Compliance for FinTech: Anti-Money Laundering
11/06/2020 by Calvin Crase Financial Crimes
In the past several years, FinTech has emerged as a much-discussed new industry. Much like disruptions in other industries, it is useful to get some clarity around what exactly is new about FinTech as opposed to traditional banks.
A FinTech firm describes a firm that is using or creating new technologies to help improve or automate the delivery of financial services.
As these firms become larger and their technologies more complex they are facing an increasing regulatory burden, much like traditional banks.
Many FinTech firms have so far avoided some of the Anti Money Laundering/Know Your Customer (AML/KYC) regulations that traditional banks face because they have maintained that they are not financial institutions in the traditional sense. The services they provide are often distinct from traditional financial institutions.
However, over time FinTech firms have begun to get larger and move into domains typically more associated with traditional banks. This has led regulatory agencies to re-evaluate their position on what specific regulations apply to these institutions. The purposes of the AML/KYC regulations are to protect the integrity of the financial system and to limit the ability of those engaging in illicit activities to legitimatize the funds they earned illegally. The question facing regulators today and into the future is, to what degree are FinTech firms susceptible to exploitation from those acting illegally?
In March 2019 FinCEN, the main regulatory body enforcing AML laws said that ‘The expectation is that you will comply with existing regulation’. This should signal to any FinTech firms who are looking to expand their offerings or scale the services they are providing to expect to be in line with anti-money laundering laws.
The amount of money to maintain an AML compliance program is significant. So is the amount of money the government fines organizations for failure to comply properly. The importance of maintaining an effective and efficient compliance division within your institution cannot be overstated. It can save your organization both on the costs of maintenance and avoiding fines.
The difficulties some of these FinTech firms face are sometimes unique and complicated as they do not always have insight into who or what the entity is they are doing business with, or who is on the other side of the transaction being conducted. This is either due to the nature of the service provided or in some cases the currency being used such as Bitcoin, which has anonymity as one of its key properties.
Traditional banks on the other hand have central banking systems where much of the information needed is readily available for monitoring. The data streams have been in place and need only be leveraged. The difficulty in the FinTech industry is partly a consequence of their size and how new they are. How the data is stored and how much data is stored, are not consistent across firms and not always readily accessible for regulatory and compliance purposes.
Although it can seem overwhelming for FinTech firms to meet regulations, it doesn’t have to be. Here are 3 examples of how Zencos have helped a fintech company with their compliance needs.
The Organization: A fintech payment platform organization needed an effective transaction monitoring system for their operations. This organization provides payment services for Apple, Uber, and Lyft, and operates via prepaid cards over 100,000 retail stores.
The Business Need: Operating with many different businesses meant that this organization’s AML program needed to address different and often inconsistent data from various source systems. This organization needed a way to centralize their alert system, the ability to reduce false-positive alerts, and processes to automate manual work to lower overall cost. More importantly, the organization needs an AML system that meets compliance requirements from the regulators.
Due to the nature of the organization’s business, they do not have the typical banking data structure, such as account, customers, and their relationships. Therefore, we went through a mapping exercise to link their data to the out of box SAS AML solution data model.
For instance, the card activation date was mapped to the account open date, because the account was created when a customer activates their prepaid card. We also added a card dimensional table to the data model to incorporate the essential information about their business. Using an existing solution allows the organization to save money and time.
The organization’s rule-based scenarios were generating lots of false-positive alerts. This was causing excessive resources to investigate those alerts. We built a series of machine learning scenarios to reduce false positive alerts. The new scenarios leverage machine learning techniques, such as Principle Component Analysis and Cluster Analysis, to detect anomalous transaction behaviors. You can find more details in our recent blog, A Better Approach To Anomalous Detection For AML.
The organization has some experience with certain types of alerts that they know are going to be escalated through a series of escalation processes such as investigation, manager approval, adding to a case, and eventually a SAR that needs to be submitted to FinCEN. Therefore, we built several automated escalation processes to reduce manual and repetitive tasks, such as case creation, alert attachment, and E-file validation.
There are more and more compliance requirements as technology advances rapidly. Companies must make sure they are compliant. Non-compliance is not an option, and companies that put compliance first gain an advantage over their competitors. Zencos is here to help. By customization, analytics, automation, and other innovative ways, we can keep the AML processes efficient, low cost, effective, consistent, and most importantly, satisfying the expectation of regulators.