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Datanamix | AML Sanctions Screening

AML Guide for
Digital Banks

Unfortunately, the same qualities that make digital banks so attractive to customers, also make them very lucrative (and easy targets) for money launderers.


Anti-Money Laundering Guide for Digital Banks


The number of digital banking customers is growing at massive rate, thanks to the convenience and speed digital enables. Unfortunately, the same qualities that make digital banks so attractive to customers, also make them very lucrative (and easy targets) for money launderers.

Which is why, as fintech start-ups and digital banks become fully regulated financial institutions:

  • Governments insist on tough compliance standards; and
  • Regulators demand that accurate customer data be collected and built into risk assessment processes.

Digital banking and money laundering: The methods

Digital banks (or traditional banks with online components) are exposed to much greater risk, because:

  • In online banking, customers connect to the bank’s web server without physically visiting a bank, completing forms or presenting an ID card.
  • Financial criminals can access digital bank accounts, without verifying their true identity, from anywhere in the world.
  • On top of that, it’s much harder to determine the activities carried out with e-cash than with actual cash.
  • Digital banking is relatively anonymous. This, together with the convenience factor, makes them susceptible to money laundering transactions.

The risk profiles for digital banks are similar to that of their traditional counterparts. Some of the most common money laundering schemes targeting digital banks include:



Money mules


Individuals with legitimate bank accounts are recruited to open multiple accounts and move small amounts of money as part of a larger scam


Smurfing

Criminals move large amounts of illicit money through legitimate financial systems by making multiple smaller deposits, to avoid reporting thresholds


Fraudulent accounts


Fraudulent accounts are set up by blending legitimate and falsified information. This enables identity theft and account takeovers


Social engineering


Legitimate customers are tricked into providing sensitive information to hijack their accounts and move funds.

Regulations For digital banking

Similar to the risks associated with virtual currencies, digital banking companies are subject to money laundering and emergent risks. Global authorities have introduced legislation focusing on digital banking services to address risks specific to the industry, including FinCEN’s guidance on crypto assets, the EU’s Fifth Anti-Money Laundering Directive (5AMLD) and the

FATF’s guidance on digital identification and anti-money laundering frameworks.
Some of the most notable regulations include:

The Indonesian Financial Service Authority (OJK)’s digital bank regulatory compliance measures: Digital banks are required to establish thorough risk management systems to identify possible criminal activities;

Financial Crimes Enforcement Network (FinCEN)’s currency transaction reporting requirements require digital banks to fulfil customer ID verification, the maintenance of customer reports, and suspicious transaction reporting requirements.

The Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) has introduced enhanced standards and compliance requirements to curb money laundering using digital banks.

What is digital banking compliance?

Digital banks must ensure they deliver services with the appropriate AML/CFT regulatory frameworks in place. Under FATF guidelines, these firms need to adopt a risk-based approach, which includes:

  • Customer due diligence (CDD) measures that accurately verify the identities of digital banking customers and the beneficial ownership of customer firms. As a digital bank, digital ID systems that include biometric technology can be used to assist banks in creating more accurate and reliable CDD and monitoring measures throughout their relationship.
  • Monitoring measures that detect suspicious or unusual customer activity during digital banking transactions. These include unusual transaction
  • patterns, transactions above the reporting thresholds or transactions with high-risk countries. AI technology can be used to streamline ongoing transaction monitoring and recognise high- and low-risk customers with ease.
  • Screening and monitoring for PEPs (Politically Exposed Persons) and individuals/entities on Sanctions Lists, as well as searching for adverse media stories through negative news screening.

Some countries, especially in Asia, require digital banks to obtain special licenses for digital services, including crypto trading or digital wallets.

FATF policy also requires regular training for compliance employees, as well as the appointment of a compliance officer to oversee their AML framework.

Why is an AML solution necessary for digital banks?

Digital banks around the world have already paid the high price of poor preparation.

  • In the UK, Monzo was investigated by the FCA for failure to comply with financial crime regulations, leading to financial losses.
  • German digital bank N26 was fined €4.25 million and presented with a new customer limit following a BaFin investigation into AML failings, hampering their growth.

Faced with these harsh consequences, digital banks have every reason to adopt robust AML processes to avoid money laundering (and legal penalties).

As digital-first businesses, they can adopt technological tools that support anti-money laundering initiatives, including Know Your Customer (KYC) and Sanctions Lists compliance checks and AI-powered transaction monitoring.

These solutions are scalable and flexible, allowing firms to react to legislative changes that are bound to come up as regulators and governments scramble to keep up with emerging technologies.

The benefits of speed and convenience should not be digital banks’ downfall. As legislation changes and regulators turn their attention to digital banking and cryptocurrencies, it’s important for these institutions to adopt new techniques and tools that will help them achieve and maintain compliance.

Companies like sanctions.io can assist digital banks with automated, smart technology that allows them to retain their agility, without compromising on compliance requirements.

Please contact us for more information on our range of services