Why do you work in Financial Crime Compliance?

Payal Patel, who leads our new office in Asia, tells us why she works in Financial Crime Compliance and how she initially found her way into the field.

Payal combines her legal education and extensive compliance experience to build 'best-in-class' anti-financial crime programmes for clients and is focused on enabling innovative business whilst balancing risk and regulatory demands. She brings over 14 years of experience in financial services across multiple regions, focusing recently on FinTech and crypto. She has led engagements with regulators on new business models and has worked with a wide range of organisations globally on international best practices.

---

‘Why do you work in Financial Crime Compliance...isn’t it boring?’

I’ve lost count of the number of times I’ve been asked this question in some form.

Truth be told, I never intended on pursuing a career in Financial Crime Compliance. After completing my LLB and my legal training, it became very clear that my legal career wasn’t going to be like an episode of Suits, and I decided to follow many of my friends into the world of banking. During my undergraduate degree, we had talks from practically every bank selling us the pre global financial crisis dream of trading and earning pots of money. But I wasn’t sure that world was for me. I hadn’t heard of compliance until a recruiter called me about an entry level role that preferred people from a legal background. I was particularly intrigued as soon as she started talking about fighting financial crime. As a further plus. the team seemed nice, and the work was new, so I took the opportunity.

14 years later, and despite many opportunities to move into other areas, I’ve chosen to continue working in this space - and here’s why.

It impacts us all

People often forget the social impact of money laundering and terrorist financing - it costs us all. Serious crime, from drugs and cybercrime to people trafficking, has huge negative  impacts on society and the people affected, as well as costing the economy billions each year. The trickle down effect of this is that taxes need to be raised to compensate not only for the financial loss but also the additional resource required to police the activity going forward.  The price of consumer services increase as businesses seek to cover the costs associated with the higher taxes. Incidents of corruption, violent crimes and job losses go up and all of this can ultimately destabilise companies, industries and even developing nations. For the victims of crimes enabled by laundered money, the effects can be devastating and lifelong, including great personal and family loss. I see my role as preventing the criminal activity at a crucial point – where criminals seek to convert and clean their money by concealing it within the financial system, essentially allowing their crime to pay off.

Business enabling

Further, I strongly believe that compliance done right is business enabling. Throughout my career, I have actively sought to work in partnership with Business Heads to fully understand their business and the bespoke nature of the financial crime risk it introduces, seeking ways to illuminate this, and show how combatting it will give the business not only the stability it needs to grow, but how fighting financial crime actively builds trust among its customers. This collaborative approach has allowed me to creatively think of new and innovative ways to manage risk whilst also allowing me to be an integral part of the product / service roll out.

The cost of getting it wrong

From an organisation’s perspective the cost of getting compliance wrong can also be devastating, not only financially but also reputationally. Whilst the value add of a robust compliance programme cannot be tagged directly to sales or revenue, the fines imposed for failures can be massive, and licenses revoked or not granted at all.

As I now turn my focus to the world of FinTech, I am more passionate than ever about my role. As technology evolves, so does criminal activity. I want to make crime, corruption and terrorism harder for perpetrators. I want to protect the reputation of the organisations I work for and help them establish and maintain relationships with legitimate customers. This seems far from boring to me.

The Money Mule Trap

by Ishima Roman (Analyst, FINTRAIL)

In mid-February 2019, the UK House of Commons Treasury Select Committee heard from UK financial services providers about the problem of ‘money mules,’ reported to be on an upwards trajectory(1). The term ‘money mule’ is very familiar to financial crime risk professionals, denoting an individual used by criminals, knowingly or not, to transport illegal funds. The term is of course fraught with value judgements; being ‘mules’, they are perceived at best naive and unwitting accomplices, and at worst willing and able conspirators. However, as those giving evidence noted, ‘mules’ although enabling financial crime, can often be victims too.

Money mules can present challenges for FinTechs, especially those offering account based services and payments, because their customer base often draws on groups targeted to become mules: the young, immigrants, the economically precarious. This post explores the mechanics and consequences of money muling, and asks what can be done to mitigate the problem. In part, we believe that the answer is robust financial crime risk management; but FinTechs can also play an important educational role in preventing the vulnerable falling into the ‘mule’ trap.

What is ‘Money Muling’?

Europol, the European Union’s (EU) law enforcement agency, defines money mules as ‘people who, often without knowing it, have been recruited as money laundering intermediaries for criminals and criminal organisations(2).’ The term is sometimes used interchangeably with ‘smurfers,’ although this latter term more precisely refers to those who deposit many small batches of illicit funds to avoid a threshold of regulatory interest.

The process of money muling usually comprises:

1. The recruitment of the mule by criminal sources;

2. The mule receives funds into their account;

3. The mule withdraws the funds; or

4. The mule wires the funds to another account(s) at the direction or request of criminals. This often includes cross-border transactions.

5. The mule receives a ‘commission’, either separately or as a cut of the funds sent to their account.

There are of course variations upon this modus operandi, and criminals have also been known to ask the mule to transfer electronically the funds to another account, without the withdrawal at stage (C). Like any money laundering typology, muling will evolve with the development of technology and institutional requirements.

Becoming a Money Mule

As noted above, criminals are often looking to target those who are in a financially vulnerable position, but can provide enough psychological ‘distance’ from criminality in the minds of financial services providers that they are less likely to generate interest. Criminals are known to use many avenues to attract or pressure individuals into money muling, but some of the most common include:

• Speculative/vague job profiles or money-making ‘opportunities’, advertised online or in local or free papers. This can often be presented as lucrative ‘home working’ and increasingly as an opportunity in a FinTech itself, often using a meaningless job title such as ‘Financial Transactions Analyst(3)’;

• Direct approaches over social media, such as Facebook and Instagram, and communications apps such as WhatsApp;

• Direct approaches in person.

Criminals will often pose as reputable organisations, in order to convince the target that what they are doing or proposing is legitimate and legal. Some may present themselves as representatives of an overseas firm whose details are difficult to verify. Other criminal gangs use techniques such as impersonation and role-playing, presenting themselves as an authority figure, such as police officer, government official or soldier, seeking help in some awkward personal circumstance, often requiring the transfer of funds overseas.

How Money Muling Works(4)

Vulnerability to Muling

The unemployed and new immigrants from developing to developed countries have been major targets for muling operations for some time; financial desperation provides a motivation in both cases, and in the second, there is likely to be a lack of cultural understanding that criminals can exploit. However, there is an increasing trend in Europe towards the exploitation of young people and students, driven by their high levels of aspiration and low incomes, perceived naïveté, and accessibility online.  According to a report in April 2018 from CIFAS, the UK-based not-for-profit fraud prevention group, 2017 saw:

• An 27% increase in the number of 14-24 year olds being used as money mules. Many of these young people were students, promised substantial payments for little effort.

• An 11% rise in the number of accounts believed to have been used by money mules (32,000 plus in total)(5).
  

In the UK, young people are also increasingly becoming the targets of identity fraud, leading to the misuse of their accounts by money launderers. At the Treasury Select Committee hearing, representatives from Santander noted that the young were particularly vulnerable to having their accounts being used for muling without their knowledge because so many of them take a lax approach to data security; according to Santander’s research, 85% of 18- to 25-year-olds had shared financial information online(6).

The Consequences of Muling

The consequences of becoming a money mule can be harsh, even if the mules are not aware of the ultimate rationale behind the transfers. Regardless of their level of knowledge, they will have played a crucial role in a financial crime, and as such are liable to criminal charges in most developed jurisdictions. In the UK, for instance, muling can lead to a prison sentence of up to fourteen years; in June 2018, the UK group Financial Fraud Action reported on a case of a 26 year old man sentenced by a London court to a year in prison for two mule transactions that totalled at £28,000(7).

Even if criminal charges don’t arise, there is still the risk of long-term financial exclusion and limitations on career prospects. In April 2018, the BBC reported on the case of an anonymous teenage girl, ‘Holly’, who had been targeted by online mule recruiters, or ‘Fraud Boys’ as they are known, on Instagram and Snapchat, but had been caught out by bank staff when depositing a large amount of cash into her account. According to the report, Holly has struggled to get a bank account since, and has had to ask her employers for payment by cheque, which can only be cashed - at substantial cost - in payday loan shops(8).

The Risk to FinTechs

Money mules are a problem for all financial services providers,. Research by Europol and Eurojust in 2016 suggests that 90% of money-mule transactions were linked to cybercrime. This included phishing and malware attacks, but also online shopping/e-commerce fraud and payment card fraud, typologies experienced by certain types of FinTech products largely due to the nature of their customer base(9):

Young people and students are attracted to products designed specifically to appeal to their needs, many FinTech products are seeing significant traction amongst this demographic. Other groups such as new immigrants or those seeking access to financial services might also be attracted to using online services which do not require lengthy verbal interactions with in-branch bank staff and offer products that are designed to address the imbalance of financial exclusion.

Criminals are aware of these developments, and it’s possible that they will focus increasingly on the recruitment of FinTech customers, particularly as other routes, via traditional institutions are closed off for them.  This highlights the increasing need for close collaboration and joint working between financial institutions of all types to combat this type of crime.

Detecting Mules

The first consideration is awareness of the issue, and factoring it into your risk assessment and appetite. If your firm is focused on building a client base in the vulnerable demographics, then you need to make sure you explicitly recognise the risks and have the right controls to manage the nuances.

Every firm and product is different, and there is no generic approach to this, but it is worth recognising that it is difficult to identify all mules at onboarding, especially as some will onboard legitimately, being recruited as mule later (if you’re offering a product aimed directly at improving financial inclusion for example). This can be made harder if ‘at risk’ groups are part of your target customer segments. However, gaining a thorough understanding of the client during the Know-Your-Customer (KYC) phase and building that customer profiling in to a tuned customer risk assessment is a key to detecting problems later on. Because it is in the context of their expected behaviours that we judge what is unusual.

Unlike legacy banks, FinTechs are not going to catch mules out ‘in branch,’ as happened to ‘Holly’, mentioned above. Transactions take place online, so it’s important to have monitoring tools in place that can alert you to deviations in normal behaviour, along with an appropriately trained team to investigate those alerts and report them through a Suspicious Activity Report (SAR) if necessary.

Utilising available data to identify and robustly investigate ‘at-risk’ accounts is a key control activity. Mule accounts are sometimes maintained through linked life-style payments to add an air of legitimacy so investigating account connections and leveraging data points such as common addresses (and others) can be a powerful way to proactively identify accounts for further review.

