15th July 2020
P2P Money Laundering: How to Comply
How to Comply with AML Regulations
Why is P2P money laundering becoming more prevalent among financial criminals?
Advances in fintech have allowed for the development and widespread uptake of a variety of online financial services, including peer-to-peer lending and crowdfunding, both of which have grown to represent multi-billion dollar markets. Peer-to-peer (P2P) lending (sometimes known as microlending) is the practice of lending money to other individuals or businesses via an online platform that matches lenders with borrowers for a faster and more efficient loan process. Similarly, crowdfunding is a way of raising funds online by bypassing traditional funding sources and instead putting the owners of businesses or projects directly in touch with potential investors who may choose to invest in return for profit or reward if financial goals are met.
Both services rely on the online transfer of funds between entities and individuals and exploit the speed and efficiency of digital technology to deliver their services for customers. However, the widespread use of peer-to-peer lending services and crowdfunding platforms has also attracted the interest of financial criminals seeking to use their AML vulnerabilities to launder money and finance terrorist activities.
Given the inherent money laundering risks, P2P lending and crowdfunding firms should ensure that they have an AML/CFT framework in place to deal with the criminal threats they face and should understand the compliance obligations of the jurisdictions in which they operate.
P2P money laundering risks derive primarily from the anonymity associated with online financial services and the lack of regulation in what are still relatively new types of financial service.
In more detail, crowdfunding and P2P money laundering risks involve:
Customer identities: By applying for loans or transferring funds to crowdfunding projects online, criminals may be able to conceal their identities and avoid triggering AML measures. Money launderers may be deceptive in their applications to use the services or arrange for proxies to use the services on their behalf.
Service legitimacy: Criminals may be able to use crowdfunding mechanisms to market securities for a seemingly legitimate company while distributing illegal products to investors on the side. Similarly, peer-to-peer loan platforms could allow money launderers to transfer illegal funds to recipients with minimal regulatory scrutiny.
Cross-border transfers: Both crowdfunding and peer-to-peer lending services often involve the transfer of funds across international borders. In this context, money launderers may be able to exploit differences in regulatory standards, such as identity verification or suspicious activity reporting thresholds. The logistical challenge of tracking illegal funds across jurisdictions may also make it more difficult for financial authorities to carry out money laundering investigations.
Structuring potential: Peer-to-peer lending and crowdfunding mechanisms may be used to engage in “structured” transactions. Practically, this involves moving funds through multiple transactions across multiple platforms. The convenience and speed of crowdfunding and peer-to-peer lending allow criminals to engage in structured transactions more easily and deepen the legitimate appearance of illegal funds.
Financial service providers must be able to comply with a range of AML/CFT regulations in order to detect P2P money laundering activities and report suspicious activity to the authorities. Under the recommendations of the Financial Action Task Force (FATF), member states must ensure that firms implement a risk-based approach to money laundering by conducting risk assessments of their customers and adjusting their AML/CFT response to match those risks.
Accordingly, anti-money laundering crowdfunding and peer-to-peer lending service providers should ensure that their compliance programs feature:
- Customer due diligence (CDD) measures to accurately verify the identities or beneficial ownership of loan customers or investors.
- Transaction monitoring in order to detect suspicious activity: this many include unusual transactions or transactions with high-risk countries.
- Screening and monitoring for politically exposed persons (PEP), customers subject to international sanctions and customer involvement in adverse media stories.
Under FATF policy, AML compliance for crowdfunding and peer-to-peer lending services should also involve the appointment of a compliance officer with sufficient authority and expertise to supervise the AML program. Similarly, firms should implement a training schedule for compliance employees in order to maintain ongoing compliance performance.
AML red flags: To better spot criminals using peer-to-peer lending or crowdfunding projects to launder money, firms should be vigilant for red-flag behaviors including:
- Loans or transfers above jurisdictional reporting thresholds.
- Loans or transfers involving PEPs, customers on sanctions lists or customers that are the subject of adverse media stories.
- Unusual patterns of loans or crowdfunding investments or transactions involving customers in high-risk jurisdictions.
- False representation or inadequate identity verification of loan recipients.
- Patterns of loan overpayment.
- Use of correspondent banking services with unclear ownership as part of money transfer structures.