A Guide to Anti-Money Laundering for Crypto Firms
Representing a disruptive presence on the traditional financial landscape, challenger banks compete with traditional ‘high street’ banking institutions by offering a diverse range of services to their customers, often delivered online with a focus on customer experiences. Recent global events, such as the Covid-19 pandemic, have driven a surge in challenger bank uptake, as customers turn to online banking services as an alternative to banking in person. The popularity of challenger banks has been accompanied by increased regulatory risk as criminals seek to misuse online financial services for a variety of illegal activities including money laundering, terrorism financing, and fraud. Given the AML threat, it is vital that challenger banks understand their AML/CFT responsibilities and deploy a transaction monitoring solution capable of detecting customers that are using their services for illegal activities.
Challenger banks offer innovative financial services driven by advances in financial technology and online connectivity. The services that challenger banks offer tend to be more accessible and versatile than those of traditional banks: customers can sign up for online accounts quickly and use financial instruments and products that are unavailable to them through traditional banking channels.
Challenger bank services include traditional credit and debit card and savings accounts, but may also offer customers access to novel online investment products, bill payment facilities, currency exchange facilities, and more.
The novelty of challenger bank services means that they often create regulatory grey areas or blindspots which, in turn, offer opportunities for criminals to evade AML/CFT scrutiny to introduce illegal money into the financial system. The increased criminal risk associated with online and digital financial services means that challenger banks must pay close attention to their compliance responsibilities and the AML/CFT requirements applicable within their jurisdiction.
In practice, this means that challenger banks must implement AML/CFT compliance programs featuring suitable know-your-customer (KYC) and transaction monitoring measures. KYC is a foundation of effective transaction monitoring: banks must build an accurate risk profile of their customers in order to understand their transactional behavior. When a customer deviates from their known risk profile, transaction monitoring measures should alert the challenger bank’s compliance team and, if necessary, generate a suspicious activity report (SAR) for the relevant authority.
The services that challenger banks offer present specific transaction monitoring compliance challenges, including:
- Transaction speed: Online financial services allow criminals to move money between accounts quickly, evading AML/CFT controls and the attention of authorities. Since their services are almost exclusively online, criminals may seek to exploit the speed of challenger bank transactions to launder money.
- Anonymous transactions: Online transactions may offer criminals a degree of anonymity that in-person transactions do not. Money launderers may be able to use challenger bank services to conceal their identities and avoid triggering AML controls.
- Structuring potential: Criminals may be able to use structured transactions to introduce illegal money into the financial system. Structuring involves a series of transactions in amounts just under AML reporting thresholds: it may be easier for criminals to engage in structuring through challenger bank services by opening multiple transactions with different banks.
- Money muling: Criminals may coerce or incentivize third parties, known as ‘money mules’, to open accounts with challenger banks, make deposits, and carry out transactions on their behalf. Money mules may present a misleading risk profile during the onboarding process, allowing criminals to evade AML controls.
Transaction Monitoring Red flags
Given the specific compliance issues, challenger banks should be particularly vigilant for red flag transactional characteristics that may indicate that illegal activities such as money laundering are taking place. Those red flags include:
- Unusual transactions: Unusual transaction patterns that do not match a customer’s risk profile, including unusually high frequencies of transaction or transactions in unusually high amounts.
- Multiple accounts: Customers that open or attempt to open more than one account with the same challenger bank.
- Customer identities: Discrepancies in or problems with customer identity verification during the onboarding process and throughout the business relationship.
- Service unfamiliarity: Customers that seem unfamiliar with challenger bank services or that use them incorrectly.
- Customer locations: Customers that send funds to, or receive funds from, high risk geographic locations. Digital indicators may include inconsistent or suspicious IP addresses.
Under FATF Recommendations, financial institutions, including challenger banks, must take a risk-based approach to AML, deploying compliance measures proportionate to the level of risk that they face and subjecting higher risk customers to a greater level of AML scrutiny. Risk-based transaction monitoring allows challenger banks to fulfill their regulatory obligations while maintaining the customer experience advantages that distinguish them from conventional banks.
A risk-based AML compliance program suitable for challenger banks should feature the following measures and controls:
- Customer due diligence: Challenger banks should establish and verify the identities of their customers in order to inform the transaction monitoring process. It may be necessary to implement digital identity verification for online financial services, including scans of official documents and biometric markers such as fingerprint, voice, or face recognition
- Transaction monitoring: The transaction monitoring process should reflect the risk profiles of customers while avoiding false positives as much as possible. Alerts should be remediated efficiently and SARs submitted to the relevant authorities in a timely manner.
- Screening and monitoring: Challenger banks should screen and monitor for transactions involving persons that are subject to international sanctions and watchlists and for politically exposed persons (PEP).
Smart technology: In order to collect and analyze the vast amounts of data generated by online transactions, challenger banks should seek to implement a smart monitoring solution in order to fulfill their compliance obligations. Beyond the automated efficiency and accuracy of smart technology, challenger banks will also be better able to adapt their transaction monitoring solution to upcoming regulatory changes and to emergent criminal methodologies.
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Disclaimer: This is for general information only. The information presented does not constitute legal advice. ComplyAdvantage accepts no responsibility for any information contained herein and disclaims and excludes any liability in respect of the contents or for action taken based on this information.
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