Additionally, building a suitable greylist or using industry databases such as CIFAS (or others) can provide a mechanism of detecting suspicious profiles at onboarding. Research suggests that accounts used during the later phases of mule activity in a network are more likely to be used by criminals more than once, presenting an opportunity to detect them via robust data sharing and blacklisting.

Increase Education and Prevent Mules

Prevention is often better than a cure so an important additional approach is to think about how FinTechs can help prevent the problem in the first instance. Reducing the pool of potential mules is a more cost effective ‘up-stream’ solution than tackling the effects of their activities. It also provides an opportunity for anti-financial crime professional to add something back to the community with clear positive social impact.

FinTechs have a unique advantage in the way they interact with their customer base and can play an important role in educating particularly vulnerable clients - especially young people - through explicit guidance during onboarding and throughout the customer lifecycle. Companies can engage in and support anti-muling campaigns, such as the EU’s European Money Mule Action (EMMA) imitative, or the ‘Don’t be Fooled’ campaign by the UK groups CIFAS and Financial Fraud Action (FFA)(10).

The young are especially in need guidance on what is ‘normal’ in the financial space, and arguably all financial providers have a duty of care in this regard. It does not take much to deliver simple key messages that reduce the risk to themselves and their clients: there is no legitimate reason to allow someone else to move their money via your account, however convincing they might be. There a three simple pieces of guidance FinTechs can give to their customers:

• If you get offered a job or income, research any potential employer

• Don’t respond to adverts offering large sums of money, for minimal input

• Don’t allow anyone to access your account or use you card/app

• And if it sounds too good to be true - it is. Walk away or ignore them.

Get in Contact

If you would like to discuss the issues in this post, or wider anti-financial crime topics in an increasingly digital FinTech world, please feel free to get in touch with one of our team or at contact@fintrail.co.uk.

1. https://www.theguardian.com/business/2019/feb/13/banks-close-thousands-of-money-mule-accounts-mps-told

2. https://www.europol.europa.eu/crime-areas-and-trends/crime-areas/forgery-of-money-and-means-of-payment/money-muling

3. https://ftalphaville.ft.com/2018/01/12/2197610/fintech-as-a-gateway-for-criminal-enterprise/

4. https://www.europol.europa.eu/activities-services/public-awareness-and-prevention-guides/money-muling

5. https://www.telegraph.co.uk/personal-banking/current-accounts/fraudsters-target-cash-strapped-students-use-money-mules/

6. https://www.theguardian.com/business/2019/feb/13/banks-close-thousands-of-money-mule-accounts-mps-told

7. https://www.financialfraudaction.org.uk/news/2018/06/06/sentencing-of-26-year-old-money-mules-from-enfield-serves-as-stark-warning/

8. https://www.bbc.co.uk/news/business-43897614

9. https://www.europol.europa.eu/newsroom/news/europe-wide-action-targets-money-mule-schemes

10. https://www.moneymules.co.uk

Risk Assessment: Back to Basics

By Meredith Beeston (FINTRAIL Solutions) and Allison Spagnolo (FINTRAIL Solutions).

Adopting a risk-based approach is the foundation of best-in-class anti-financial crime practice. Your anti-financial crime (“AFC”) risk assessment should be one of the cornerstones of that practice.

While financial crime risk professionals are familiar with the AFC risk assessment, also known as the Bank Secrecy Act/Anti-Money Laundering (“BSA/AML”) risk assessment in the U.S., it can be easy to underestimate its true value in the risk management framework. Risk assessments often feel like a chore or little more than a check-the-box exercise to please your regulator. The AFC risk assessment, however, is one of the most powerful tools you have to reduce your exposure to financial criminals and should be designed to grow and evolve to match any new vulnerabilities. A properly-executed AFC risk assessment will close gaps in your compliance program and identify the appropriate policies, procedures and controls that should be implemented to protect your firm and your customers. To help you design a risk assessment of your own, we’ve gone “back to basics” and drawn on our experience with FinTechs to unpack the fundamentals of a modern and effective risk assessment . This post will explore features common to all AFC risk assessments and offer practical advice about how to design one for your company.

What is an AFC Risk Assessment?

In most jurisdictions, AFC risk assessments are indeed a regulatory requirement. The U.S. Bank Secrecy Act (“BSA”), the EU’s 4th Anti-Money Laundering Directive (“4MLD”), and the Financial Action Task Force (“FATF”) all require periodic internal risk assessments. Consider, though, that this particular regulatory requirement can also be an opportunity to meaningfully guide your entire AFC framework and not just a task to complete to avoid regulatory displeasure.

AFC risk assessments also serve as:

• A map of vulnerabilities: It is important to understand the ways in which a criminal might seek to misuse your product. It is much better to proactively identify and address potential vulnerabilities instead of discovering them as part of a “post-mortem.”

• A resource plan. Once you know where your vulnerabilities lie, you can consider the controls you need to tackle them, giving you the opportunity to better strategize how to divide up your company’s finite resources. For instance, which RegTech products are most worth the investment? What skills do you need in your next AML analyst? The answers to these questions will be resolved in the risk assessment.

• A development strategy. In the FinTech sector, growth and innovation are a daily feature of the business. Your AFC risk assessment can and should guide these efforts - helping you select which jurisdictions are best for expansion, which product features offer the most potential with the least risk, and which customer segments to market to next.

• A dialogue. Much like your company itself, your AFC risk assessment has to evolve. It should change to reflect insights and feedback from your senior management, auditors, consultants, banking partners and regulators. Each risk assessment - and its results - offers an opportunity to dialogue with relevant stakeholders about the future of the AFC risk assessment, resourcing and compliance program.

How do I Create an AFC Risk Assessment?

At their core, AFC risk assessments can be summarized in one essential formula:

INHERENT RISK - CONTROL EFFECTIVENESS = RESIDUAL RISK

Let’s break down each of these factors in a bit more detail.

Inherent Risk

Inherent risks are the financial crime risks you face before you apply any of your existing (or if you’re just starting off, planned) AML controls. At a high level, your inherent risks generally fall into three categories:

• Who your customers are

• What geographies you serve

• Your unique product and delivery features

Then, you will need to develop criteria or questions about the specific financial crime risks your company and customers are exposed to in each area. While it is important to initially consider the broad categories of financial crime risk (e.g., money laundering, terrorist financing, and fraud), you will likely want to generate more granular questions. For instance, if you offer a prepaid card targeting students, you will want to specifically address the risk of money mule activity occurring on your platform. In another example, if you offer a direct debit service, you will want to consider how vulnerable your product is to transaction laundering.

You should be able to analyze the data you gather across your company. While many FinTechs we deal with have a single office or product, over time, your approach to gathering data to establish inherent risk will need to evolve. For instance, for a FinTech with branches in Europe, the United States and Asia, instead of asking, “Are you aware of any high risk or medium-high risk-rated customers in a branch’s customer population?,”  the risk assessment should ask, “Provide the number of high-risk customers in each branch.”

Where appropriate and where the information is available, the risk assessment should also seek volumes (i.e. with respect to transaction data and SAR data). This will help to accurately reflect financial crime exposure.

Based on the responses in the inherent risk portion of the risk assessment, an inherent risk score is generated. It is typically along the “Low,” “Medium,” and “High” spectrum. There is no one-size-fits-all calculation of the inherent risk score, and some institutions will develop simple scoring while others will create complex weighting systems. The key is that your methodology is clearly explained and can be replicated when you update your risk assessment.

Control Effectiveness

Control effectiveness refers to the capacity of the specific processes and systems you have in place to mitigate each identified risk. As with inherent risk, granularity is important here. The control effectiveness portion of the risk assessment should be tailored, so that each relevant control is assessed against the corresponding risk, and impartial, so that controls are accurately represented in their effectiveness. For instance, if the control effectiveness topic is “Payment Alert Investigations” and the inherent risk is related to the processing of a sanctioned payment, you may want to consider: “Do the procedures covering alert handling address what documentation should be collected to support the investigation of sanctions screening payment alerts?”

As with inherent risk, you want to allow for as much impartiality as possible in assessing control effectiveness, and to rely on clear data when it is available (such as false positive rates, rates of false IDs that pass KYC, etc.).

It is important to have an understanding as to whether each control effectiveness topic has meaningfully addressed each inherent risk, both precisely and with a wider understanding of your overall control landscape. If you have multiple products or branches, you may want to be able to draw comparisons across your company. Like with inherent risk, there is no one way to measure control effectiveness; the key is that your methodology is clear, objective and justifiable.

Residual Risk

Residual risk is the risk that remains once all your controls are in place. In other words, it is what you are left with after identifying inherent risk and applying your mitigating control effectiveness. It is unlikely that residual risk will be “Low” across the board, but that is normal and expected. Your residual risk score will help shape the broader financial crime risk appetite of your business. Knowing this risk level gives you the opportunity to consider issues such as whether your company is comfortable with a “Medium” residual sanctions risk when expanding into certain jurisdictions.

Case Study

AFC risk assessments are designed to be complex and comprehensive, so it is not possible to provide an in-depth breakdown of an example here. However, even through the brief case study below, you can see why completing an AFC risk assessment provides a clear benefit to a FinTech:

Scenario

A FinTech planning to offer individuals an app-based foreign exchange service, loaded through debit cards and bank transfers, decides to conduct an AFC risk assessment prior to going live with its pilot.

Risks and Vulnerabilities

The FinTech discovers a range of inherent risks to which it is exposed, with particularly alarming scores linked to potential sanctions evasion, attempted payments to sanctioned individuals or companies, financing acts of international terrorism through purported charitable donations, and money laundering connected to narcotics or human trafficking.

Managing Risks

The FinTech uses the inherent risk analysis to shape its controls in order to obtain an acceptable level of residual risk. The controls are designed to go beyond comprehensive monitoring and screening and robust KYC and adverse media checks. The company also limits the geographic scope of its product to non-sanctioned countries with lower levels of money laundering/terrorist financing risk, and designs its expansion plan so that geographic risk is added only incrementally. This increases confidence in the product, which allows it to be signed off by all relevant stakeholders.

Things to Remember

Here are a few key lessons to take away:

1. AFC risk assessments are not “out of the box.” They should reflect the nature, size and scale of your business. If your business is just starting up, you can start with a simple risk assessment!

2. AFC risk assessments should make sense. There is no need for over-complicating the questions or the scoring. You want to be able to communicate it easily across your company.

3. AFC risk assessments evolve. While this is certainly true as it relates to your business growth, it is likewise true in relation to the evolving typologies that criminals try. If you learn about an emerging risk from a reliable source, consider adding it to your next risk assessment.

