By 
As war continues to rage in Ukraine and inflation impacts the economy, fintechs and digital banks expect the subsequent global economic downturn to drive a rise in financial crime – and they’re staffing up their financial crime prevention teams.
A new survey by ComplyAdvantage, a leading financial crime and fraud risk detection firm, shows 100% of fintechs are re-evaluating their approach to risk. This will likely lead to “de-risking” or restricting client and business relationships to minimize the likelihood of onboarding criminals. While the approach appears effective, it may also make it harder for legitimate consumers and businesses to access financial products like loans.
Proportionate risk management is an essential compliance strategy, but de-risking occurs when firms adopt blanket policies that, in practice, push criminals into less regulated territories. De-risking can also undermine the wider financial system, as it disproportionately impacts groups like humanitarian organisations and charities that rely on financial services to support vulnerable people worldwide. The Financial Action Task Force, the global standard-setter for anti-money laundering regulations, has said de-risking “should never be an excuse for a bank to avoid implementing a risk-based approach.”
In addition to the near-universal plans among fintech compliance professionals to re-evaluate their approach to financial risk, the survey showed that:
– nearly two thirds (65%) expect a rise in financial crime, and 56% are hiring more compliance staff
– the war in Ukraine has transformed the compliance universe, with 59% of fintechs changing their business model.
– 90% of fintechs and digital banks said they’d seen an increase in the use of decentralised finance platforms – such as crowdfunding – to fund extremist political groups.
Vatsa Narasimha, CEO at ComplyAdvantage, said: “Following the pandemic’s peak, 2023 was supposed to be the year that fintechs and digital banks began to hit their stride. Instead, economic headwinds have increased, and financial crime is rising. New risks are emerging from the decentralisation of finance, and fintechs must structure their compliance programs with a more cutting-edge, dynamic, and data-driven strategy to succeed.”
Narasimha continued, “Fintechs must also determine how to scale their compliance programs. Existing compliance models focused on hiring more employees to address the issue will not be enough, and they will not be cost-effective. Unanimous agreement exists that technology, including AI, must be a part of the solution.”
Cyber, fraud, and environmental crime are top concerns
The primary offense fintech compliance teams said is most important when screening transactions is cybercrime, cited by 39% of respondents. Over a third (37%) of respondents chose tax fraud, followed by environmental crime and corruption, both on 27%.
Investment scams and credit/debit card fraud topped fintechs’ list of fraud typologies.
While all are likely fuelled by the economic downturn, investment fraud, in particular, often runs counter-cyclically to the economy. As global markets decline, the temptation to fall for bogus schemes promising “market-beating” returns increases.
Andrew Davies, Global Head of Regulatory Affairs at ComplyAdvantage, said: “We anticipate that in 2023 more firms will become wise to how environmental crime intersects with other types of financial crime. For example, successful investigations into wildlife crimes invariably reveal that those crimes were facilitated by bribery and corruption, fraud, and money laundering. Increasing awareness of this intersectionality will put firms in a better position to understand, prioritise and control against risks associated with environmental crime.”
Russia reshapes the fintech landscape
When asked to name their top geopolitical hotspot of concern, Russia was the overwhelming choice, selected by 47% of fintechs and digital banks.
Over half of fintechs (59%) said the invasion of Ukraine had changed their business model, six percentage points higher than the figure for financial institutions as a whole – 42% implemented asset freezes, and 39% instituted an onboarding freeze in Russia. Just three percent said the war had not impacted their business.
Davies adds, “It’s clear that fintechs have not underestimated how significantly the war in Ukraine impacts their business. But they should always be prepared for further changes to the lists of Russian sanctions designations. Firms must ensure they do not take a minimalistic approach to detecting potential Russian sanctions exposure, especially since western government agencies will increasingly focus on improving private sector implementation and reducing evasion. We anticipate increased enforcement actions in 2023 will drive this message home.”
Extremists being financed through crowdfunding platforms
Attention is also increasingly turning to crowdfunding platforms and how they are being used to finance extremist groups. When asked if they had seen a change in attempts to use decentralised finance platforms to finance extremist political groups over the last 12 months, 90% of fintechs and digital banks said they had seen an increase,
Davies explains: “It’s clear that many crowdfunding platforms have been caught short by the surging demand for their services. Crowdfunding, in conjunction with cryptocurrencies and social media, increases the risks of terrorist financing by allowing bad actors to utilize the reach of crowdfunding platforms and crypto asset technologies to gain support from followers and receive funds. Crowdfunding platforms should ensure they have appropriate anti-fraud and money laundering solutions. fintechs, digital banks, and other providers working with crowdfunding organisations should perform enhanced due diligence before agreeing to a partnership, or they risk being exposed to financial crime risks and the bad publicity that comes with these.”
About the survey
In October 2022, ComplyAdvantage surveyed 800 C-suite and senior compliance decision-makers across the US, Canada, UK, France, Germany, Netherlands, Singapore, Hong Kong, and Australia. One hundred respondents were located in the UK.
All respondents currently work in financial services, with 50+ employees and total assets of over $5 billion.
Those who responded to the in-depth survey are represented by the following sectors: financial institutions (e.g., banks), wealth and investment management, capital markets, money service businesses, crypto exchanges, and insurance.
About ComplyAdvantage
ComplyAdvantage is the financial industry’s leading source of AI-driven financial crime risk data and fraud detection technology. ComplyAdvantage’s mission is to neutralise the risk of money laundering, terrorist financing, corruption, and other financial crime. More than 1000 enterprises in 75 countries rely on ComplyAdvantage to understand the risk of who they’re doing business with through the world’s only global, real-time database of people and companies. The company identifies thousands of risk events daily from millions of structured and unstructured data points.
ComplyAdvantage has four global hubs in New York, London, Singapore, and Cluj-Napoca and is backed by Goldman Sachs, Ontario Teachers, Index Ventures, and Balderton Capital.
Learn more at complyadvantage.com.
Comments