1st March 2021

US Challenger Banks Compliance

US Challenger Banks Compliance

The increasing appeal of challenger banks in the US and the innovative, digital services that offer also presents new risks as criminals find ways to exploit emerging vulnerabilities for a variety of illegal activities including money laundering and terrorism financing. In response to that threat, US regulators are scrutinizing US challenger banks for compliance with AML/CFT regulations, with heavy penalties for those that fail to meet their obligations. 

Given the risks, challenger banks in the US must understand their regulatory responsibilities, and how to implement AML programs that suit the digital services they offer. 

What are Challenger Banks?

US Challenger Banks AML Regulations

While the service that US challenger banks offer allows them to compete with traditional banks, it also means that they are required to take on the same regulatory obligations and comply with relevant financial legislation. In practice this means obtaining a license or charter from the Office of the Comptroller of the Currency (OCC) and achieving compliance with the Bank Secrecy Act (BSA) and other relevant legislation such as the US Patriot Act.

  • OCC Charter: In order to obtain the relevant charter or license from the OCC, challenger banks must demonstrate that they will operate ‘in accordance with the principles of a safe and sound banking system’. 
  • Bank Secrecy Act: The BSA requires challenger banks in US jurisdictions to implement a suitable AML program with reporting and record-keeping procedures, screening and monitoring measures, and a schedule of independent audits.
  • US Patriot Act: Introduced in response to the 9/11 terror attacks, the Patriot Act expands the scope of the BSA with further identity verification and information sharing requirements. 

OCC Fintech Charter: Under OCC proposals, a new ‘Fintech Charter’ may be introduced in the US in order to create a more specific regulatory environment for challenger banks. The proposed Fintech Charter has faced legal obstacles and questions about its constitutionality but the OCC continues to explore its potential. 

Challenger Bank Risk Considerations

Anonymity

Transaction speed

Emergent methodologies

Structuring

How to Comply with US Challenger Banks Regulations

Following FATF guidance, US challenger banks must put a risk-based AML program in place that reflects the level of risk they face. Risk-based AML is particularly important to challenger banks because it enables a balance between regulatory compliance and customer experience, allowing lower risk customers to engage with services with less friction while subjecting higher risk customers to more robust AML/CFT scrutiny. 

With that in mind, an effective AML program for challenger banks should feature: 

  • Customer due diligence (CDD): Firms must establish and verify the identity of their customers. In an online context, challenger banks should consider using digital identity verification, including biometric data or scans of official documents. 
  • Transaction monitoring: Challenger banks must be able to understand the transactional behavior of their customers and be vigilant for suspicious activity such as unusual frequencies or volumes of transaction, or transactions involving high risk countries. 
  • Screening and monitoring: Building on effective digital identity verification, challenger banks must be able to accurately screen customers against international sanctions lists and watch lists, monitor their politically exposed person (PEP) status, and monitor for their involvement in adverse media stories which might reveal a change in their AML risk profile. 

Smart technology: The AML compliance burden on US challenger banks is significant and requires the collection and analysis of vast amounts of customer data in order to remediate suspicious activity in a timely manner. Since managing that requirement manually is unfeasible, challenger banks must seek to integrate suitable smart technology tools.

Beyond the automated accuracy and efficiency that smart AML solutions bring, challenger banks will also be able to react to emergent criminal methodologies, reduce administrative friction for customers, and adapt to a shifting compliance landscape as new fintech legislation is introduced. 

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