4. AFC risk assessments do not result in perfect scores. You will never have zero risks. Rather, it is more important to be aware of the risk levels you do have and develop a comfortable risk appetite in response.

5. AFC risk assessments are all about the details. Be sure the risk assessment is as useful to you as possible, keeping in mind all the ways it can add value beyond a simple regulatory requirement.

Help and Resources

If you have any other questions related to your AFC risk assessment or how to execute it, do not hesitate to reach out to FINTRAIL Solutions in the U.S. or FINTRAIL in the UK. If you are interested in further improving your risk assessment, here are a few key resources to consider:

• Financial Action Task Force Money laundering and terrorist financing risks: The resource provides a series of useful links to countries’ national AML/CTF risk assessments, as well as to narrower typologies identified by FATF. National risk assessments will give you an idea of the particular risks considered to be of most importance in a particular country.

• The Wolfsberg FAQs on Risk Assessments: These Frequently Asked Questions are in-depth responses to common risk assessment inquiries. Remember, though, the risk assessment format and methodology that will work best for you will depend on your company’s unique characteristics (e.g., size, scale, and overall offering).

• ACAMS’ Auditing and Updating an AML Risk Assessment: This white paper describes about how a risk assessment should be reviewed and revised within a major banking institution, though there are still plenty of lessons for the FinTech sector.

A Modern Curse - Fentanyl and FinCrime

Matthew Redhead (Senior Associate, FINTRAIL) & Krista Tongring (Managing Director, Guidepost)

Matthew Redhead is a financial crime risk and intelligence specialist, who has undertaken a range of senior operational, change management and leadership roles in financial services, consultancy and government. He works with FinTechs and challengers to build responsive and smart compliance frameworks that encourage innovation whilst minimising risk. 

Krista Tongring oversees a variety of compliance issues and investigations for clients including AML, trade compliance and anti-corruption matters. Previously, she had an accomplished career at the U.S. Department of Justice having most recently served as the Acting Section Chief at the Drug Enforcement Administration Office of Compliance. She led policy discussions and developed strategies to implement new and revised policies. She also worked to establish a more efficient policy review process. Ms. Tongring spent a significant portion of her career as a federal prosecutor where she investigated and prosecuted complex criminal matters, including racketeering, money laundering, abusive trust and other tax matters, international organized crime, criminal asset forfeiture, and violations of the Bank Secrecy Act.

As close partners of FINTRAIL Solutions are aware, we have been concerned about the impact of fentanyl - a powerful and highly addictive opioid used legally for the relief of extreme pain, but also produced and sold illegally - since early last year. The illegal use of the drug is at epidemic proportions in North America, and based on Canadian government warnings, we highlighted to clients and collaborators the potential financial crime risks that the burgeoning trade in the drug posed directly to FinTechs and their customers. 

As professionals in risk management, it is easy to look at issues like fentanyl and treat them as technical problems alone: risks to be identified and mitigate. However, the fentanyl epidemic highlights the underlying human tragedies that often drive the financial crime we seek to tackle. Overdoses of illegal fentanyl are reported to have killed the singers Prince and Tom Petty,[1] while the US Centers for Disease Control and Prevention (CDC) reported in December 2018 that fentanyl is now one of the main drugs involved in overdose deaths across the US.[2]

 This blog post is the first in a series which will look at the social causes and contexts of financial crime. The aim is to look at the problem in the round - its character, causes and impact - to help remind us why it is not only important to fight the financial crime the problem engenders, but also consider the reality for people who are caught up in these illegal trades - the mules, the users and the small time dealers, who, in truth, are victims too.

The Fentanyl Problem

Fentanyl is an opioid: a category of drug that suppresses feelings of pain in the brain, whilst also engendering states of relief and relaxation. In its legally manufactured form, it is usually prescribed for extreme, chronic pain, and is rated as being up to 100 times stronger than a sister opioid, morphine. Legitimate fentanyl is usually taken as a patch, lozenge or injection, but care has to be taken, as there is a very real risk of overdose and death.[3] Fentanyl can also be illegally sourced, either through the theft and diversion of legitimate supplies, or the purchase of synthetically produced illegal variations, usually coming as a white powder that can be ‘cooked’ and injected, snorted or ingested, either on its own, or in combination with other illegal drugs, especially cocaine and heroin.[4]

 Even in the legal variety of the drug is extremely dangerous, and is classified in the top category of most countries’ controlled substance schedules.[5] Indeed, the drug is so powerful that in August 2018 it was used in Nebraska to execute Carey Dean Moore by lethal injection,[6] and has allegedly been banned on some drug supplier websites on the darknet, according to a 2018 report by the UK paper The Guardian.[7]

The Market

 There is little doubt that the current epicentre of the fentanyl epidemic is North America. In the US, the drug has had a devastating effect; in a recently published report from December 2018, the US Centers for Disease Control and Prevention (CDC) stated that, as of 2016, fentanyl is now linked to 29 percent of all overdose deaths.[8] Overall, more US citizens were killed by all opioids - of which fentanyl is most prominent - than were killed by guns or car accidents.[9] This CDC chart of opioid related deaths in the US gives some indication of the dramatic rise of the problem, and fentanyl’s role within it.

Figure 1 - Synthetic Opioid Drug Poisoning Deaths, per 100,000 of US Population 2011-2016, (Source CDC)[10]

In Canada, the problem is equally significant. In June 2018, the Canadian authorities reported that over 4,000 Canadians had died from opioid overdoses in 2017, a new record, of which 72% were fentanyl or pseudo-fentanyl analogs.[11] Outside of North America, there has also been a reported rise in deaths by fentanyl in Australia,[12] New Zealand[13] and the UK[14] over recent years, although rates do not yet appear to have reached US levels. The EU Monitoring Centre for Drugs and Drug Addiction states on its website that fentanyl is a more marginal problem in the EU, affecting primarily Estonia, Germany, Belgium and Austria. However, EU statistics show that opioids as a class are becoming a greater problem in Ireland, France, Italy and Portugal.[15]

The Mechanics of the US Trade

The DEA and Department of Homeland Security (DHS) believe that the primary source of the illicit versions of the drug is China - one of the most popular terms for a range of fentanyl analogs is in fact ‘China White.’ Laboratories run by Chinese organised crime gangs produce high volumes of fentanyl, which are then marketed to other transnational traffickers, including the Mexican cartels, who move the drugs into North America. Fentanyl flows across the Pacific to Canada and Mexico via mail order services and smuggling, where it is often mixed with other drugs, and then smuggled into the US via the north eastern and south eastern borders.[16] The drug often comes in a powdered form, or disguised as the tablet forms of legal pharmaceuticals, such as oxycodone and hydrocodone.[17] 

The secondary source, and one of growing significance, is Mexico itself. In 2016, the DEA reported its suspicion that the Mexican cartels were ‘branching out’ into the production of fentanyl, using imported precursor chemicals from the US and China.[18] Over the last year this assessment has been confirmed by busts in Mexico, including one in December in the capital, that have revealed the existence of cartel-managed fentanyl labs.[19]

The mixture or ‘cutting’ of fentanyl with other drugs, such as cocaine or heroin, makes the combined hybrid drug even stronger and more addictive, and further help us understand why its market is so sustainable. First, selling fentanyl keeps the costs of the traffickers and pushers down, because a small amount, though dangerous and potentially toxic, is relatively easy to produce and ship, yet has extreme potency. Second, the potency of the drug, especially when combined with other narcotics, means that users become quickly and highly dependent, ensuring that the suppliers have a captive market. Some of the strongest markets for fentanyl are in US states that already have high rates of opioid addiction.  This is borne out by a DEA report indicating that many of the younger users of fentanyl turned to the drug once they could no longer obtain and/or afford illicit pharmaceutical opioids.[20]

The prospects of breaking this market in the short-term appear bleak. The problem has become so great that the US President, Donald Trump, has pressured his Chinese counterpart, Xi Jinping, to take action against the Asian end of the trade, most recently at the November/December 2018 G20 summit in Argentina. Although President Xi was supportive, it is likely to take some time before practical action occurs.[21] Moreover, recent Canadian requests to China for similar help have been less warmly met, largely because of ongoing disputes over the return of Chinese fugitives to Canada.[22] As long as the Canadian and Mexican gateways to the US remain open, the scourge of fentanyl in North America is likely to continue.

Fentanyl, FinCrime & FinTechs 

What role then for FinTechs?

 For the last five years, there has been media ‘hype’ about the roles that FinTech platforms might play in the purchase of illegal drugs. Payments providers have been put out of business because their platforms have allowed individuals to buy illegal items unimpeded. In 2013, for example, the US Department of Justice (DoJ) closed Liberty Reserve, a digital payment processor, for facilitating the sale of drugs and child pornography, while cryptocurrencies are of particular current concern. In June 2018 the US media reported a DoJ enforcement action named ‘Operation Dark Gold,’ to stop the darknet sales of drugs using Bitcoin and other cryptocurrencies. [23]

Our clients’ experience tends to be more prosaic than some of these more sensational media cases. As a recent FinTech FinCrime Exchange (FFE) survey of UK FinTechs demonstrated, most financial crime typologies experienced in the UK cryptocurrency sector were around varieties of customer fraud. Nonetheless, we still believe that FinTechs have a responsibility to take these issues seriously. There are potentially striking indicators that, in combination, should raise concern (see breakout box), and we would urge all FinTechs working in payments services, retail accounts, prepaid cards and crypto transmission and exchange providers to give them due attention in their financial crime investigations.

●      Unusual Chinese transactions: Customers buying items from China, especially where this does not fit with the customer transaction profile or nature of businesses, along with multiple unconnected payments to a single individual in China;

●      Unusual health products: Firms offering apparently pharmaceutical or health products who demonstrate other unusual indicators such as those listed here;

●      High use of currency exchanges: Multiple payments from global currency and cryptocurrency exchanges, usually in small amounts; and

●      Tags and nicknames: Payments including nicknames such as Apache, China Girl and China Town, or precursor references such as NPP or ANPP.

For more details, contact FINTRAIL Solutions at contact@fintrailsolutions.com

At the same time, the case of fentanyl drives home the need for FinTechs to take a longer term view too about the types of business they are doing. As regular readers of the FINTRAIL and FINTRAIL Solutions blogs will know, we recommend some basic prevention methods that include active risk assessment and defined risk appetite. We have found that its critical for FinTechs to take basic risk management seriously from the beginning - asking themselves questions about the vulnerabilities of their product and the risks that opens them up to. If you think your company is vulnerable, then take action. Get the basics right. Because it is in no one’s interest to facilitate the sale of a drug like fentanyl.

