AML For Fintechs: Comply With Regulations

A picture of graphs and money to symbolize financial services

If you’re a FinTech company, you know compliance with anti-money laundering (AML) regulations is essential. But keeping up with all the latest changes to those regulations can be tricky. This post will discuss how to comply with AML for FinTechs, so read on. 

The Evolution of FinTech

An image that says FinTech with symbols of various things that relate to it.

The 21st century has seen the rise of many new technologies that have disrupted traditional industries. One of the most significant disruptions has been in the financial sector, where new FinTech companies emerged to provide innovative solutions to customers.

FinTech stands for Financial Technology, which refers to using technology to provide financial services. This financial technology includes everything from mobile payments and peer-to-peer lending to investment platforms and digital currencies.

The global FinTech industry is currently worth an estimated $115.34 billion in 2021, and it is increasing at a compound annual growth rate (CAGR) of 26.2%. In the Americas alone, there are now over 10,755 FinTech start-ups.

One of the main reasons for FinTech’s success is that it has made financial services more accessible to consumers. In the past, the financial system excluded many people because they did not have a bank account or access to traditional banking services.

However, the rise of mobile banking and other FinTech solutions has enabled everyone to access financial services. This access is particularly important in developing countries, where FinTech can help to reduce poverty, promote economic growth, and improve financial inclusion.

With financial services moving online, trust is more important than ever.  This move is why FinTech companies must keep their data secure and out of the hands of fraudsters. It is, therefore, crucial that they comply with AML regulations to ensure they keep their customers and business safe from these threats. So, let’s take a deeper look into this.

FinTech and AML Risks

The Financial Action Task Force (FATF) is an intergovernmental organization combating money laundering and terrorist financing. In 2021, they published a report that covers the risks posed by FinTech to the financial system.

The report found that there are three main types of risks associated with FinTech:

  • Money laundering (ML)
  • Terrorist financing (TF)
  • Financial crime and fraud

Money laundering is when fraudsters move money obtained through criminal activity, so it appears to come from a legitimate source. Criminals do this by using multiple bank accounts or shell companies to transfer the money around.

Terrorist financing is the action of providing financial support to terrorist organizations. It can include fundraising, money laundering, purchasing weapons, financing attacks, and more.

Financial crime and fraud refer to any illegal activity in the financial system. This unlawful activity includes credit card fraud, insider trading, and cybercrime.

AML for Fintechs: A bank account

All of these activities pose a risk to the financial system, and they can harm consumers.

For example, if a fraudster steals a person’s credit card details, they could suffer financial losses. And if money laundering finances a terrorist attack, it could lead to loss of life.

So, why don’t FinTech companies implement adequate measures to prevent this? Well, let’s take a look at the challenges.

The Challenges Of AML For FinTechs

Complying with AML regulations can be challenging for FinTech companies; they often have to deal with large amounts of data and may not have the tools to track it effectively.

In addition, many FinTech businesses are startups and may not have the resources or expertise to comply with AML regulations. This conundrum is particularly pronounced for small companies operating on a tight budget.

Another challenge is that FinTechs typically have customers from all over the world who are subject to different legal jurisdictions. Hence, they may need to comply with multiple AML regulations, often with competing requirements, which can be challenging to implement.

Finally, it is essential to note that the FinTech industry is fast-paced and constantly evolving. Therefore, AML regulations and risks are continually changing, and FinTech companies must ensure they are up-to-date with the latest requirements.

Despite these challenges, there are several tips that FinTech companies can follow to ensure they comply with these regulations.

Tips To Build the Right AML Compliance Program for a FinTech Business

A map with pins in and a paper that says anti-money laundering.

Now that you know what the challenges of AML implementation are for FinTechs, it’s time to take a look at tips that simplify the process.

  • Tip 1: Implement a risk-based approach that focuses on the risks associated with your business. This approach should be based on understanding the types of customers you are dealing with, the business context, and the prevalent risks in the countries your firm operates in.
  • Tip 2: Put in place an effective compliance program. This should include customer due diligence, continuous monitoring, and reporting suspicious activity.
  • Tip 3: Have a good understanding of the AML laws that apply to FinTech businesses, including keeping up-to-date with any changes to the regulations.
  • Tip 4: Use technology to help with compliance, including data analytics to track customer behavior and biometric authentication to verify customer identity. You can find a more comprehensive guide on this form of verification here: The advantages of biometric authentication.
  • Tip 5: Have a robust internal controls system. This should include segregation of duties and independent testing of the compliance program.
  • Tip 6: Train employees on the compliance program and ensure they understand the importance of following it.
  • Tip 7: Cooperate with regulators, and be prepared to provide information when requested.

By following these tips, FinTechs can drastically reduce the stress of implementing and maintaining proper AML controls.

The FATF Recommendations For FinTech Compliance

People discussing something, such as recommendations for AML regulations

The FATF is an international organization that develops policies to combat money laundering and terrorist financing.

They have published a list of 40 recommendations for Financial Institutions, including FinTech companies, which set out the requirements for compliance with AML regulations.

