banks, money launderers target online-only financial services with well-known tactics, such as:

Let's expand on each money-laundering tactic in the context of FinTechs:

Smurfing & structuring

Criminals use techniques such as smurfing and structuring. Although different, both involve breaking down large amounts of illicit funds into smaller transactions to evade detection. FinTech firms, with their seamless and fast transaction capabilities, can be exploited if inadequate AML processes exist. 

Money mules

Money launderers recruit individuals as money mules to transfer illegal funds through their accounts. FinTechs, with their rapid onboarding processes, can be targeted for facilitating these illicit transactions involving dirty money. Again, if poor AML procedures are in place - criminals will find and target the weakness. 

Social engineering

Criminals are increasingly using online social engineering tactics to manipulate individuals into unknowingly participating in money laundering schemes. FinTechs, operating in a digital environment are vulnerable to such tactics. Once again, criminals quickly identify weak AML procedures. 

You can learn more about money laundering and digital banks in this sanctions.io guide.

Bottom line: All FinTechs in consumer and business banking must prioritize implementing comprehensive AML measures to mitigate the serious money laundering risks. An essential part of this process is checking if new and existing customers appear on global sanctions lists in what is known as sanctions screening. Sanctioned individuals and entities are high-risk money launderers.  

Digital Onboarding Vulnerabilities for FinTechs

FinTechs have a specific unique selling point (USP): Fast onboarding. Rapid Know Your Customer (KYC) processes that embrace the latest technology see customers buying financial products on their smartphones in minutes and clicks.

However, there is a glaring issue. Speedy, digital, fully-automated customer approvals create vulnerabilities in the onboarding process. And it means financial criminals engaged in money laundering can deceive (and already have) Know Your Customer (KYC) safeguards.

A big problem for FinTechs is that their customer promise of seamless approvals and transactions goes against regulators' requirements - stringent KYC processes that slow everything down and make the user experience clunky (increasing drop-off rates).

As with the case of Wise, regulators target inadequate KYC processes. Another example is from India, where the Reserve Bank of India (RBI) slapped a penalty on Amazon Pay for breaking KYC rules.

Bottom line:  Robust KYC processes that meet regulators' demands while delivering fast, frictionless experiences are achieved through embracing regulation technology (RegTech).

Expanding on FinTech AML Compliance Risks

Our overview of money laundering risks for FinTechs revealed that regulatory compliance is a growing concern in the industry. Compliance professionals in the sector have a challenging and pressuring responsibility. Drilling down into the problem, the following is true:

  • Complex regulatory landscapes are hard to manage
  • Regulations evolve rapidly, and it isn't easy to keep up
  • Scaling AML compliance is hard in periods of rapid growth
  • FinTechs have limited compliance resources
  • Operating in multiple jurisdictions exacerbates all of the above

It is an understatement to say AML professionals working in FinTechs have a lot on their plate. 

Bottom line: To stay ahead, FinTechs should take several actions, such as staying informed in the best way they can, engaging AML experts, conducting regular risk assessments, implementing robust compliance programs, and embracing RegTech solutions. 

Final Thoughts and How sanctions.io Can Help

FinTechs are in the money launderers' crosshairs. Criminals can and will exploit weaknesses specific to financial technology companies if left alone. Regulators in jurisdictions around the world are also increasingly punishing FinTechs for failing to comply with AML regulations - which are rapidly evolving as the digitalization of finance continues quickly. 

A fundamental facet of meeting AML regulatory requirements is sanctions list screening. 

Sanctions compliance is a legal obligation in itself. But it's also worth remembering that individuals and entities that appear on global sanctions lists are high-risk money launderers

To learn more about how our sanctions, PEP, and criminal watchlist screening service works and to receive answers to all your queries regarding the sanctions.io API, integrations, and more. Book a free Discovery Call now. 

7-Day Free Trial (No Credit Card Required)

We offer a free 7-day trial (no credit card is required) and will be delighted to walk you through our 

sanctions.io is a highly reliable and cost-effective solution for sanction checking. AI-powered and with an enterprise-grade API with 99.99% uptime are reasons why customers globally trust us with their sanctions screening needs.