If you would like to know more about how FINTRAIL Solutions and how we can help you and our business better manage financial crime risks, please contact us at contact@fintrailsolutions.com.

[1] https://www.rollingstone.com/music/music-features/musics-fentanyl-crisis-inside-the-drug-that-killed-prince-and-tom-petty-666019/

[2] https://www.cdc.gov/nchs/data/nvsr/nvsr67/nvsr67_09-508.pdf

[3] https://bnf.nice.org.uk/drug/fentanyl.html; https://adf.org.au/drug-facts/fentanyl/

[4] https://adf.org.au/drug-facts/fentanyl/

[5] https://www.dea.gov/drug-scheduling; https://napra.ca/nds/fentanyl; https://www.gov.uk/government/publications/controlled-drugs-list--2/list-of-most-commonly-encountered-drugs-currently-controlled-under-the-misuse-of-drugs-legislation

[6] https://www.independent.co.uk/news/world/americas/carey-dean-moore-fentanyl-capital-punishment-death-penalty-nebraska-execute-a8491671.html

[7] https://www.theguardian.com/society/2018/dec/01/dark-web-dealers-voluntary-ban-deadly-fentanyl

[8] https://www.cdc.gov/nchs/data/nvsr/nvsr67/nvsr67_09-508.pdf, p.1

[9] https://www.centeronaddiction.org/the-buzz-blog/we-asked-you-answered-did-guns-car-crashes-or-drug-overdoses-kill-more-people-2017

[10] https://www.cdc.gov/nchs/data/nvsr/nvsr67/nvsr67_09-508.pdf, p.4

[11] https://globalnews.ca/news/4282699/canada-opioid-death-statistics-2017/

[12] https://www.theguardian.com/science/2018/may/13/he-was-gone-fentanyl-and-the-opioid-deaths-destroying-australian-families

[13] https://www.newsroom.co.nz/2018/09/03/220753/drug-cartels-dealing-illicit-prescription-drugs-eye-new-zealand

[14] https://www.theguardian.com/society/2018/aug/06/fentanyl-drug-deaths-rise-nearly-third-england-wales

[15] http://www.emcdda.europa.eu/html.cfm/indexEN.html

[16] https://www.hsdl.org/?view&did=797265, p.70

[17] http://facethefentanyl.ca/?page_id=15

[18] https://www.hsdl.org/?view&did=797265, p.65

[19] https://www.washingtonpost.com/world/the_americas/mexico-raids-lab-producing-fentanyl-in-capital/2018/12/12/fd21ee18-fe55-11e8-a17e-162b712e8fc2_story.html?noredirect=on&utm_term=.06db3fad0ad1

[20] https://www.dea.gov/sites/default/files/2018-10/PA%20Opioid%20Report%20Final%20FINAL.pdf, p.28

[21] https://edition.cnn.com/2018/12/01/politics/fentanyl-us-china-g20-talks/index.html

[22] https://globalnews.ca/news/4658188/fentanyl-china-canada-diplomatic-tensions/

[23] https://www.theverge.com/2018/6/27/17509444/dark-web-drug-market-money-laundering-hsi-dark-gold

2018 and 2019

As we head into 2019, here is a summary of 2018 in numbers.

---

We welcomed James and John-Paul into the FINTRAIL family.

John-Paul will be leading the FINTRAIL and FFE communities so that Fintechs can collaborate on best practices in financial crime risk management.

James joins us to provide industry expertise all of our projects across a wide range of subjects and specialisms.

---

We launched the FFE in the USA

As the FFE continues to grow and support its members in the UK and the Netherlands, we launched the FFE in the USA where we will be connecting the community to support the specific needs of American Fintechs.

---

We held our first FFE conference in London

Over 100 representatives from across the Fintech community spent a day discussing and sharing ideas on the theme of...
 

‘Disruptive Perspectives on Financial Crime’ 

Which was a huge success with over 100 Fintech experts meeting for a day of learning, sharing and networking.

Geopolitics & Cryptocurrency

Cryptocurrencies have been a controversial topic in the FinTech space and wider financial sector in recent years.  Despite a reputation for higher financial crime risk, their increased popularity makes them difficult to ignore and financial institutions are looking for compliant ways to engage.  With evidence to suggest that sanctioned governments are using cryptocurrencies, a robust and responsive risk approach is necessary.

Korean Cryptocurrency

The divisions between north and south are complex, but at first glance it would seem South Korea leads when it comes to the FinTech sector, and more specifically cryptocurrency trading.  Along with Japan, they are regional leaders and South Korea is home to some of the world’s largest crypto-exchanges, including Bithumb and Upbit, with a disproportionate volume of trade passing through its markets.

There has appeared in recent months to be the potential for a thawing of international relations for North Korea, which has been under UN sanctions since 2006, and US sanctions from as far back as 1950.  In recent weeks there have been renewed calls from Kim Jong Un’s regime for an end to US sanctions, following the North Korea-US summit in June, where Donald Trump suggested an agreement could be reached.  But with latest UN reports suggesting the Kim regime is continuing to build their nuclear military capability, a lifting of sanctions is unlikely to happen soon. This makes any North Korean involvement in the relatively borderless market of cryptocurrency trading a cause for concern.  

As sanctions persist, the decentralized, interconnected and potentially anonymous nature of cryptocurrencies offers a portal into the international economy.  It is a way to circumvent economic restrictions that hold the country in poverty, and to continue to fund the country’s nuclear programme which is estimated to cost 30% of the country’s GDP.  Despite the hardship of ordinary people, Kim is himself worth an estimated $5 billion. An unsurprising fact, as North Korea is among the most corrupt in the world, currently 171 out of 180.  Much of Kim’s wealth is rumoured to be held overseas, making the illicit movement of funds a high priority and the under-regulated alternative of cryptotrading very attractive.  The difficulty of tracing the source of virtual funds, especially when trading involves private coins that anonymise the seller and buyer, is compounded when digital assets are exchanged for legal tender.  The dollars, euros or pounds can be entirely without trace of their suspicious origins.

The regime has also allegedly turned its hand to simple theft of cryptocurrencies.  Utilising established cyber capabilities, witnessed in such devastating international cyber attacks as 2017’s WannaCry ransomware attack, North Korea is the main suspect behind at least three successful hacking attempts of cryptocurrency exchanges within the past year. This includes the security breach of the Japanese exchange Coincheck in January, where an equivalent of $530 million worth of coins and tokens was stolen. It is uncertain how much of this reached North Korea, although some estimate the regime was in possession of $200 million worth of Bitcoin and other cryptocurrencies as of March 2018.

Russia’s Crypto Measures

Along with ongoing talk of a national Russian cryptocurrency, the CryptoRuble, that could potentially evade sanctions, another example of the growing interplay between state-sponsored financial crime and digital assets can be seen in Russia’s alleged meddling in the 2016 US election.  Last month, as part of the ongoing Special Investigation led by Robert Mueller into Russian active measures to influence the outcome of the election, 12 Russian nationals were indicted for hacking email accounts affiliated with Hillary Clinton, using cryptocurrencies in an attempt to cover their tracks.  

The perceived anonymity of cryptocurrencies made them the means of choice for facilitating this cross-border criminality.  However, in this case, they were in fact the means by which the criminals were identified. In the indictment, conspirators were identified using the same pool of bitcoin funds to purchase infrastructure that was used for the hacking, such as a virtual private network (VPN).  They also raised funds through bitcoin mining.

It also detailed how they obscured the origin of bitcoin they received:

‘this included purchasing bitcoin through peer-to-peer exchanges, moving funds through other digital currencies, and using pre-paid cards.  They also enlisted the assistance of one or more third-party exchangers who facilitated layered transactions through digital currency exchange platforms providing heightened anonymity.’

As the indictment shows, attention to the mechanisms of virtual currency trading is increasingly relevant to the crime itself.  They laundered ‘the equivalent of more than $95,000 through a web of transactions structured to capitalize on the perceived anonymity of cryptocurrencies’.  The growing awareness and recognition of the intricacies of the cryptomarket by authorities, means the same will be expected of financial institutions. It was noted the 12 Russians used a mix of currencies including US dollars so the border between fiat and cryptocurrencies needs to be understood as an institution that believes itself to deal only in one or the other, is likely exposed to both.

Practical Steps for FinTechs

With over 1500 cryptocurrencies currently in circulation, a first step for a FinTech engaging with cryptocurrencies is to be aware of the relative risk of different cryptocurrencies, with the highest risk being private coins and of course coins created by sanctioned entities, such as Petro coin by Venezuela.

Weak KYC and verification processes on signing up for an account with a crypto-exchange is an important factor.   Weak KYC can be deliberately aimed at encouraging wider adoption, with minimal identification required, often with an ideological basis of preserving the anonymised freedom of the virtual realm.

Geography is central to assessing financial crime risk.  While the majority of exchanges have some restrictions in place for the jurisdictions they serve, usually in line with international sanctions, others such as Russian crypto-exchange Simex will allow a North Korean citizen to sign up for an account.

Regulatory status of a crypto-exchange is a particularly fast evolving risk factor.  There is a global move towards both self-regulatory organisations and the establishment of regulatory authorities.  However it is evident that exchanges with lower levels of regulation often have more users and more coins on offer. A lack of oversight that makes these platforms more vulnerable to financial crimes like money laundering, terrorist financing and yes, sanctions evasion.

Conclusion

While cryptocurrency trading continues to shift and adapt to geopolitical trends, FinTechs are excellently placed to respond to changes as they emerge. A comprehensive understanding of the unique financial crime risks surrounding cryptocurrencies and how this is situated in its political landscape will allow firms to assess both the individual customer and their virtual funds in their full context.  Cryptocurrency trading is one weapon in the cyber arsenal of hostile states such as North Korea and this dimension of risk from sanctioned entities should be included by any FinTech looking to deal with crypto funds. As seen in the case of Russian active measures, proper controls can go far in tracing criminal use of cryptocurrencies, and - with the accuracy and permanence of digital transaction data - perhaps even more so than traditional currencies.

5AMLD - What To Look Out For

Just over a month ago, the final text of the Fifth Anti-Money Laundering Directive (5AMLD) was published, kicking off the 18-month countdown until it comes into play. Its precise, full impact is unknown for now, but it is expected to significantly impact the way governments, regulators and businesses in Europe have to approach financial crime risk.

What’s the rush?

This new directive followed the former surprisingly quickly in large part due to the rising popularity of digital currencies combined with the hysteria following the Panama Papers. Given it’s only been 2 years since the last AMLD was adopted (some countries are still trying to implement it), compared to the 12-year gap between the previous AMLDs, it is clear the European Commission is focused on reassuring people and businesses that they are on top of new and developing issues.

