Depending upon the country, Fin-techs are classified as money services businesses. Many of them are regulated by anti money laundering regulations, but not all. Where Fin-techs are required to register with a national Financial Intelligence Unit, they are subject to that country’s record keeping norms. They are covered by client verification procedures, training, transaction reporting, and registration requirements.
As the Financial Action Task Force is the enforcement agency across the world anti money laundering norms in most countries are similar. Fin-techs are required to be registered with an FIU. They have to adhere to Know Your Customer norms. But its just a small part of financial crimes domain.
As a financial technology company, following considerations are important to combat money laundering.
Reporting Suspicious Transactions
Fin-techs should report suspicious transactions ,when it has grounds to suspect. The financial transaction is tied to the commission of a predicate offence. Predicate offences include things like murder, corruption, insider trading, drug trafficking, or tax evasion. It goes without saying that a Fin-tech must know the predicate offences to form the reasonable grounds to suspect proceeds of organized crime are involved.
Report terrorist financing transactions
Fin-techs are required to report activities related to terrorist financing. When the money, bitcoin, or other property is in their custody and that they believe is owned terrorist. Terrorists are listed, and their names are made available by governments and vary from country to country.
There are no reliable private or public databases that include comprehensive lists of terrorists and terrorist organizations, except from the OFAC in the United States, which is limited to application in the United States and applies to correspondent banking relationships.
CTF requires the constant review of such lists. Fin-techs may have to report criminal activities in their bank accounts to law enforcement agency. A terrorist financing report is also a suspicious transaction and requires dual reporting to an FIU.
Large cash transactions
Fin-techs are required to report when they receive an amount of money above thresholds. Usually $10,000 or more in most of the countries. The reporting should not be restricted to only single transaction but any series of transactions in one day where total of transactions is above threshold limits.
Electronic funds transfers
Fin-techs must report to their FIU when they send out of a country or receive from outside the country an electronic funds transfer of usually $10,000 or more in a single transaction. Electric funds transfers can easily mix the dirty money with the money from the legitimate business sources.
Politically exposed persons
Fin-techs are required to identify a politically exposed person (PEP). A PEP is a person who holds a prominent public position. It includes head of state or federal government, member of the legislature, judge, ambassador, military officer, or president of a government corporation.
If it is determined that the client is a PEP, it must verify the source of funds. Determining PEPs is a difficult part of AML compliance because it is worldwide obligation. It is also difficult to verify if money obtained by the politicians is generated from legitimate source.
When the PEP is a private company, confirming the legitimacy of the source of wealth with beneficial and legal ownership of shares is even more complex. It requires expertise in understanding corporate structures, and decoding shell companies.
PEPs represent a greater money laundering risk because of the higher probability that they will abuse their positions to carry out corrupt acts, such as accepting or extorting bribes or misappropriating state assets, and use the financial system to launder those proceeds.
Know Your Customer
Guidelines issued by FATF requires financial institutions to carry out the KYC of every customer. Fin-techs that have reporting obligations to an FIU must ascertain the identity of vendors, customers and partners using their services. The law in most countries requires that no client be on-boarded by a financial services reporting entity unless the client’s identity has been verified.
Fin-techs are subject to fairly onerous record-keeping obligations if they report to an FIU. Among other things, they must keep records of the methods used to ascertain identity, records of transactions such as large cash transactions. Records of beneficial ownership and PEP compliance are also necessary to be maintained.
Fin-techs that are registered with an FIU must undertake a risk assessment to evaluate and identify, in the course of its activities, the risk of the commission of money laundering and terrorist financing offences. The risk assessment involves an analysis of potential threats and vulnerabilities to money laundering and terrorist financing crimes to which the Fin-tech is exposed. This is a fairly involved process requiring significant review of clients, transactions, and geographical areas of service.
Role of fin-techs and Compliance Regime
Fin-techs must draft and implement a compliance program to meet the reporting, record-keeping, and client verification obligations under anti money laundering norms. A compliance program helps ensure that employees at all levels at a Fin-tech are aware of the unique obligations imposed on a Fin-tech as a financial services provider, and helps ensure those obligations are complied with as a matter of course at all levels of the organization.
One must ensure that a FinTechs have an ethical and compliant culture. This helps to minimize risk to the company and its directors of criminal and financial liability. The compliance program deters violations of the law, ensures fair and ethical business standards. It detects possible violations before they occur.
If a violation has already occurred, the compliance program can help uncover the violation, forestall its continuation, facilitate and support an internal review to understand the facts and implications of the conduct, and promote appropriate remedial measures.
The effectiveness of the compliance program ultimately depends on the extent to which a Fin-tech inculcates the program’s standards into its corporate culture and places real importance on adherence. For the compliance program to be effective, the corporate culture must encourage consideration of compliance concerns.