Fintech and money laundering risks increase as businesses integrate technological solutions for financial process enhancements. Fintech platforms remain vulnerable to criminal activities because their advancements facilitate money laundering activities. In this article, we’ll investigate how money laundering schemes expose fintech businesses to attack, demonstrate how criminals exploit these systems, and explain the powerful AML controls to avoid the risk of money laundering.
What Is Fintech?
The term fintech originates from a fusion of finance and technology elements. Modern technologies create faster and enhanced methods of processing traditional banking systems, their products and services. Moreover, fintech includes diverse software applications using blockchain, artificial intelligence (AI), data analytics, and automation to develop user-oriented platforms.
Digital wallets with mobile banking apps are typical examples of fintech alongside crypto exchanges, online payment gateways, crowdfunding platforms, RegTech solutions, and online trading of stocks through apps alongside digital credit delivery platforms and app-based portfolio management tools.
What is the Relationship Between Fintech Sector and Money Laundering?
Fintech applications benefit businesses by deploying these tools and simultaneously delivering advantages to the users of public-facing systems. Every person who uses or helps create fintech tools must protect their transactions from exploitation by money laundering procedures.
Implementing fintech solutions improves customer registration procedures, operational services, and business connection maintenance activities. The convenience of these services creates specific risks, such as money laundering and other financial crimes.
Fintech allows the operation of the money-laundering-prone financial sector, so it draws related risks that criminals can exploit.
What are Fintech and Money Laundering Risks?
Fintech firms encounter significant risks associated with money laundering because of their distinctive operational environment and business characteristics. The risk of money laundering arises due to the following core operations model of financial technology business activity:
- Easy Onboarding: Since fintech tools offer simplified customer onboarding without strict identity verification processes, they create opportunities for money launderers through payment gateways and crypto exchange services with anonymous features. Thus making fintech susceptible to money laundering.
- Cryptocurrencies Integration: Using cryptocurrencies in every fintech operation makes it vulnerable to money laundering as criminals exploit regulatory gaps within crypto exchange regulations. Also, poorly regulated cryptocurrencies pose operational challenges for financial institutions.
- Anonymity Factor: Some fintech tools provide anonymity, but this anonymity creates risks for money laundering activities. Despite being a beneficial characteristic, money laundering (ML) along with financing of terrorism (FT) and proliferation financing (PF) present security risks as an effect of the anonymity feature.
- Efficient Transactions: Maintaining swift operations in customer onboarding exposes fintech platforms to potential finance terrorist activities.
- Transaction Monitoring Challenges: Fintech may be exposed to money laundering risks as it encounters difficulties deploying transaction monitoring solutions. The absence of effective procedures to monitor existing customer profile changes exposes businesses to high-risk situations because low-risk customers can become vulnerable when included on sanctions lists or when customer profiles show irregularities beyond normal expected patterns.
- Cross-Border Transactions: Money launderers can easily exploit fintech digital wallets that do cross-border transactions because these international payments carry significant risks. Criminals continuously search for methods to move funds abroad through untapped systems because they seek ways to transfer money while avoiding detection.
Fintech Money Laundering Methods
The multiple strategies for money laundering via fintech involve standard money laundering procedures, starting with placement, then layering and ending in integrating illegal funds. According to research, AED 7.35 trillion* is laundered globally every year.
The following actions represent the illicit laundering money methods implemented through fintech platforms:
- Use of Money Mules
Money launderers use money mules. Money mules create a platform for launderers to transfer illegal funds from bank accounts by accepting small payments in exchange. Money mules consist of two types of persons used by launderers either through deliberate trickery or unintentionally to transport illegal funds.
The financially motivated proxy serves between the origin of criminal funds and creating genuine external sources for them. The money laundering process requires multiple money mule accounts across national borders and banks because criminals use such accounts to move large amounts of funds into their accounts.
- Technological Exploitation
Fintech exploitation of money laundering techniques has become possible following technological progress. Cybercriminals assist money launderers using the fintech AML compliance program by pretending to represent legitimate customers and business partners planning to develop business relationships.
Through collaboration with cyber criminals, launderers access hacking application programming interface (API) connections that fintech providers use to receive AML sanctions screening data. Sanctioned criminals exploit technology to protect financial criminals from accessing API data regarding sanctions lists, thus allowing illegal borders to bypass compliance systems.
- Fake Identities
Fabricated identification has been an established approach for launderers to gain access to every legitimate financial network. Technological developments for detecting fake documents have not deterred criminals because they maintain advanced methods to construct indistinguishable fake identity profiles. This allows money launderers to open customer accounts through fraudulent, deceptive names.
- Smurfing and Structuring
Smurfing and structuring are different operations, yet both methods break down significant amounts of illegal revenue into anonymous segments to prevent detection through threshold-based systems and regulatory reporting. The weakness or inadequacy of transaction monitoring systems at fintech companies creates opportunities for money launderers to perform smurfing or structuring operations through their platform.