What does 5AMLD actually change?

The key change from the 4AMLD comes in the definition of “obliged entities”, increasing its scope to include virtual currencies, anonymous prepaid cards and other digital currencies. Previously, there have been no specific laws aimed to cope with the risks of virtual currencies and it’s clear that with this new directive, the European Commission is intent on making sure that virtual currencies do not become a safe space for criminality. It also shows clear signs of their move to increase the scope of the fight against money laundering (ML) and terrorist financing (TF), as criminals can take advantage of the anonymity of virtual and digital currencies.

The other key aspect of the 5AMLD is that it further clarifies the requirements and timings for the implementation of the required beneficial ownership registers introduced in the 4AMLD. Essentially, member states and the European Commission will be required to keep accurate and up to date registers that must be interconnected to the European central platform. This integration will allow for more efficient information sharing, making it easier to combat ML and TF.

Other features include the adjustments made to address Politically Exposed Persons (PEPs), expanding the definition and pledging to publish a combined list of EU and Member states’ lists of all prominent public functions. Traditionally, a “one size fits all” and “once a PEP, always a PEP” approach has been used, but this system is not adequately risk-based. The new regulations hope to address this issue by integrating a more nuanced and comprehensive approach to identifying and managing the financial crime risked linked to PEPs.

There is also set to be enhanced co-operation and information sharing among EU Financial Intelligence Units (FIUs) in the hope that this will make information more easily accessible and align with international best practices. FIUs across the EU receive broader powers under the 5AMLD as they will no longer need be limited to the identification of a predicate offence or suspicious activity report prior to filing an information request.

So, how to prepare?

With this new directive being introduced, here are a few things firms may want to consider in preparation:

1)    Virtual Currencies – 5AMLD will require obliged entities, i.e. providers engaged in exchange services between virtual and fiat currencies, to be registered and to comply with AML and CFT requirements. National authorities will be authorized to obtain all the associated information and regulate them accordingly. Exchanges that fall under the definition of an obliged entity will need to start benchmarking their existing frameworks against existing EU and jurisdiction specific AML & CTF controls and making any appropriate enhancements.

2)    PEP Categorisation – With changes being made to PEPs, firms may want to start thinking about how they categorise PEPs and how they apply different levels of monitoring such that when the new categorisation criteria come in, they are prepared

3)    Increased Reporting – Under new business ownership discrepancy rules, firms will be obliged to report discrepancies they find between the beneficial ownership information available in the central registers and their own registers. In the case of reported discrepancies, Member States will be obliged to ensure that appropriate actions be taken to resolve the discrepancies in a timely manner.

4)    Due Diligence Advances – 5AMLD will require a specific Enhanced Due Diligence list to be applied when dealing with high-risk countries defined by the European Commission. You should review and update your due diligence processes to ensure full compliance.

If you need any help scoping enhancements for implementation or indeed reviewing whether your current procedures meet the requirements of EU or jurisdiction specific requirements, FINTRAIL will be happy to offer assistance.

GDPR Principles: Vetting Data Processors In A Digital World

GDPR no longer needs any introduction, and here at FINTRAIL, we loved collaborating with the team at Jumio to help them launch their GDPR e-booklet, which you can download here.  

Together, we came up with 5 key principles that we think best help data controllers understand the activity of their online identity verification providers, and whether or not they’re fully GDPR compliant. Data processors in this space handle vast amounts of sensitive, personal data that, while integral to ensuring customers are who they say they are, can also be exploited or mishandled.  As such, GDPR compliant practices are key.

In brief, these are the main questions that controllers can ask of their processors which will help frame their thinking on this important aspect of compliance:

1. Human Review: How are verification decisions made and what recourse do data subjects have to challenge those decisions?

   • GDPR gives individuals the right not to have significant decisions made about them solely on the basis of automated processing.

2. Compliant Machine Learning: Does the data processor employ Compliant Machine Learning?

   • Under GDPR, vendors can only develop specific AI models trained on the data of a given customer and cannot leverage data from other customers to create more comprehensive models.

3. Data Retention: Can data retention policies be tailored to your business requirements?

   • Clear processes around data retention and deletion help processors and controllers deal with the stipulations around Subject Access Requests.

4. Data Breach Notifications: Do you have a data breach notification process in place and has it been tested?

   • Processors, as well as controllers need to be able to inform relevant parties of any data breach in a timely fashion; having clear and verified processes around this is one step in the right direction.

5. Data Encryption: Is personal data encrypted and protected appropriately?

   • Proper data protection and encryption reduces the likelihood of a breach and increases the privacy of citizens’ information. GDPR stipulates that personal data is properly protected.

You can read more detail in the e-booklet of course, and find out even more information about GDPR, its implications for processors, how best to approach these questions, and exactly how Jumio is helping controllers maintain and manage their GDPR compliance through its innovative identity verification solutions and careful approach to data privacy.

Cryptocurrencies and UK FinTechs: Perspectives and Experiences of Financial Crime

The UK FinTech FinCrime Exchange (FFE) has just launched its latest white paper on FinTech perspectives and experiences on the nexus of cryptocurrencies and financial crime.

Cryptocurrencies experienced a meteoric rise in both value and popularity at the end of 2017.

While the value of popular cryptocurrencies such as Bitcoin has declined, interest has remained. International governments have been slow to regulate the emerging market, and many in the traditional financial services sector and wider public have expressed concerns related to the ability of cryptocurrencies to facilitate financial crime.
This paper answers the following questions: how does the UK FinTech sector perceive the risks associated with cryptocurrencies, and how are they managing the challenges related to this new disruptive technology?

Our research suggests that while some UK FinTechs have considered engaging more with cryptocurrencies, perceived financial crime concerns, the need for meaningful AML/CTF controls and the lack of regulatory clarity have fostered an attitude of caution.

We found that perceptions of financial crime risk associated with cryptocurrencies differed from actual experiences of FFE members.   These perceptions had a disproportionate impact on how Fintechs chose to engage with cryptocurrencies, limiting their appetite for extending their exposure, and for some, that of their banking partners.

The paper recommends that FinTechs not be deterred by the challenges associated with cryptocurrencies, as financial crime concerns can be managed through tailored, risk-based anti-financial crime tools, and a solid understanding of any areas of concern through a detailed risk assessment process. Regulators as well as law enforcement actors should collaborate more with FinTechs in order to improve the broader understanding around cryptocurrencies, financial crime and new regulatory developments.

More detailed findings are presented in the white paper.

For more information on the FFE or on cryptocurrencies and financial crime, please contact the FFE Admin.

Investment Due Diligence: Leave No Stone Unturned

Due diligence - a term bandied about readily with much confidence across many different sectors - broadly accepted as a process that underpins a thorough and confident appraisal of a specific business proposition, perhaps a significant merger, acquisition or other investment. At its most effective, due diligence arms a business with the facts it needs to make confident, astute decisions. At its worst, poor due diligence muddies already murky waters and potentially guides businesses down the wrong path.

To avoid the latter outcome, it’s best to avoid an off the shelf, one-size-fits-all process and instead adopt a bespoke approach that accounts for all inherent risks associated with a particular proposition.

Venture capital (VC) investment in FinTech - a booming industry - is a case in point. VCs have to understand complex business models and cutting-edge technology to pinpoint viable investment opportunities. Armed with millions, or indeed billions - $1.8billion was raised by UK FinTechs in 2017 - and facing fierce competition from other VCs, the panoply of risks presented by startup FinTechs could appear daunting.

VCs will often feel most comfortable assessing the viability of the business model, legal and financial aspects and will engage experts to evaluate the technology. That makes perfect sense. The success of a FinTech largely hinges on a successful combination of those areas and, more often than not, those are the risks most familiar to VCs. However, other stones sometimes remain unturned..

People risk is often overlooked or considered addressed through a simple criminal background check. With the wealth of information sources now available it’s perhaps remiss not to take a closer look at those who you’re investing in. Start-up scams are not uncommon in Silicon Valley; an early 2017 Fortune article explored the sector’s “unethical underside”. Are the founders who they say they are? How accurate are CVs and other stated accomplishments - the CEO of Wkriot pleaded guilty to fraud last month. Have failed attempts to fund other start-ups been disclosed, what about other initiatives that crashed spectacularly? Are other business interests in play that conflict with those of the VC? Many a business leader and politician have fallen foul of skeletons discovered in cupboards they’d long since forgotten about.

How about the culture of the firm? Is there evidence of unethical practices in the founders’ previous businesses? What does social media tell us? The merest hint of unethical behaviour could have a huge impact on culture of the firm, which in turn could lead to corners being cut, regulations not properly adhered to and risk decisions ignored or taken well outside of risk appetite.

Thorough due diligence of a FinTech couldn’t be considered complete without a close look at how its offer might be exposed to financial crime risk. The fledgling nature of the firm will mean a full risk assessment isn’t possible, but early inspection of the proposal will allow for an early judgement to be made on the type of controls and framework needed to deliver a compliant and secure product.

An effective due diligence exercise should alert a VC or other investment firm to concerns in any of these areas. However, if risks go unflagged through neglectful or absent due diligence they hold the potential to manifest further down the line with grave consequences for the VC and other stakeholders.

FINTRAIL would be delighted to discuss structuring a bespoke due diligence process for any aspect of prospective investments. Our team have deep experience in conducting due diligence for global banks, investors and government agencies and have a wealth of cutting edge tools at our disposal.

A Step in the Right Direction Toward Mitigating Cryptocurrency Risks

It’s a truth universally acknowledged that cryptocurrencies have the power to create a more dynamic, mobile and accessible financial ecosystem, and the enormous potential of the underpinning distributed ledger technology (DLT) for application outside the financial sector is nowhere near being realised.

But as with most great strides in innovation, there are concerns and risks to address, understand and mitigate as early as possible. FINTRAIL has a keen interest in this fast-paced arena and is working with the UK FinTech FinCrime Exchange (FFE) to publish a white paper later this month exploring FinTech perspectives on and experiences of cryptocurrencies.

In the meantime, UK MPs are launching an inquiry into cryptocurrencies, including exploring the financial crime risks related to cryptocurrencies.

A government review of the need for cryptocurrency regulation is no surprise. The explosion of growth in the sector continues unabated. The German and French governments  have called for greater regulatory coordination ahead of November’s G20 meeting. And the US Securities and Exchange Commission (SEC) has described cryptocurrency as an “across the border priority.” The UK inquiry also coincides with news that seven of the UK’s largest crypto companies have formed a self-regulatory body, CryptoUK, with the intention of promoting best practice and working with the government and regulators.

