A Guide to Anti-Money Laundering for Crypto Firms
In a changing financial landscape, challenger banks are disrupting the space occupied by traditional banks and financial institutions by offering an array of innovative digital services delivered online. In the United States, recent uptake of challenger bank services has been particularly strong: in 2019, challenger banks raised a record $5.3 billion, while research into a group of seven institutions experienced a 39.3% increase in users between 2019 and 2020, amounting to around 11 million new customers. 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?
In contrast to traditional banks, challenger bank services are driven by advances in financial technology and online connectivity which enable them to offer cost-effective, novel, and versatile financial products without compromising customer experiences during onboarding and throughout the relationship. New challenger banks debut in the US every year, offering a range of traditional and fintech services to compete with their brick-and-mortar counterparts. Those products include current and savings accounts, and credit and debit cards – along with a range of innovative new products such as spending analysis apps, bill payment facilities, mobile check depositing, investment platforms, and more.
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.
In addition to conventional money laundering compliance considerations, the digital spaces in which challenger banks operate and the services they offer expose them to a range of new criminal risks. These include:
Online financial services offer a degree of anonymity that in-person banking does not. Criminals may be able to exploit this anonymity to conceal their identities and evade AML controls. Similarly, money launderers may be able to engage proxies or ‘money mules’ to open online accounts and use challenger bank services on their behalf.
The speed and efficiency of challenger bank services are a customer service benefit but also allow criminals to move large amounts of illegal money around the world quickly. In the absence of effective monitoring measures, money launderers may be able to use challenger banks to transfer funds out of jurisdictions before AML controls can take effect.
By definition, challenger banks disrupt traditional banking services but their novelty may also provide opportunities for criminals to exploit new vulnerabilities and regulatory blindspots to launder money. Accordingly, challenger banks must work closely with regulators to detect and address emergent criminal methodologies.
Money launderers may be able to exploit challenger bank services to engage in ‘structuring’ – a practice in which multiple transactions are executed in amounts just under AML reporting thresholds. Structuring is a way to further exploit the anonymity and speed of online services to evade regulatory scrutiny.
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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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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