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6 payment risks to assess for your AML strategies

The shadow of the black economy will always find new places to hide. Learn 6 risks that the FCA recommends payments institutions should avoid when implementing AML.

Elise Thrale
August 3, 2023

The payments sector is an integral part of the financial landscape, playing an important role in keeping global economies in motion by making financial services available to citizens. Payment service providers, issuers and acquirers enable the execution of transactions, the withdrawal of cash money remittance, and more services, that keep economies and lives moving.  

The sector has seen a seismic shift to digitisation since the COVID-19 pandemic, and continues to be in constant flux and transformation as the world increasingly becomes cashless. Despite the decline of untraceable cash transactions, the shadow of the black economy will always find new places to hide.  

According to PwC, cashless payments globally are expected to increase by a huge 80% from 2020 to 2025, from about 1 trillion transactions to almost 1.9 trillion, and to almost triple by 2030. This phenomenal growth, coupled with an increased demand from merchants and consumers to move digital money within a country and across borders, increases the risk of sanctions evasion, money laundering, terrorist financing, and of consumers unknowingly using their accounts for money mule activities.  

There has been recent criticism from the UK regulator on the ‘unacceptable’ financial crime risk posed by the payments sector, due to insufficiently robust controls. The Financial Conduct Authority (FCA) and UK Financial Intelligence Unit (UKFIU) consequently hosted a webinar on financial crime in the payments and e-money sector.  

The regulator has taken concern with weaknesses in governance, oversight and risk procedures that do not match the complexity of the sector. However, this is something that can be rectified by watching out for the following financial crime risks that were laid out by the FCA:  

1. Governance and oversight

Payments institutions must be careful to exercise effective oversight. This becomes more likely in situations where transaction monitoring is sourced to third parties and not done effectively.

2. Customer risk assessment

The FCA is seeing recurring instances in which payments institutions have a poor understanding of customers and their risk levels throughout the customer lifecycle.  

3. Customer due diligence (CDD) and enhanced due diligence (EDD)

Lack of effective CDD and EDD strategies can often result in payments institutions not fully understanding risk profiles of their customers, diminishing quality of ongoing monitoring. This can result in too heavy a reliance on transaction monitoring to detect money laundering and terrorist financing.  

4. Transaction monitoring

A failure to operate an effective transaction monitoring solution with the appropriate rules, parameters and typologies can lead to too many false positives and decrease an institution’s ability to detect suspicious activity.  

5. Sanctions

A current key focus for payments institutions, a frequent over reliance on third party providers for sanction screening makes it difficult to generate lists with the right names, and therefore money laundering detection becomes less accurate.  

6. Fraud

Fraud is a huge concern for payments institutions, to protect customers’ funds and ensure they aren’t being used as money mules, to facilitate the movement of illicit funds. Using anti-money laundering strategies to mitigate the risk of fraud at onboarding stage, by checking the customer against databases, can reduce the risk.  

By considering the above, payments institutions can look to significantly reduce risk. With such rising digitalisation of payments, and an increasing amount of payments to process every day, it is clear why institutions are looking to differentiate themselves from the competition by releasing new products, but preventing financial crime needs to remain top of mind.

While innovation helps improve competitiveness in the market, institutions must understand financial crime risks when launching new products or services, with the right controls in place to identify, access and manage risk.  

Innovative technologies such as AI are transforming financial crime compliance, with enhanced risk assessment, improved monitoring, streamlined due diligence and increased ability to process and analyse data. But it is important that innovative AI financial crime prevention strategies work effectively at launch, on day one.  

Learn more about how to implement the right AI anti-money laundering strategies here.

Photo by Steve Johnson on Unsplash

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