The Treasury Committee will no doubt consider the late-2017 revision of the EU 4th Anti-Money Laundering Directive (4AMLD), known as 5AMLD that delivers a definition of “virtual currencies,” which include cryptocurrencies, for all member states to adopt in AML legislation.[1]

In addition to the definition, the 5AMLD aims to mitigate risks associated with the use of virtual currencies for terrorist financing. To do so, the 5AMLD extended the scope of “obliged entities”, which previously included financial institutions, accountants, lawyers, estate agents etc., to include cryptocurrencies and other related services such as exchanges and custodial wallet providers. This is significant as it acknowledges that cryptocurrencies and their supporting services carry the risks of money laundering and terrorist financing and that KYC policies, EDD controls and transaction monitoring are required alongside the immediate submission of suspicious activity reports to law enforcement.

While adoption of the new rules into national legislation will take time the principles of the 5AMLD and the obvious appetite from EU member states, the US and the cryptocurrency sector itself to bring about a more coordinated regulatory position, will inevitably play an important role in the deliberations of the Treasury Committee.

Regardless of the outcome of the inquiry, government scrutiny of cryptocurrency at a time when uncertainty and volatility pervade the sector is an encouraging development.

As to the 5MLD, further work is needed to ensure legislation keeps up with the high-tempo cryptocurrency risk landscape; however, for the time being, EU acknowledgement that cryptocurrency carries financial crime risk is a much-needed starting block.

[1] Virtual currency is not synonymous with cryptocurrency. Virtual currencies are tradable digital representations of value that are not issued by any government and don't have status as legal tender. Virtual currencies can have a central administrator (as in the case of services like WebMoney, or game-based currencies like World of Warcraft Gold); or they can be decentralised cryptocurrencies, which use cryptography to validate and confirm transactions.

Unravelling the Complexity of Multi-Jurisdictional KYC

Scaling up is a natural part of any FinTech’s journey. This typically involves the exciting opportunity of offering your product or services in new jurisdictions overseas. However, this growth comes with significant regulatory and practical know your customer (‘KYC’) complexity that may expose you to regulatory risk.

Here are some factors to consider when adjusting your onboarding policies and procedures to support customers from new jurisdictions:

Onboarding Portal

You may think setting up in a new country just means copying and pasting your current onboarding portal into another language. Unfortunately, it’s not that simple. Some countries may have different legal entity types or have entity types that do not translate directly. There are also different types of identification numbers in some countries that are given to sole traders and businesses, so make sure to request the correct number. Be careful to ensure your initial KYC questions are clear in all languages on your websites and apps to prevent customer confusion.

Identification

UK Joint Money Laundering Steering Group (‘JMLSG’)  guidance recommends asking for an individual’s name, date of birth and address. But be aware, some countries require more information! In half of the countries we’ve looked at, national identification numbers, like social security numbers, were required. Place of birth and nationality were other common identification asks in other countries. This could require several operational changes, from rewriting some of your procedures, to redoing parts on your onboarding portal.

Verification of Companies

In the UK, many FinTechs will verify the identities of legal entities against Companies House. However, there is no registry for sole traders. In other countries, it is important to check if there is a register for sole traders that should be used for verifying identities as part of KYC, as around two-thirds of countries we’ve looked at had some searchable registry of sole traders. Furthermore, other countries’ corporate registries may not be as easy to navigate as Companies House--requiring you to purchase certain documents or existing as one of multiple company registries. Third party providers should be checked to ensure they are accessing data directly from your jurisdictions’ registries. Understanding verification options for companies and sole traders is important for simplifying your operations.

Documents

In the UK, a primary government-issued photo ID includes a passport, identity card, driving license, biometric residence permit or firearms license. However, in several countries, a drivers licence is not actually considered a primary form of photo ID for compliance purposes. For secondary documentation, while a document from a bank or utility provider may be acceptable in the UK, this is not always the case in other jurisdictions.

Beneficial Ownership

While the 4th MLD made it a requirement for countries to have a publicly-accessible beneficial ownership registry, this is still slowly being implemented in some countries. Of the EU/EEA countries we’ve checked, a UBO register was only available a little more than half of the time. Many countries outside of the EU have shown very little progress on the issue of a publicly-accessible registry of beneficial owners. Not being able to refer to a public registry of beneficial owners may add unforeseen operational costs and considerations that should be taken into account to ensure a smooth rollout.

Directors

JMLSG clearly outlines requirements for identifying a legal entity’s directors and senior management when commencing a business relationship. However, the vast majority of countries we’ve checked do not have explicit policies around the identification of directors. Some may include directors in their definition of beneficial owners, however. This ambiguity could lead you to having to rethink your AML/CTF standard operating procedure on who to identify.

Certification

When information is not easily available to verify through eKYC or checks against a registry, you may need to request certified documentation. Be sure to know the professional bodies of accountants and solicitors in each jurisdiction you operate in order to check the status of whomever has certified your customer’s documents. This will help you avoid any operational hiccups down the line.

Expanding your business into new countries or regions is really exciting, but is not a simple or risk-free process. The amount of nuance and complexity involved in each jurisdiction highlights the need for assessing the financial crime and compliance risks posed in each jurisdiction where you plan to operate. Not only is it important to check for regulatory differences that may create operational challenges in different countries, but also to check areas for higher corruption, identity fraud, money laundering and terrorist financing risks in order to determine whether you need to rethink any parts of your KYC policy.

If you ever have any questions on or need any assistance with managing the financial crime regulatory landscape of a new country or jurisdiction, don’t hesitate to get in touch for more information.

Managing a Financial Crime or Regulatory Crisis

Dealing with a financial crime crisis - whether that be a backlog of suspicious reporting that has built up, facing de-risking by a partner or finding out that a sanctions process has been working ineffectively - can be an especially stressful time for clients, particularly if the issues could lead to regulatory intervention, potential losses or the restriction of banking or payments facilities.

This is not to mention the obvious and negative impacts that such a crisis can have on customer trust and the potential reputational impact; in many cases, it can be a matter of survival for the business and brand, where trust is hard won but so easily lost.

So, we wanted to share some insight on how our team approaches these tasks to help readers be better prepared and have a head-start if you find yourself in the position of crisis managing a response to financial crime issues.

• Understand the nature of the problem. This sounds like an obvious place to start but it is absolutely critical to everything that follows. If you do not genuinely understand the root cause of the issue your are facing, it makes it very difficult to put in place a response that is effective and proportionate. So for example, if you are dealing with a significant up-tick in fraud or failings in AML or sanctions controls, you need to efficiently and effectively understand the nature of the problem so you can identify the core contributing factors and develop a proportionate response.

• Develop a considered plan of action. Once you have identified the root cause/s of an issue, you need to ensure that you develop a response plan that is action focused and targeted on addressing those specific items as well as factoring in any linked or dependency tasks. For example, it is pointless implementing a new tool or process unless you train those involved in using the tool, otherwise you may just make things worse by increasing operational risk. It is worth bearing in mind that you must be able to demonstrate to your stakeholders that tangible action has been undertaken.  

• Mobilise effectively. This covers not only how you engage the services of and mobilise external parties but also those internal stakeholders or your support network. This is a careful balancing-act against the needs of normal daily business. Depending on the nature of the issue, segregating resources to focus on the crisis can be most effective. Our view of mobilisation is making sure all those involved very clearly understand the issues at hand and are aligned to the common goal of solving the problem, and that those involved have the commensurate level of accountability and authorisation from senior management. This is no time for egoes or political wranglings.

• Ensure transparency. We often get asked ‘what should we say to our bank partner’ or similar. Our advice is always the same and that is you should be transparent. In a crisis scenario, you are aiming to maintain the trust you have built with all your stakeholders and transparency and openness are key values underpinning trust. We can confidently tell you from experience that one of the fastest ways to make a difficult situation even worse is by developing an opaque strategy with your partners - when they find out, trust goes out of the window, making the situation far worse. Instead, communicating the issue, along with regular situation reports and plans for resolution will really help to continue the trust you’ve worked so hard to earn.

• Accurate and effective communication. This needs to focus on the communication intra-team  but also the flow of information to wider internal and external stakeholders. In our view there is a big difference between communicating and communicating effectively. We define effective communication as ensuring the content is received, understood and a behaviour influenced, i.e. action is taken. Accuracy in communication and information is important in a crisis scenario and at times is an area that can suffer from the impact of stress. There are times when a 70% solution on time is going to be better than 90% that is late but accuracy becomes really important when you start to communicate with stakeholders, especially those externally. Accurate and simple communication (underpinned by high quality and accurate information) creates a sense of confidence that the situation is in-hand and under control.

• Continuous Evaluation. Once you have expended effort developing a response to the issue or crisis and have started to execute, it is vital to constantly evaluate progress and impact. Has anything changed? If it has, what are you going to do about it, how and when? The re-evaluation should be ongoing but it is also a critical process once you get to a point you have achieved your objectives and exited the crisis management situation. A wash-up and/or de-brief is a vital activity as it captures lessons learned and facilitates organisational learning.

The FINTRAIL team has developed deep expertise supporting international banks, FinTech, payments and regulated sectors in response to financial crime or regulatory crisis scenarios, drawing on our capabilities across financial intelligence & investigations, compliance advisory, technology, legal and communications. Our multidisciplinary response team can mobilise rapidly in support of a client crisis, providing executive level guidance and peace-of-mind while also delivering operational impact, all backed up by a support network and follow-on technical capacity as required.

If you would like to discuss managing a crisis further, learn more about how FINTRAIL can help your organisation or to discuss any other financial crime topic feel free to get in touch with the team.

Tax Fraud And FinTech - What You Need To Know

FinTechs have been ahead of the curve in understanding certain criminal typologies thanks to the holistic and data centric approach they often take to tackling financial crime. However, there has been little focus on tax fraud as a criminal enterprise and how that may effect the FinTech community.

With the recent release of the Paradise Papers and Panama Papers, tax evasion and tax avoidance are back under public debate as governments and individuals ponder how best to ensure that everyone pays the taxes they owe. The data leaked by the Paradise and Panama Papers put into the spotlight the blurred lines between tax avoidance and tax evasion, which are often facilitated using the same complex mechanisms and can confuse our understanding of what is acceptable tax reduction and what is not. This has put international governments under pressure to address the growing consensus that tax avoidance and the exploitation of tax loopholes has gone too far.

