Britain is among world leaders in the growing fintech industry — unfortunately this may keep the country a leader in money laundering, too. The UK does commit a significant number of resources to fighting economic crime but it doesn’t seem to be enough despite its very large financial sector and the rapid growth of digital payments and money transfer firms.
UK is especially attractive to money launderers for several reasons: It’s an open economy, a global hub for financial flows and lax company formation rules. The UK has the right regulations, however, there is much room for enhancements, especially with the hundreds of electronic money institutions (EMIs), according to Transparency International.
The pressure group has analysed 260 UK-based EMIs, all regulated by the Financial Conduct Authority, and found nearly 40% raised red flags for potential links to money laundering. Its concerns range from some owners and directors not being fit and proper, to some companies having links with tainted finance and others having weak money laundering standards.
Many of these fintechs are still small, but others like Revolut Ltd. are becoming significant players. The privately-owned online bank was valued at $33 billion in a capital raising this summer, which is more than NatWest Group PLC and not far behind Barclays PLC. The company, which is based in London but runs services across Europe on a Lithuanian banking license, has suffered hiccups with its own anti-money laundering systems, according to reports, which is why it was named in the Transparency International study.
It is unsurprising that companies focused on technology-driven growth might slip up in meeting the kind of compliance standards that even the world’s biggest banks still sometimes fail to meet. In recent months, NatWest and ABN Amro Bank NV have paid hundreds of millions of dollars in fines related to money laundering, while Danske Bank A/S of Denmark is still waiting to learn how much it might have to pay to US authorities for one of the biggest ever such scandals.
At the same time, it is an open secret in the payments industry that new companies often boost revenue in their early days by taking on so-called high-risk business. Much of this is legal — transactions where the risk of demands for refunds is high. It is also an area that lends cover to dubious activity or outright scams and frauds. Wirecard AG of Germany, which collapsed in an alleged corporate fraud last year, dealt with a lot of high-risk payments business in its brief existence.
Money laundering often involves cross-border transactions, which are harder for regulators to track in part because they require international cooperation and time-consuming requests to foreign banks. The international gambling industry has endemic levels of money laundering and fraud, according to Lexis Nexis Risk Solutions bi-annual cybercrime report.
Easy rules on company formations — online agents offer the service for less than £20 and say it can be completed in just three to four hours — also aid fraudsters; the UK’s National Economic Crime Centre says criminals exploit this primarily to move illicit funds. The NECC says money laundering costs the UK about 100 billion pounds a year, but the money laundering intelligence taskforce it runs jointly with banks, the FCA and other agencies has seized just 13 million pounds since it was set up in 2015.
The FCA says it has done substantial work on raising anti-financial crime standards at digital money and payments firms, including reviewing systems and controls at about 50 firms in 2019 which led to business restrictions being placed on four firms. However, the ease with which UK-licensed EMIs can apparently be bought and sold by offshore owners remains a cause for concern. Money laundering is a global problem and criminals will spot and exploit any easy gateway into the bigger financial system. There’s no point looking proudly at the defences of bigger banks and bolstering the same, if fintech back door is poorly guarded and provides a gateway for criminals.
Five easy steps that will help close that poorly guarded fintech back door:
- More stringent fit and proper rules/tests for fintech operators prior to issuing licences
- Higher standards and more guidance in the form of proper risk management framework and strategy for fintechs prior to issuing licences
- Ongoing and random thematic monitoring of fintech systems and controls
- More intervention and tougher supervision by the FCA with three strikes and restrictions model.
- Transparency with regulator and revocation of authorisations in the event of continuous failings.
How can Kharis & Knoble help?
It is inevitable that the regulators will sooner rather than later introduce more stringent regulations for the fintech industry in a bid to tackle the fight against financial crime. Fintech will need to up their approach to financial crime by utilising more robust mitigating tools in their day to day operations. Non-compliance could lead to monetary sanctions, business restrictions and ultimately revocation of authorisation. To avoid this, please contact Kharis & Knoble for your financial crime prevention solutions. Kharis & Knoble Risk and Compliance Consultants specialises in providing support in the form of training, policy writing and overall compliance health check for financial services companies and regulators in the UK, EU, Middle East and Africa to leverage an effective and sustainable AML, Fraud and Anti Bribery and Corruption environment as a competitive advantage and driver of business growth.