With experience as a lawyer and as Head of AML & Compliance for a number of banks in Europe, Simon has first-hand experience of the issues faced by MLRO’s and has also worked closely with regulatory authorities and both private and public bodies to advise on regulatory changes and new legislation. Simon is now focused on expanding to the UAE, with DX currently growing a team out of Hub71 in the ADGM.
Connect with and message Simon Dix on his MAGNiTT profile
The world of Fintech is ripe for growth in today's complex digital world, yet one of the concerns of growth for investors, clients, and staff, however, is how it can be sustainable and long-lasting.
With Fintech companies demonstrating some of the most well-known growth stories within the startup and innovation communities, the segment has grown dramatically. The problem is scaling Fintech compliance while growing. To ensure that you are able to remain compliant, keep a strong, clean reputation and avoid large fines while still managing to scale in a cost-effective manner.
What is Anti-Money Laundering?
One thing that often prevents startups from scaling easily is Anti-Money Laundering (AML) compliance, or more precisely a lack of understanding on this topic. AML is essentially the focus of international governments and supranational bodies to make it harder and less attractive for criminals to profit from the proceeds of large organised crime and corruption activity.
One of the biggest challenges is making sure companies understand the risk involved once a seemingly ‘innocent’ customer is on-board, how can they monitor that behaviour? How can they detect potentially suspicious patterns of activity? This challenge exists because many people with none or limited compliance and risk management experience, consider compliance topics to be ‘box-ticking’ exercises, i.e. “In order to be compliant I need to do X”. Compliance is, however, very much a risk-based activity, something such as monitoring transactions, for example, is not covered (or ticked off your list) by simply doing 9 or 10 things, it takes a deep understanding of the business model, your target customers, their financial behaviour and much more.
It’s not only traditional banks that are required to monitor in this way, rather the young developing Fintechs, Cryptocurrency Exchanges, FX Exchanges, and similar are all required to do this. Younger Fintechs in particular often misunderstand these requirements, sometimes until it is too late. There are many stories of companies such as Revolut or N26 off-boarding customers or freezing thousands of accounts due to misunderstanding this basic ‘risk-based’ approach.
While the global cost of AML compliance is difficult to calculate it is estimated to be in excess of $200B per year.
One of the interesting developments over the past few years is that compliance is no longer being viewed as solely a strategically important cost centre, but a competitive advantage by many young companies wanting to offer cross-border payments and serving a wider range of clients.
Receiving too many emails? Keep your inbox clean by updating your preferences to the MAGNiTT newsletters that matter to you most.
Know Your Customer
One of the biggest issues with Fintech when it was gaining steam, was how to comply with all the regulations or for many, was to understand which regulations applied to them in the first place. A perfect example of this is Know Your Customer (KYC) compliance and AML. A lot of people within the industry are not aware of the difference.
KYC compliance is being able to onboard the client and understand as much as possible about them; to fulfill initial and on-going due diligence obligations. During this process, customers will also be scanned against lists of sanctioned persons/entities and politically exposed persons.
AML compliance goes a lot deeper than this, with Financial institutions such as money exchanges or FX companies, investment platforms, and banks being required to monitor every single transaction for potentially suspicious behaviour. Setting up these processes early on, with the correct provider makes a huge difference to the long-term scalability of the company. Not only will you spend less time arguing with regulatory authorities, but you will also avoid the very expensive mistakes that lead you to freeze accounts, off-board customers, suffer potentially fatal reputational damage (by being seen in the market as a ‘less serious’ financial institution).
You’ll also avoid the huge costs of constantly increasing manpower in back-office functions, as setting up the right systems and processes early on enables you to avoid the typical response seen in many growth-stage Fintechs (throwing bodies at the problem). In addition to all of this, you’ll also be significantly less likely to be threatened with the loss of a license or a huge fine.
The full-breadth of AML compliance and the extent to which it penetrates a company’s team, procedures, and day-to-day life is hard for most people to comprehend. Whether you are in the USA, UAE, or EU, you must comply with a wide range of regulations. Similarly, even cryptocurrency exchanges must bow to the SEC and IRS's will in the USA by adhering to stricter AML standards.
Now, frontier technologies, utilising AI and Machine Learning, Fintechs are able to leverage best in class solutions to help them on their journey.
Many Fintech business models, require the team to raise VC funding to help them grow and realise their plans. Increasingly, VC’s will expect their founding teams to be aware of the compliance and AML challenges surrounding their business model and be aware of the costs involved in mitigating the relevant risks.
To get that VC funding, a Fintech startup needs to have a strong framework for KYC and AML compliance. Investors will not work only with guarantees, they are now wanting to see the right systems in place. Regulators around the world are also now often only issuing licenses once the systems for AML transactions monitoring are in place.
What are most Fintechs doing?
● Checking lists of sanctioned persons/entities.
● PEP (politically exposed person) screening.
● Monitoring transactions against basic thresholds.
What most Fintech’s are forgetting to do
● Automating SARs (suspicious activity reports) and AML compliance reporting.
● Using machine learning to detect suspicious behaviour in transactions (basic rules and thresholds are not enough to keep up with criminal activity).
● Creating risk-based scenarios to detect suspicious behaviour in transactions (which is needed to not get charged multi-million-dollar fines).
● Automating Transaction monitoring and replacing manual reviews to save money, add scalability, and reduce human error.
In 2019, more than $8.4B in AML fines were handed down, more than double the previous year. It's in Fintech's best interest to work with best-in-breed solutions for their software from the start to get the funding, trust, and sustainability they need.
The scalability of transaction monitoring in Fintech is the biggest compliance hurdle. Niche software solutions make it possible, accessible, and easy to use for small and medium institutions most affected by these compliance problems and to detect the real money launderers which might be already in the Fintech’s customer database, misusing the product to launder their criminal money.
The rise of digital currencies only solidifies Fintech's place in the global economy further, as COVID-19 accelerates a trend of going away from physical cash.
A perfect pair
Let's face the music that AML compliance isn't going to go away, even if today's changing society does go cashless. If anything, transaction monitoring will become more important as transactions increase in volume and speed and more regulators keep an eye on these Regtech solutions.
To be competitive, raise VC funding and give your customers a great experience, Fintech needs to show it is scalable and up to the task from the first minute. Traditional banking can't keep up. If they're using these AML solutions from the start, Fintech will be the answer.
In times such as these, more than ever, a focus on sustainable growth is key. To be able to grow healthily as a business, on solid footing and not have large risks constantly looming (such as potentially losing your license, reputation, or receiving a large fine) will need to be a key focus for many Fintechs.
Are you a startup looking for investment? Apply for funding to 110+ investors now