For the FinTech sector, this means that in the near-to-medium future, our understanding of tax fraud and tax evasion could fundamentally shift. To stay ahead of the curve, we therefore have to ask ourselves: how does tax fraud affect FinTechs and what are our responsibilities in combating it?

One of the major confusions around tax fraud, tax evasion and tax avoidance is the definitions used. So, here are some definitions to help us clarify the issue at hand:

Tax Avoidance: tax avoidance is reducing one’s tax burden within the letter of the law (but often not within the spirit of the law). Examples include tax deductions or establishing an offshore company or trust in a tax haven to reduce tax liability.

Tax Fraud: tax fraud, according to HMRC, is illegally avoiding paying taxes. It is made up of three components—tax evasion, criminal attacks and participation in the hidden economy.

Tax Evasion: tax evasion is one type of tax fraud concerning individuals or businesses who intentionally misreport information to reduce their tax liabilities.

In terms of regulation, tax fraud has never received the attention given to sexier crimes such as money laundering or terrorist financing. However, this is beginning to change. At the end of September 2017, the Criminal Finances Act came into force in the UK, which made companies more liable for failing to prevent tax evasion, including facilitating the evasion of UK taxes by international entities and facilitating the evasion of foreign taxes by UK entities. The best way for FinTech companies to avoid liability is through robust risk management and a strong compliance programme.

Not only are FinTechs more liable for tax fraud than before, but the problem of tax fraud is growing. The current gap between taxes owed and taxes due is £34 billion, half of which is due to tax fraud.

There are several ways that tax fraud can touch the FinTech sector, including:

• Using FinTech products to collect bogus tax refunds or to facilitate tax fraud.

• Using FinTech products to process funds derived from the hidden economy.

• Using FinTech products to mask the origin of funds

So what can FinTechs do to protect themselves and reduce the negative social impact of tax fraud? Here are our recommendations:

1.     File SARs in a timely fashion. A quarter of all HMRC tax investigations are stimulated by SARs, so filing these properly is critical in the fight against tax fraud. You can also contact HMRC direct via the link here.

2.     Ensure robust onboarding and KYC policies to a) decrease the anonymity of the product and b) avoid liability in tax fraud cases.

3.     Impose reasonable transaction limits and limits on the number of accounts held in order to decrease the attractiveness of the product to tax fraudsters. Keep these limits under constant review based on changing typologies.

4.     Monitor relationships in an ongoing fashion and watch out for red flags such as

• Suspiciously large transactions sent for ‘expenses’

• Spending that does not reflect expected income

• Unexplained payments into customer accounts from sources linked to work or employment

• Multiple tax refunds coming into one account

• Multiple transfers to financial institutions in high-risk tax jurisdictions

If you would like to discuss tax fraud further and learn about how FINTRAIL can help identify and combat tax fraud typologies, please do not hesitate to contact us.

Casting A Light On Complex Networks To Disrupt Financial Crime

The global, connected web of financial criminality is difficult to unpick.  However, investigations over the past few years have shed light on the few, yet critically important bad apples amongst the network of financial institutions that enable this web to go un-checked. While many of these simply may lack the adequate controls to tackle money laundering or terrorist financing, other financial institutions have taken a much more direct role in criminal activity. The use of financial intelligence and investigation techniques present an opportunity for the regulated sectors to disrupt criminality at scale and efficiently. As such we are excited to announce the appointment of Nick Herrod as head of our Financial Intelligence and Investigations practice, who will help us drive solutions for clients that continue to deliver impact.

During a recent event hosted by Thomson Reuters, OCCRP Executive Director Paul Radu was asked how the international community should tackle the global and seemingly untouchable scourge of financial crime. His response was telling — go after the financial institutions, big or small, that facilitate the criminal activity. This is an interesting strategy to take, and targeting the institutions facilitating criminal activity presents an opportunity to disrupt criminality on a wholesale basis. The team at FINTRAIL decided to examine this subject in more detail, yielding some interesting results. Through our research we have found that one of the most significant red flags when it comes to these types of institutions (and counterparty risk) is the influence of high risk individuals/PEPs within the ownership structure. To better understand this, two public case studies are detailed below—the Global Laundromat and the BGFIBank Democratic Republic of Congo (DRC)/Hezbollah connection. It is evident that the links between financial institutions and owners more susceptible to criminal motivations can affect the robustness of an institution’s compliance regime and undermine industry efforts to counter financial crime. Taking an intelligence-led approach and exploiting a range of data sources allows us to highlight additional red flags and begin targeting the key nodes and facilitators of this volume criminal activity.

The Global (Russian) Laundromat: This laundromat, exposed by the OCCRP[1] three years ago, funnelled more than $20.8 billion from Russia into Europe. OCCRP reports show that it involved approximately 500 people, from oligarchs to FSB-affiliated individuals.

Igor Putin, cousin to current Russian President Vladimir Putin was a manager and executive board member for the Russian Land Bank (RZB), an institution whose accounts reportedly processed more than $9.7 billion, or nearly half of the total funds involved in the laundromat case. Funds were sent from RZB to Moldindconbank in Moldova, where they were then sent to Trasta Komercbanka in Latvia and from there to the rest of Europe. The OCCRP adds that Igor Putin was brought into RZB initially by Alexander Grigoriev, who allegedly has ties to the FSB and whom the Guardian identified as one of the main ringleaders of the Laundromat. Grigoriev headed the RZB during the laundromat’s operation until the time of his arrest. Putin and Grigoriev were also connected through other companies where Putin was a board member and Grigoriev a shareholder. Putin left the RZB board in 2014 contending he left after becoming aware of ‘the real situation.’[2]

BGFIBank DRC and Hezbollah: According to a recent Sentry report[3], BGFIBank DRC, run by the brother and sister of the president of the DRC, Joseph Kabila, reportedly allowed transactions from companies connected to a known financial contributor to Hezbollah: Kasim Tajideen. Tajideen, and his brothers Ali and Husayn, were subject to US sanctions, as were entities under their control. Despite this, and despite warnings from BGFIBank DRC employees, the financial ties between the bank and the sanctioned parties reportedly remained intact. Subsidiaries of Ovlas Trading, owned by Kassim Tajideen, would make transfers through BGFIBank DRC to subsidiaries of Congo Futur, managed by Kassim’s non-sanctioned brother, Ahmed Tajideen. Both Ovlas Trading and Congo Futur are under US sanctions, though Ahmed is not. Despite employee awareness of the risks involved, transactions from the sanctioned entities were allowed to continue, and BGFIBank DRC even went as far as to request the US Treasury unblock a transaction involving one of Tajideen’s companies and another bank. BGFIBank DRC had previously been alleged of diverting millions of dollars in public funds, further calling in to question the AML/CTF regime of BGFIBank DRC and the role the bank’s leadership played in the activity.

These two sample cases demonstrate how financial institution ownership from individuals more susceptible to criminal motivations can encourage complicity or active participation in criminal networks facilitating financial crime. In both, banks with ties to PEPs and high-risk individuals allowed significant cash flows to be laundered and used for criminal purposes. Though only two cases are discussed here, the findings still show how the use of financial crime intelligence and investigations can be utilised to go beyond the basic information generated by many static compliance controls, help better the understanding of evolving typologies and surface new opportunities to counter the capricious threat of financial crime.

At FINTRAIL we have seen an unprecedented level of interest in the financial intelligence and investigation capabilities we offer to our financial service clients, from start-ups to established firms. As such, Nick’s arrival to lead FINTRAIL’s Financial Intelligence and Investigations practice could not be more timely. Nick brings an exceptional pedigree to the experienced team at FINTRAIL after completing a range of public and private sector roles, culminating in his position as the Head of Global Intelligence Team within HSBC’s Financial Intelligence Unit where he was responsible for overseeing a significant portfolio of investigations that focused predominately on large, multi-jurisdictional networks facilitating illicit financial activity. Nick will continue to build on FINTRAIL’s strategy in this area, understanding the needs of our clients of all sizes and ensuring that we are delivering a suite of capabilities and solutions to help our clients mitigate the negative impacts of financial crime.

[1] https://www.occrp.org/en/laundromat/the-russian-laundromat-exposed/

[2] https://www.occrp.org/en/laundromat/the-russian-banks-and-putins-cousin/

[3] https://cdn.thesentry.org/wp-content/uploads/2016/09/TerroristsTreasury_TheSentry_October2017_final.pdf

Loss Of Freedom - Human Trafficking And Its Impact On FinTechs

Human trafficking has sadly become a widespread and global issue; from the woman forced into prostitution and kept locked up in a house, to the man working on a construction site, stripped of his documents and any salary taken from him. Every 30 seconds, the criminal industry of human trafficking makes more than $30,000; bringing in approximately $32 billion a year.

In the world of financial crime, human trafficking is a predicate offence (the criminal activity and the proceeds money laundering), the revenues of which may touch financial services as the profits are laundered. Financial services may also be used to facilitate these offences, providing the ability to pay subsistence for accommodation, book flights for a trafficked person and other activities traffickers rely on. As the awareness of human trafficking increases and pressure is applied to the criminals that make huge sums from the exploitation of others, the criminals may be forced to look at alternative financial arrangements or exploit new technologies to their advantage.

There are numerous behavioural patterns characterising the organised crime groups involved. Having analysed the most often occurring subtleties, it is evident that tools such as the Internet and other communication devices are utilised expansively. The most intimidating organised crime groups are mainly those capable of governing the entire course of trafficking, from the recruitment of victims to the reinvestment of the criminal proceeds.

Through our industry engagement, FINTRAIL has seen an increase in FinTechs’ awareness of the fight against human trafficking and subsequently, human trafficking was the subject of the October 2017 FinTech Financial Crime Exchange (FFE). Members presented case studies and industry experts provided insights on the changing nature of the threat and industry initiatives to tackle the problem. Many of the FFE members were able to give examples of cases where they had detected indicators of financial crime involving human trafficking or exploitation, demonstrating this is not only an issue that impacts large financial institutions but may also directly impact the FinTech industry. In fact, some of the features common to modern FinTech such as non-face-to-face onboarding and ease of account management/overview may make it potentially attractive to those involved in trafficking and exploitation. As a result, FinTechs are conducting enhanced Know Your Customer (KYC) checks and are scrutinizing onboarding documentation in an attempt to combat human trafficking.

The FFE session identified specific typologies that may be relevant in a FinTech environment and what mitigations and actions industry may be able to apply. Some basic example indicators or red flags are detailed below:

- Customers taking selfies or completing onboarding checks, appear to be under control of someone else. This may appear as someone in close proximity as the images are being taken or controlling what is done or said.

- A customer may not be in possession of their own legal documents and may add unreasonable delay while they get them from someone else.

