Fintechs Take Notice: Regulators Are Watching

September 8, 2016

Canadian fintech companies should take note: expect closer scrutiny by FINTRAC, the country’s anti-money laundering watchdog, to ensure that your new and emerging technologies aren’t vulnerable to financial crime. The regulator is concerned that some fintechs are adopting new business models that may pose a risk to Canada’s current regulatory environment.

To stay on top of these concerns, FINTRAC has been researching these new and emerging technologies and monitoring their advancement to be aware of how vulnerable they may be to criminal exploitation.

According to organization’s director, while supporting and fostering the fintech industry is important, one of FINTRAC’s most important goals is to ensure the financial system is safeguarded against crime that could corrupt or affect its stability.

Fintech is a segment of business that centers on using software and other technology to provide financial services such as money transfers, loans, fundraising, asset management and mobile payments.

Many fintech companies are startups setting out to shake up existing financial systems and carve out new avenues that could lead to big profits. With global investments in fintech tripling from $4.05 billion to $12.2 billion between 2012 and 2014 alone, there is good reason for fintech companies to take note of the increasing attention from regulatory authorities.

The research FINTRAC is conducting will almost certainly lead to the introduction of new regulations that will apply to fintech companies. Changes have already been seen in recent years, including in 2014 when the definition of a money services business (MSB) was expanded to include any company that works with virtual currencies.

The Finance Department is also reportedly working on regulations that will outline exactly which activities related to virtual currencies will be included in the regulations. Under the 2014 rule, fintech startups that exchange currencies or send money transfers must now register with FINTRAC as an MSB. Failure to comply with this requirement can lead to criminal or administrative penalties that could seriously impact a business.

Fintech companies will be wise to comply with regulations as they are already trying to gain a foothold in the industry while facing another significant challenge: many banks are derisking by ending relations with fintechs as well as MSBs and charities.

According to a recent study by the Financial Conduct Authority, these are the three groups whose bank accounts are closed most frequently because they are viewed as a high risk for money laundering and terrorist financing.

Banks have also noted that despite the fact that many fintechs pay their insiders large sums of money on a monthly basis, they often spend very little on maintaining regulatory compliance, leaving the banks to shoulder the burden—and the risk.

To build strong relationships with their banking partners, fintech businesses will need to clearly demonstrate that they are taking steps to meet anti-money laundering (AML) compliance requirements and to protect themselves and their partners from fines and penalties for infractions.

To demonstrate their commitment to fulfilling their end of AML compliance regulations, fintechs should adopt an effective AML compliance solution, like Alessa. In a single platform, our solution offers transaction monitoring, due diligence, sanctions list screening, and regulatory reporting capabilities to help fintechs and other financial organizations stay on top of their AML compliance challenges. Contact us for more information.

About Andrew Simpson

Andrew Simpson (LinkedIn | Twitter) is Chief Operating Officer at CaseWare RCM and has more than 20 years of experience building businesses in the fields of information systems audit and security, data analytics, Anti-Money Laundering and forensics. He is a regular contributor to conferences and a recognized thought leader in financial crime management.

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