Know Your Customer (KYC) and Anti Money laundering (AML) regulations are often considered as the obligations of the financial industry. The increase in crime and fraud has changed this scenario. The regulatory authorities are adding more entities to the list of reporting entities of these laws.
The Fintech industry is the latest addition to this list because the fastly growing sector has attracted a massive bunch of criminals. Criminals are using this new industry to channel their black money, as this is a decentralized industry with minimal regulatory scrutiny as compared to traditional financial institutions.
Fintech industry participants, such as crypto-currencies, payment gateways, prepaid cards, digital exchanges, Age verification online, and money services businesses, are added to the scope of KYC and AML laws by FATF and some regional authorities in EU, UK, Switzerland, etc. This regulatory inclusion is changing the future landscape of the Fintech industry.
Significance of KYC and AML compliance for the industry
The Fintech industry is very keen to bag massive growth, but it would be possible only if it fulfills the regulatory obligations. Below are the benefits why:
Non-compliance leads to hefty fines
The Fintech industry is in the growth phase, and most of the market players are startups, with budgeted resources. In this case, where the financial resources are scarce Fintech startups could not afford to pay non-compliance penalties. These fines could make a startup go bankrupt. So the startups must take proactive measures to eliminate the risk of non-compliance penalties.
Financial crime and fraud are increasing in the Fintech industry, and one of the primary resources of criminals is fake or stolen identities that they use to manipulate the Fintech startups. Stolen identities are used to register temporarily on the Fintech platforms to commit financial crimes such as money laundering and terrorist financing. Or sometimes, criminals use the account credentials of legitimate customers to use the account as a means to defraud a business platform.
In case the Fintech startup performs KYC and AML screening on the customers before onboarding them, it’ll be able to identify fake identities and money launderers. And ongoing KYC/AML screening at every login attempt will prevent account takeover fraud.
ICO fraud is widespread; it is conducted by both parties, the investors, and the startups offering ICO. If a startup will be compliant with KYC/AML and data protection regulations, it’ll be distinguished and will attract more investors.
Also, if KYC and AML screening will be performed on the investors, the risk of onboarding white-collar criminals will reduce substantially. Onboarding criminals as investors might prove to be a killing blow for a startup. These investors don’t stay with the startup for long and leave once their motive to wash their black money is fulfilled.
Fake merchant fraud
It is very common to develop shell companies to convert black money into white money. If the Fintech startups comply with Know Your Business (KYB) and AML laws, they’ll be able to identify shell companies.
As KYB screening checks the business against blacklists and grey lists, AML screening verifies the ultimate beneficial owners and highlights the blacklisted people behind fake companies. As Fintech startups also develop many B2B agreements, it’ll prove beneficial for them. Fake merchants and shell companies will be identified beforehand, and the risk of fake onboarding entities will reduce substantially.
To wrap up, Fintech startups must perform KYC and AML screening on their customers, investors, merchants, and businesses, to reduce the risk of non-compliance penalties and fraud. Due to a lack of efficiency of manual verification, most of them are outsourcing, KYC screening solutions.
These solutions are integrated through a KYC/AML API and can verify customers or business within seconds, with high accuracy. This is because these solutions use artificial intelligence to perform verifications. So it is high time the Fintech startups should opt for regulatory compliance to prevent any heavy losses and to retain their growth in the future.