- Recurring payments being made from one account to multiple accounts for wages at unreasonably low amounts.

- Multiple point-of-sale transactions at car rental agencies, airline ticket purchases and train ticket purchases with no subsequent spend in that destination.

- High expenditure payments at fast food outlets, supermarket outlets, clothing stores, drug stores etc.

The FFE and its members will continue to focus on human trafficking and its negative impact on society and implications for financial services. In addition, FINTRAIL will track the evolution of financial crime typologies associated with human trafficking in order to identify any shift by those criminals to target financial services as a tool to further their illicit and damaging behaviours.

If you would like to discuss human trafficking further, learn more about the FFE and how FINTRAIL can help your organisation identify and combat human trafficking get in touch.

Laundromats, FinTech and Financial crime – Know Your Customers!

On 17 October 2017 Thomson Reuters held the first in a series of events on Financial Crime. This event explored the recent investigations conducted by the team at the Organised Crime & Corruption Reporting Project (OCCRP) into the global laundromats. The brave and fascinating work by the team at OCCRP exposed the complex and globally connected money laundering networks that via a web of hundreds of companies and associated financial institutions have laundered over $20 billion.

Although the laundromats are money laundering on a huge and global scale, and it may seem like a problem only big financial institutions may have to deal with, OCCRP Executive Director Paul Radu stated that every laundromat case he’s worked on has involved myriad UK companies. This means the issue is right here on our UK doorstep.

Although money laundering through complex laundromats can seem like a victimless crime, they are in fact part of networks taking huge sums via corruption of national pensions, financing groups involved in serious organised crime like human trafficking, funding terrorist organisations, and destroying lives.

So what does this mean for the FinTech community? There is real excitement about the commercial opportunities for challengers in the business and commercial customer segments and this is very much true, but this segment also brings with it a very different set of financial crime risks that really need to be understood and factored in to an effective and proportionate financial crime risk management framework. When you consider the factors that may impact on financial crime risk, the customer type (i.e. complex corporate ownerships), geographies (i.e dealing with suppliers/customers across a range of geographies), product type (i.e. high value transactions or products) and channel (i.e. often in a FinTech this is non face-to-face), can all have a material impact on the potential risks a FinTech targeting this segment may face.

So what can FinTechs targeting these new and exciting customer segments do to assist in the fight against these laundromats, comply with applicable regulations and do their bit to reduce money laundering? We have provided a few helpful hints below:

- Ensure you have a financial crime risk assessment that accurately reflects your unique circumstances. All companies and products will have their own unique factors to be considered and may impact on your risk profile. In many cases, it is not only a regulatory requirement to have a risk assessment but it is also a hugely powerful tool to help you define and navigate your compliance and risk frameworks.

- Understand your customers. Just because you are targeting customers who may be registered in the UK or other equally regulated markets, it does not mean they may not get involved in illicit activity. This goes beyond basic identification of your customers to ensure you understand the nature of your customer’s business and how they intend to use your product/s. Without that knowledge, it becomes very difficult to monitor effectively and can/will cause negative customer experience in the long-term.

- Understand the typologies and red flags that you and your team should be looking for. By staying current on evolving typologies allows you to keep pace or even out-pace the criminals and reduces the long term negative impacts criminals may have on your business.

Paul Radu said at the event "it takes a network to fight a network" and although he was referring to an international network of the likes of law enforcement and financial institutions working together to tackle it, the growth of alternative financial services further diversifies the pool. The FinTech FinCrime Exchange (FFE) is one such network, where FinTechs come together to effectively collaborate and combat financial crime such as money laundering.

If you would like to discuss money laundering, or any of the topics raised in this post please don’t hesitate to contact the team at FINTRAIL.

Re-Establishing Trust - High Risk Industries and Banking

For the last nine months FINTRAIL has been working with the awesome team at the Antwerp World Diamond Centre (AWDC) who represent 1700 Antwerp based diamond traders, to address some of the challenges their members and industry as a whole are having with access to viable bank accounts. The issues they've been having are due to the perceived high financial crime risk within the diamond industry and the associated bank de-risking phenomenon.

The short video below highlights one of the exciting developments coming from our work with AWDC and is a great example of where Financial Technology (FinTech) and Regulatory Technology (RegTech) can combine to offer solutions to some really complex challenges for traditional and non-traditional financial services. Our focus has been on how we can re-affirm trust across all stakeholders and ensure there is a sustainable and commercially viable solution for all parties.

Money Laundering and FinTech: Risks and Realities – FFE White Paper

FINTRAIL is very excited to announce the release of a new white paper by the FinTech Financial Crime Exchange (FFE), a FinTech industry forum we co-founded in January with the Centre for Financial Crime and Security Studies (CFCS) at RUSI, a London-based defence and security think tank.

All too often, discussions about FinTech and money laundering risk are greatly oversimplified. Much of the discussion starts from a blanket assumption that new technologies will inevitably make life easier for money launderers, and that FinTech companies are therefore uniformly “high risk.”

One downside to this perception is that FinTechs have been subject to “derisking” – or losing access to vital banking services because the risks associated with FinTechs are perceived as very high.

As this new white paper shows, labelling the entire FinTech sector as “high risk” for money laundering purposes is unhelpful and oversimplifies the true picture.

After all, the FinTech sector is an incredibly diverse one. It features prepaid cards, peer-to-peer lenders, service aggregators, payment service providers, and a host of other products and services with very different features. The way money laundering risks appear from one FinTech to another is as diverse as the sector itself – and the picture is not always one of just “high risks.”

There’s certainly little reason to think that all FinTechs are necessarily higher risk than banks or other types of financial institutions when it comes to money laundering.

For example, while some FinTech products can be used for “money mule” or “smurfing” activity, they’re usually not very useful for high-end money laundering, or the laundering of the proceeds of crimes like major tax evasion or international corruption that feature in scandals such as the Panama Papers or the recent Laundromat cases.

It’s important that this nuance is understood, so that FinTechs aren’t all stigmatised as “high risk” where it isn’t warranted.

As the paper points out, because FinTechs often only see a limited piece of a much larger financial puzzle, establishing an intelligence picture of money laundering activity across the sector can be a huge challenge. Coming to a true understanding of the nature of risks across the sector requires further detailed study - and the FFE intends to do just that through its future meetings and research.

In addition to describing this overarching picture, the paper also provides recommendations for various stakeholders.

·      FinTechs should work to clarify the true picture of money laundering risk they face, and demonstrate that they are building resiliency against those risks.

·      Countries’ financial intelligence units and law enforcement agencies should share information with FinTechs on criminal typologies.

·      Regulators should provide detailed guidance that is relevant to sub-sectors of the FinTech community.

·      International organisations like the Financial Action Task Force can help build an understanding of the picture globally. 

To find out more about the FFE, contact rebecca.marriott@fintrail.co.uk 

Machine Learning & Artificial Intelligence - Financial Crime

It seems that everyone is talking about Artificial Intelligence (AI) at the moment: whether it’s Elon Musk and Mark Zuckerberg disagreeing publicly on the doomsday type scenarios that AI might bring [1], or banks predicting AI to be the primary way in which they interact with customers in the future [2], there’s wide-ranging interest in what AI can do for society as a whole, companies and individuals. But, to be clear, and before going further, what exactly is the difference between Machine Learning and AI, or is there indeed a difference?  The clearest explanation we’ve seen goes something like this:

·      Artificial Intelligence – this is the high level concept that machines can do something in a way that we, as humans, would consider “smart”

·      Machine Learning - is a current application of AI based around the idea that we should really just be able to give machines access to data and let them learn for themselves [3]. (Thanks Forbes!)

Similarly, in the financial crime space, numerous articles exist about how AI and Machine Learning can help to combat illegal activity in banking and beyond [4].

At FINTRAIL, we believe that AI and Machine Learning have huge potential to deliver great results in the financial crime space.  Whether it’s AI helping investigators to detect previously unknown connections between entities and typologies, or Machine Learning helping refine transaction-monitoring rules by different customer sets and behaviour, the benefits for companies and their customers are huge. Imagine for a moment that your bank could tell whether purchases made at a high-end online retailer at midnight just after you received a bonus cheque were genuine or fraudulent, based on your previous behaviour in a similar scenario.  Great, right?  No annoying text messages, or blocked transactions if it were genuine, and peace of mind that that kind of transaction would be blocked if it were fraudulent, and you didn’t actually have a compulsive online shopping habit (ahem).

But, as with anything new and relatively untested, there are pitfalls.  One of the key ones is making sure that any Machine Learning models start off with relevant data, such that they can begin the learning process appropriately, and you don’t program in algorithmic bias.  Typically – and let’s take the case of a Machine Learning engine for transaction monitoring -  this is relatively easy to build: you have a known scenario, which is fed into the engine for it to learn and refine over time as the transactional data is processed and fed into it.  However, this can be tricky in financial crime situations, as ideally you don’t want any money laundering or bribery (for example) to go through your system before you work out what the scenario or relevant data for the Machine Learning engine is. 

So, how do we address this?  Well, something we are passionate about at FINTRAIL is making sure that firms have a thorough risk assessment; truly understanding your business model and the ways in which criminals might seek to exploit it will help to build the best scenarios for any future financial crime Machine Learning engine. These can then be used to create the baseline relevant data that goes into the Machine Learning engine, such that it can start to learn behaviours. Examples here might include understanding your typical customer profile, such that you can build a Machine Learning model to automatically categorise them by risk profile, or Machine Learning models that take into account transactional behaviour and a range identifying particulars to reduce sanction re-screening hits.

Another tactic we’ve seen is to combine more traditional models with Machine Learning.  Again, in the transaction monitoring space, combining a rules-based approach with Machine Learning is a great way of teaching the engine to learn, and giving good baseline scenarios that it can work from.

So, all in all, we’re on Mark Zuckerberg’s side of this particular argument – we think AI has great potential, but that it, and Machine Learning in particular, needs strong data to support it, and as with humans, the right conditions to succeed.

[1] http://fortune.com/2017/07/26/mark-zuckerberg-argues-against-elon-musks-view-of-artificial-intelligence-again/

[2] http://uk.reuters.com/article/us-banks-ai-accenture-idUKKBN16Z1AH

[3] https://www.forbes.com/sites/bernardmarr/2016/12/06/what-is-the-difference-between-artificial-intelligence-and-machine-learning/#6ac626162742

[4] https://www.finextra.com/blogposting/14225/artificial-intelligence-the-next-step-in-financial-crime-compliance-evolution

Image Courtesy: Saad Faruque, Flickr (Creative Commons)