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Almost 40 Percent Of E-Money Institutions Raise Money Laundering Red Flags, Transparency International Says

December 16, 2021
New analysis published by Transparency International says 38 percent of the UK’s electronic money institutions raise some sort of money laundering concerns and calls out for more oversight of the growing sector.

New analysis published by Transparency International says 38 percent of the UK’s electronic money institutions (EMIs) raise some sort of money laundering concerns and calls out for more oversight of the growing sector.

The organisation analysed all 261 UK firms that have received an EMI licence from the Financial Conduct Authority (FCA) and found that 38 percent of them, that is 100 EMIs, raised anti-money laundering (AML) red flags to a certain extent.

These red flagged firms included: those with poor AML controls for processing criminal proceeds; have owners, directors or senior members who were named in money laundering investigations; or worked previously for institutions investigated over AML failings.

For instance, one EMI is run by a man implicated in the money laundering scandal of FBME Bank, which in 2014 was identified in the US as a foreign financial institution of primary money laundering concern. Another EMI is operated by the CEO of a cryptocurrency exchange that was named in the Mueller report, which investigated Russian efforts to interfere in the 2016 United States presidential election.

Meanwhile, electronic payments is a rapidly growing sector, which processed transactions worth £500bn in 2020/21, according to the organisation.

“While most e-payment businesses appear to follow the rules,” the report warns that “without tougher supervision, EMIs will become a route of choice for those seeking to funnel the proceeds of crime and corruption through Britain — if they are not already.”

Increasing oversight for emerging sector

Transparency International is urging the FCA to conduct a new thematic risk review of the rapidly expanding sector and increase the monitoring and oversight of EMIs named in money laundering schemes to ascertain whether those firms have appropriate systems and controls in place.

In response to the report, an FCA spokesperson said the regulator is focused on tackling financial crime and “will continue to take assertive action where firms do not meet the standard we expect”.

“We have done a substantial amount of work to raise anti-financial crime standards at payment and e-money firms, including placing business restrictions on some,” the regulator added.

Payments, including the supervision of EMIs, has been named as a priority theme for the FCA in its Business Plan. This includes the assessment of the appropriateness of firms’ financial crime systems and controls, as set out in the FCA’s "Dear CEO" letter for payment services firms and e-money issuers.

Although UK regulators have a fintech and innovation-friendly approach, it does not necessarily mean that there are no proper controls in place. During the past year, the FCA has concluded the assessment of 89 applicant e-money firms and granted approval to 39 firms. This means only around 44 percent of firms that wish to enter the sector are able to meet the standards for approval, including in relation to financial crime systems and controls, the FCA said in an email statement.

Although criminals often use fintechs to launder their dirty money, it is important to separate transparent fintechs and those who call themselves "fintechs" but they in fact just facilitate shady transactions, said Ivan Zhiznevskiy, CEO of 3S Money, a UK-authorised EMI.

The issue here is “not about improving fintechs and their processes but, instead, it is about understanding that certain types of businesses are designed to facilitate dodgy transactions”.

“It is important we can recognise and identify the difference between the two,” Zhiznevskiy noted.

Fintechs better placed to tackle AML

Although the report raises interesting considerations, the recent NatWest scandal may have placed the findings in a different light. Earlier this week, the Southwark Crown Court ordered the bank to pay a £264.8m fine for its involvement in money laundering, resulting, in part, from weaknesses in its automated transaction monitoring system.

Many fintechs meet the same AML and know your customer (KYC) requirements as banks, but they use technology to make that far more convenient.

Fintech providers can sometimes do a much better job of implementing these rules conveniently but with just as much safety and a lot of efficiency, Henry Holden, advisor at the BIS Innovation Hub, said at an OMFIF event earlier this week.

“If you look at some of the requirements that are put on you by a traditional bank to meet KYC or AML requirements, you think that is really weird, surely those cannot be the actual law. And it is not. The law is actually quite sensible in a lot of cases. It is just the implementation that is mad,” Holden explained.

As high-street banks still use legacy systems and they do not keep up with new technologies that help financial institutions tackle AML, they can become more exposed to AML and other risks, Zhiznevskiy added.

Many banks have “largely lost any real trace of what’s going on in their institutions and that’s a dangerous position to be in”, he warned. Hence, fintechs often have stronger processes than large high-street banks.

In addition to asking for a higher level of scrutiny, Transparency international recommends government bring forward Companies House reform that prevents UK shell companies from being abused for financial crimes.

Finally, the report calls on the government to extend the Senior Managers and Certification Regime to e-payment firms. The regime, which is intended to increase individual accountability of members of the senior management, currently applies to financial institutions only.

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