These recommendations include the following:

  • Customer due diligence: FinTechs must have mechanisms to identify and verify their customers. This includes identifying and verifying customers, which they can do using know your customer (KYC) checks. In addition, regulators expect them to obtain information on the ultimate beneficial owners of companies.
  • Continuous monitoring: FinTech firms must have systems to conduct ongoing due diligence on customers and identify suspicious activity. This includes flagging changes in customer status and unusual transactions and investigating any of them that might be money laundering or terrorist financing.
  • Reporting: FinTech companies must have procedures to report any suspicious activity to the relevant authorities, such as the Financial Intelligence Unit (FIU). They should do this as a further effort to prevent criminal activity or money laundering.
  • Record keeping: FinTech companies have to keep records of all their customers and transactions for international and domestic clients. They need to keep this information for at least five years and should make it available to the relevant authorities upon request.
  • Cooperation with law enforcement: FinTech companies must cooperate with law enforcement agencies and provide them with any information they request.

These are merely some of the requirements that FinTechs need to meet to comply with AML regulations.

Registration and Regulators For FinTech

Another vital compliance issue for FinTech companies is registration and regulation.

In many countries, FinTech companies must register with the financial regulator and obtain a license to operate. It can be lengthy and complicated and often requires the assistance of a law firm.

The registration requirements vary from country to country but typically provide information on the company’s owners, directors, and employees. The company must also provide evidence that it has adequate systems and controls to comply with AML regulations.

These systems include:

  • Training for employees, so they understand the importance and process of AML.
  • Written procedures for AML and Counter-Funding of Terrorism (CFT)
  • Appointing a Money Laundering Reporting Officer (MLRO)

Once the registration process is complete, the FinTech company will be subject to ongoing supervision by the financial regulator, periodic reporting, and the submission of audited financial statements.

The level of supervision will vary from country to country and state to state in the US. But, it is typically more stringent for companies involved in activities considered to be high risks, such as money remittance or foreign exchange trading.

Compliance with AML regulations is a complex and essential issue for FinTech companies. They need to manage many compliance risks, and the regulatory requirements can be demanding.

However, compliance is crucial to ensure that the FinTech industry remains stable and trustworthy. By following the tips outlined in the previous section, FinTech companies can ensure they meet their compliance obligations.

Global Compliance In FinTech

A world map to show the global AML regulations

The global FinTech compliance landscape is constantly evolving. Entrepreneurs continually develop new technologies and business models, which impacts compliance requirements.

In recent years, there has been a growing focus on the need for FinTech companies to comply with AML regulations. This is due to criminals’ worldwide increased use of FinTech services to launder money.

Several countries have introduced new laws and regulations specifically for FinTech companies to combat this. These include registration requirements, KYC checks, and ongoing monitoring.

United States

The United States was among the first to introduce specific FinTech AML regulations. In 2015, the US launched the BitLicense regime, which requires companies that offer digital currency services to get a license from the financial regulator.

The central regulating bodies are the Financial Crimes Enforcement Network (FinCEN) and the Office of Foreign Assets Control (OFAC). They work together to enforce the AML and CFT regulations set in place by their government.

Europe

In 2020, the European Union introduced the Sixth Anti-Money Laundering Directive (6AMLD), which supersedes the Fifth Anti-Money Laundering Directive (5AMLD). It includes some provisions that apply specifically to FinTech companies.

The 6AMLD further expanded the list of predicate crimes and also included cybercrime as an offense. This addition requires FinTechs to enhance their KYC and AML measures, while the 5AMLD requires them to register with the financial regulator and carry out KYC checks on their customers. 

It also imposes stricter requirements for transaction monitoring and imposes new reporting obligations. Furthermore, the 6AMLD builds on the 5AMLD’s implemented regulations for cryptocurrencies to prevent money laundering further.

Even though the European Union has this directive in place, most countries have regulatory bodies and laws for AML.

Here is a short list of some of their regulators:

You can find more information on this here: https://www.cliffordchance.com/content/dam/cliffordchance/briefings/2017/04/european-fintech-regulation.pdf

Australia

In 2018, Australia introduced a new edition of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006, which includes many provisions that apply to FinTech companies but don’t directly mention it.

The Act requires FinTech companies, among others, to obtain a license from the financial regulator and to comply with KYC and AML requirements. Their regulator is the Australian Transaction Reports and Analysis Centre (AUSTRAC).

The compliance landscape for FinTech companies is constantly changing. Therefore, companies must keep up-to-date with the latest developments and ensure they comply with all applicable laws and regulations.

Conclusion

FinTech is an exciting example of how innovative technology can disrupt an industry, once monopolized by brick-and-mortar institutions, to improve consumers’ lives. Nonetheless, The FinTech industry is highly competitive, face-paced, constantly evolving, and increasingly globalized. As a result, compliance risks are growing, and the challenges of AML for FinTech companies are becoming more complex.

However, with the right approach and a bit of planning, it is possible to build an effective AML compliance program for your business.

At ComplyCube, we understand these challenges and have developed solutions to help you get started. Contact us today to learn more about how we can help you build a FinTech compliance program that meets global standards.

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