- Social Engineering
Money launderers execute social engineering by using psychological manipulation to obtain individual details from humans. Money launderers develop trust with fintech operations while obtaining confidential information, which becomes invaluable during their identity fraud and virtual banking account setup activities.
- Shell Companies
Money launderers aim to conceal natural persons behind shell companies and intricate legal ownership frameworks to hide the identity of individuals who move and launder illegitimate funds. The actual beneficial owners of shell companies remain unknown because money launderers create nonexistent legal entities through which they accomplish their objectives.
Fintech AML Compliance Measures
Companies must adopt a risk-based approach in fintech endorsed by the Financial Action Task Force (FATF) to conduct regulatory compliance through AML measures that scale according to their prevailing risk levels. The implementation of an AML risk management program in fintech must possess capabilities to address the distinctive problems arising from fintech money laundering operations.
The AML risk compliance programs for fintech companies must use the following measures to prevent money laundering risks:
- Customer Due Diligence
A legal obligation exists for fintech companies to validate the identities of their clients, including their beneficial ownership entities, to build proper risk assessments. The traditional anti-money laundering CDD practices of name and address and birth-date collection prove insufficient for online services.
Moreover, enhanced due diligence protocols help fintech companies by obtaining digital biometric information such as facial, vocal and fingerprint coordinates.
- AML/CFT Program
All financial technology companies aiming to improve potential money laundering prevention must establish an Anti-Money Laundering and Counter-Financing of Terrorism (AML/CFT) program.
- AML Software
Companies should use AML software to address Fintech money laundering risks, and it must comply with AML regulations. Functioning programs for onboarding customers start with conducting KYC and CDD assessments while performing Customer Risk Assessment (CRA).
Moreover, AML software enables fintech companies to execute AML obligations efficiently and at reduced cost for better compliance needs.
- Know Your Customer / Know Your Business
Financial technology must implement verification and identification systems for their customer base through KYC/KYB. Implementing KYC procedures and Know Your Business (KYB) requirements is important in verifying legal entity customers. Implementing KYC and KYB procedures enables businesses to authenticate their commercial clients.
- Politically Exposed Persons
High-ranking officials and government regulators fall under the definition of politically exposed persons (PEP), thus creating detection challenges for fintech anti-money laundering risks. The financial technology sector needs continuous screening to determine whether customers hold politically exposed person (PEP) status.
- Sanctions Screening
Sanctions screening must be done for fintech clients because sanctioned individuals often try to use these services to bypass economic limitations, enforcing global restrictions against them. Fintech organisations must screen users through the CBUAE sanctions list.
- Transaction Monitoring
Fintech operators must conduct full transaction monitoring related to their business relations with legal regulators and natural persons to detect suspicious changes in customer risk profiles, contrasting with recorded business activity.
- Regulatory Reporting
Fintech operations must file all detected suspicious transactions toward appropriate regulatory bodies which detect money laundering and financing of terrorism activities. AML compliance in fintech remains complete when companies implement regulatory reporting systems because non-compliance penalties or fines exist across several jurisdictions for non-reporting suspicious activities.
- AML audit
An independent AML audit must ensure that the AML compliance measures within organisations correctly detect money laundering threats while effectively lowering their financial crime risks.
- Anti-Money Laundering Training
Fintech institutions must provide employees with proper training about AML, corresponding to their responsibilities in managing clients. AML compliance officers require substantial training based on their job functions to maintain focus on future criminal procedures and newly emerging AML legislative changes and their related compliance needs.
Senior management needs essential AML training because their approval determines high-risk customer business relationships, and they maintain overall AML compliance throughout the organisation.
Final Words
Fintech and money laundering operate together because financial technology tools provide rapid transactions that function invisibly over global networks. Fintech features various benefits, enabling wrongdoers to discover legal gaps through which they can perform criminal activities. Moreover, strong AML measures can allow Fintech companies to minimise their risks.
Do you have measures to protect your business from money laundering and fintech risks? If not, Xpert Advisory provides expert AML services that include risk evaluations, transaction surveillance, and obligation reporting functions. These AML solutions help companies meet their AML requirements to achieve compliance. Contact us now to enhance your business security while complying with the AML obligations.
FAQs
What is AML Compliance in Fintech?
The financial technology industry must keep all regulatory standards in force at the same level as conventional banking institutions. These regulations are AML regulations. Financial sectors maintain equivalent risks of financial crimes, which require Fintech entities to fulfil their regulatory AML obligations across all segments.
What Types of Financial Crimes Exist Within Fintech?
A financial technology company’s achievement of long-lasting business success requires compliance with data protection regulations because following these laws builds trust with users while reducing their risks. The fast-paced growth of fintech industries creates new conditions that allow financial criminals to launder money or commit terrorist financing operations and conduct fraud schemes.
What is KYC in Fintech?
Know Your Customer (KYC) is a series of verification and risk evaluation procedures that serve the investment and financial services industry to authenticate customers and examine their monetary backgrounds and security threats. The main principles of KYC include Customer Identification Program (CIP), Customer Due Diligence (CDD), and other components.
