Fintechs brace for soaring financial crime
Fintechs and digital banks are ramping up their financial crime prevention teams as the economic downturn is expected to drive a rise in offenses.
A survey by financial crime and fraud risk detection firm ComplyAdvantage found fintechs are universally re-evaluating their approach to risk, leading to an anticipated ‘de-risking’ or restricting of client and business relationships to minimize the likelihood of onboarding criminals.
While a blanket ‘de-risking’ approach appears effective, it may also make it harder for legitimate consumers and businesses to access financial products like loans.
De-risking can push criminals into less regulated territories and is known to disproportionately impact humanitarian organisations and charities that rely on financial services to support vulnerable people worldwide.
The Financial Action Task Force, a global standard-setter for anti-money laundering regulations, said de-risking “should never be an excuse for a bank to avoid implementing a risk-based approach”.
Read more: FCA urges firms to ‘embed financial crime checks’
The survey found that nearly two thirds of fintechs (65 per cent) expect a rise in financial crime, and 56 per cent are hiring more compliance staff.
The war in Ukraine has transformed the compliance universe, with 59 per cent of fintechs changing their business model and 90 per cent of fintechs and digital banks saying they’d seen an increase in the use of decentralised finance platforms, such as crowdfunding, to fund extremist political groups.
“Following the pandemic’s peak, 2023 was supposed to be the year that fintechs and digital banks began to hit their stride,” said ComplyAdvantage chief executive Vatsa Narasimha. “Instead, economic headwinds have increased, and financial crime is rising. New risks are emerging from the decentralisation of finance, and fintechs must structure their compliance programs with a more cutting-edge, dynamic, and data-driven strategy to succeed.”
Read more: Finance firms failing to detect criminal “ghosts”
He added: “Fintechs must also determine how to scale their compliance programs. Existing compliance models focused on hiring more employees to address the issue will not be enough, and they will not be cost-effective. Unanimous agreement exists that technology, including AI, must be a part of the solution.”
Cybercrime is the most important offense cited by compliance teams when screening transactions, with 39 per cent of respondents saying this was their top concern.
Over a third (37 per cent) of respondents chose tax fraud, followed by environmental crime and corruption, both on 27 per cent.
When asked to name their top geopolitical hotspot of concern, Russia was the overwhelming choice, selected by 47 per cent of fintechs and digital banks.
Read more: ComplyAdvantage launches tool to weed out sanctioned customers
More than half of fintechs (59 per cent) said the invasion of Ukraine had changed their business model, six percentage points higher than the figure for financial institutions as a whole – 42 per cent implemented asset freezes, and 39 per cent instituted an onboarding freeze in Russia. Just three per cent said the war had not impacted their business.
Attention is also increasingly turning to crowdfunding platforms and how they are being used to finance extremist groups.
When asked if they had seen a change in attempts to use decentralised finance platforms to finance extremist political groups over the last 12 months, 90 per cent of fintechs and digital banks said they had seen an increase.