The pandemic boosted opportunities for payment service providers (PSPs), accelerated the adoption of electronic payments, and created long-lasting changes to the way customers and merchants make and accept payments. Moreover, the growth of the payments industry is set to continue strongly over the next five years, driven by worldwide digital transformation.
Yet, as the sector has grown, so too have the risks and regulatory scrutiny that PSPs face. Just like banks and other financial institutions, PSPs in many jurisdictions have a duty to prevent and detect financial crime by complying with the relevant anti-money laundering and counter terrorist financing (AML/CFT) regulations. Money laundering is one of the most common financial crimes PSPs face but others include fraud (which is a predicate offence for money laundering and therefore triggers regulatory obligations in most jurisdictions), sanctions violations, terrorist financing, and other illegal payments.
While facilitating fast, seamless payments is the goal for most PSPs, financial crime risks are increasing for these businesses, so here we will look at why this is so.
Why financial crime risks are increasing for PSPs
1. Transaction volumes are increasing
The amount of money flowing through mobile payment systems has seen explosive growth over the last two years, partly driven by the COVID-19 pandemic. And as the volume of transactions has grown, so too has criminal interest and therefore, also the risk of PSPs being caught up in financial crime.
PSPs offer a relatively new and attractive means of laundering dirty money, even if the fundamental money laundering typologies used are not particularly novel.
For example, a common tactic is to set up a fake business that accepts mobile payments and have fake customers paying for fake goods and services. Mobile money makes it simpler for criminals to do this and lowers the risk of detection.
2. Some PSPs may consider mobile payments to be low risk
High volumes of low value payments, coupled with varying levels of regulation across jurisdictions, may lead to some PSPs believing they are at a lower risk than banks and other financial institutions.
The perception that mobile payments are low risk is especially dangerous where PSPs facilitate cross-border transactions or service jurisdictions that are subject to a high money laundering risk.
This perception is particularly risky for PSPs because criminals will often choose to process high volumes of legitimate transactions to conceal a low volume of illegal transactions.
3. The need for effective AML/CFT controls may be underestimated or overlooked
Newly established PSPs can be less experienced in tackling financial crime. They may also have limited scope to detect or control customer and merchant activities, like the location, frequency and value of transactions. As the number of transactions continues to rise, these limitations make it difficult to conduct customer due diligence and ongoing monitoring effectively..
In some cases, the need for effective AML/CFT controls may be overlooked. For example, rather than embedding controls into all products, services, systems and processes from the outset, some PSPs may only consider them as an afterthought at a later stage. Some may even accept losses arising from financial crime as simply a cost of doing business or adopt a pay-and-chase approach, where financial loss is accepted and attempts are later made to recover the funds.
This oversight can be costly in terms of risk exposure and ultimately reputations. Evidence suggests that while some PSPs are not investing in their financial crime compliance systems sufficiently, criminals are investing in and aggressively applying sophisticated technologies like machine learning to test payment thresholds and location limits.
4. The COVID-19 pandemic has heightened financial crime risks
Finally, while there are hopes that the pandemic is nearing its end, no discussion of financial crime risks would be complete without reference to the impact of COVID-19.
From the fraudsters opening bogus online shops, to the failing businesses willing to engage in unethical financial conduct the risks of PSPs being caught up in financial crime have been sky high at a time of unprecedented operational challenges.
In its report, COVID-19-related Money Laundering and Terrorist Financing Risks, FATF emphasised how changing financial behaviours have made it increasingly difficult to identify anomalies.
Regulatory scrutiny is increasing
It’s important to recognise that, against a backdrop of rising transactions and growing financial crime risks, regulatory scrutiny is also increasing for PSPs. While regulatory frameworks differ across jurisdictions, PSPs can be subject to many of the same regulations as other financial institutions like traditional banks.
If found to be non-compliant, those lacking robust AML policies, systems and processes can ultimately find themselves facing:
- Regulatory action and fines – as well as immediate regulatory pressure and fines, increased regulatory scrutiny may occur going forward
- Financial losses – losses can be to customers, to the PSP itself, and to other associated financial institutions
- Reputational damage – reputational repercussions can be far-reaching and can take the form of negative media coverage, loss of investment, loss of customers, and regulatory pressure
All these factors make it more important than ever for PSPs to mitigate financial crime risks.
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