Two reasons digital banks face AML ‘challenges’

Digital banks are more likely to be targeted by financial criminals, while still facing the same financial crime risks as their larger counterparts.

New research from ComplyAdvantage has found that this is largely down to having leaner teams and the speed at which digital banks onboard their customers, often meaning that financial criminals can slip through the cracks. 

Demand for speedy answers with digital banks has become the norm to solve issues and onboard new customers in mere hours, compared to the days it often takes traditional banks, leaving little room for inefficiencies.

The research, which forms part of a guidebook for digital banks, suggests a “fail fast and learn fast” approach doesn’t fit as fintech startups become fully regulated banks that need to strictly follow tough standards of compliance.

“Governments and the public are depending on financial institutions to identify and flag illicit money flows. As a result, regulators will expect digital banks to have the data they need to review available and built into risk assessment processes,” the report stated.

Digital banks have allowed millions of customers to access their finances easier than ever before but they have also proved to be a hotbed for financial criminals and, as a result, have attracted more scrutiny from the regulators.

Criminal organisations have exploited the ease of access that digital banks provide, lining their own pockets, laundering money and funding terrorism in the process.

“Our research is intended to help both customers and the financial services industry by providing insights with prescriptive measures so they can maintain the greatest level of risk management integrity,” Charles Delingpole, CEO and founder of ComplyAdvantage, added. 

“With areas from sanctions to cryptocurrencies evolving at such a rapid pace, what you don’t know can truly hurt your business.”

Just recently some of the most well-known digital banks have found themselves in hot water with regulators.

Here in the UK, digital bank Monzo revealed that it is being investigated by the FCA for a potential breach of anti-money laundering regulations.

On 7 May 2021, the FCA informed Monzo that it has “started an investigation into our compliance with financial crime regulation,” after initially telling the bank to appoint someone internally to oversee the initial review into its financial crime practices in August 2020.

Monzo’s apparent breaches date all the way back to 1 October 2018 and the FCA is looking into the issues as both a potential civil and criminal case, with Monzo saying that the investigation “could have a material negative impact on our financial position.”

Similarly, German digital bank N26 recently found itself in BaFin’s bad books for AML failings. 

The digital bank was slapped with a €4.25m fine and a new customer limit, meaning N26 can only onboard a maximum of 50,000 - 70,000 per month.

“As the provider of an innovative money app, we recognised the importance of implementing rigorous AML and risk management processes right from the start,” Chisato Kamimura, head of compliance at Sync., said in a media release to accompany the guide’s launch.. 

“By working with ComplyAdvantage, we not only have a better understanding of the regulatory landscape but we also have the right tools and program strategies to ensure the highest level of customer vetting and transactional integrity.”