Money laundering is an age-old activity, as anyone familiar with gangster movies would tell you. However, throughout most of recent history, combatting it was of more interest to the tax authorities (like the IRS that famously busted Al Capone), than to world governments. This all changed after the attack on the World Trade Centre, which was indeed financed through the banking system. Banks needed to clean up their act and “simple international transactions” became somewhat of an oxymoron. Today, there are hundreds of companies that want to bring this simplicity back, but at what price?
9/11 had a huge impact on how we live today, starting from additional security checks in airports all the way through stringent Anti-Money Laundering and Counter-Terrorism Financing procedures across the globe. The latter led banks, big and small, to review their policies and get rid of anything that looked risky, thus making international transactions an incredibly complicated ordeal. And as business owners were facing more and more red tape, Fintechs rolled out the red carpet for them. Was there a catch? Oh, absolutely, and I’ve already written about the drawbacks of using a fintech company as your primary PSP entails.
Ever since legislation for electronic money and payment institutions came in force in the early 2000s, fintechs were always higher-risk enterprises. Even if we look at the C2C side of things, the model customer for many is a student (which means no stable income and difficulty to forecast behaviour). And when it comes to onboarding businesses, it’s commonly an “everything goes” approach. There’s no hiding the fact either. One Lithuania-based fintech company, which shall be left unnamed, was even running LinkedIn ads boasting about them having transferred over €1 billion for online gambling companies. If that doesn’t scream “We take ALL the risks”, then I don’t know what does.
Sure, fintech companies invest heavily in AML, and most can boast of having half of their staff working in this area. But are all AML and KYC procedures created equal? Well, let’s start with the fact that a young and ambitious fintech usually outsources a part of the heavy-lifting required to make sure everything is in check. And by relying on a single source of information (like a document verification service), they remain blind or at least short-sighted. If ID verification is usually quite strong, verifying something like a purchase agreement is way more complicated. Forging a document now is as easy if not easier than a hundred years ago. And so one of the biggest flaws in AML that fintechs registered in Lithuania and other innovation-friendly jurisdictions is an over-reliance on not- Save so-innovative black-and-white copies of documents.
There are several factors preventing these companies from looking beyond the documents their clients provide them with. With the massive volume payment service providers need to stay afloat (don’t get me started on the ridiculously low margins), there will never be enough hands and eyes to look into the clients, whose money these companies are handling on a daily basis. Understanding and mitigating the risks takes more than a six-month certificate in AML. It takes geopolitical know-how and insights into the industries you’re dealing with (petroleum and FMCG are completely different beasts). In the words of Nassim Nicholas Taleb, it takes skin in the game.
And skin in the game or lack thereof brings us to another red flag that usually goes unnoticed. The relatively short lifetime of fintech companies and executives. If you look at the recent money laundering scandals, they rarely have to do anything with current events. After all, it can take 5 or even 10 years between a massive act of money laundering occurring and being brought to light. Looking at the turnaround of young CEOs, CFOs and Compliance Officers, you’ll see that a fintech company might have a complete makeover in their C-suite in a year’s time. And the risks for the people involved in running the company is proportional to the duration of their contract.
When my partners and I founded PayAlly, we knew that our heads are going to be on the line if things went sour. And, rather than driving risks to zero (which is impossible) or dealing with them as formalities, we sought to find a balance. Any international transaction has risk embedded in it, but we have our own principles that help us deal with those risks.
First of all, we get to know our clients and their industries, and we turn around anyone we don’t fully understand. We then rely on multiple sources of information, including databases we maintain ourselves. We also see every bank we work with as a partner, and AML is one of our primary domains of cooperation. Finally, it all boils down to having an experienced team, where every member takes full responsibility. At the end of the day, it takes a network to launder money, so, naturally, it takes a network to thwart this activity.
All of the above means we’re able to sleep at night. It also means we won’t be bragging about “transferring billions for the gambling industry” any time soon, but that’s a good trade-off to have.