Earlier this year, the Bank of Lithuania released a report stating that the number of startups in the financial sector grew by more than 40% over the year. Rapid growth comes with a number of challenges such as data protection regulations, digital customer identification, and money laundering prevention which must meet the high standards of EU regulations.
Michel Farah, former Director of Compliance at VISA Inc. and currently the CEO of ComplyTech, an AML solutions provider. shares insights on customer identification processes and threats connected to it.
"Potentially risky customers pose imminent threats to a financial institution," says Mr. Farah. "These may include politically exposed persons (PEP), someone with a criminal record or bad reputation, someone located in a jurisdiction which is deemed to pose a higher money laundering or fraud risk due to high level of corruption, or is vulnerable to terrorist activities, or lacks AML legislation."
Prevention of money laundering
Money laundering remains one of the biggest concerns for the FinTech sector. A few weeks ago, the Lithuanian government approved a proposal to amend and expand the law on the Prevention of Money Laundering and Terrorist Financing, with provisions to make it easier for tax authorities to access information about beneficiaries. Meanwhile, the amendments to the Code of Administrative Defenses propose to establish adequate liability for the provider of this information.
"AML and KYC are the key processes in preventing criminals from exploiting company’s loopholes and reducing the risk of dirty money entering the financial system thus damaging the company’s reputation,'" says Farah. "Automating and outsourcing AML and KYC processes reduces the need for more employees and allows the company to optimize operations."
Risk assessment is one of the mandatory tools for implementing the AML program. "The company has to check a list of questions: is the customer affiliated with terrorist groups, is the money being sent from/to countries of a higher risk, or is there a conflict of interest," Farah explains. The AML programs are subject to periodic review by the person responsible for preventing money laundering in the company. Regular audits are not to be forgotten, too, and it is suggested to rely on independent auditors for complete objectivity and transparency.
Financial consequences for failure to comply with regulations
Michel Farah believes that managing huge amounts of data is becoming too complicated and companies should look for alternatives. "Contractors specializing in AML and KYC can provide faster and more efficient analysis as the companies often lack the expertise or experience in this area," states Farah. The CEO of ComplyTech suggests companies optimize their operations by transferring this part of their work to professionals.
Money laundering problems are relevant not only for start-ups. At the beginning of this year, the media reported that between 2007 and 2015 over 9 billion euros were transferred between potentially risky clients of Swedbank and Danske Bank in Lithuania, Latvia, and Estonia. Although most companies take AML challenges seriously, the consequences of wrongly implemented programs can be devastating. After the money laundering scandal, Swedbank’s shares fell by 10.2%. As a result of this, the bank could have lost up to 5 billion euros in just a few days.