AML Compliance for Fintech: Risks, Rules & Best Practices

Payment and money transfer related fintechs handle high volumes of fast, cross-border transactions, which inherently elevates money laundering risk. Criminals may attempt to exploit these platforms by breaking illicit funds into many small transfers³ or sending money through multiple countries to obscure the funds’ origin. The cross-border nature of these services also means transactions traverse jurisdictions with varying regulations and oversight, creating potential weak points that launderers can target. Peer-to-peer payment⁴ apps and remittance services⁵ must therefore recognize that large transaction throughput and global reach make them prime targets for abuse.

Many payment startups operate globally, which introduces cross-border AML risks. Funds moving between countries can facilitate layering of money across jurisdictions. It’s crucial to screen not just customers but also payment recipients in real-time against sanctions lists. For example, even a reputable fintech can get in trouble if it unknowingly processes transfers for a sanctioned individual or a blacklisted country. A notable case occurred in 2022 when TransferWise⁶ was fined by Abu Dhabi Global Market's Financial Services Regulatory Authority (FSRA) for not adequately verifying the origins of funds and wealth of high-risk customers, highlighting the need for stringent checks on international payments.

Payment processors and gateways have an extra layer of AML concern: Their merchant clients.
Criminals might set up fake online stores or use complicit merchants⁷ to launder money, e.g., running stolen cards or phantom transactions through a merchant account. Fintechs that facilitate payments for merchants must strengthen their KYC processes and remain diligent in identifying suspicious merchant behavior. Verify the legitimacy of each merchant, their ownership, and the nature of goods/services. Ongoing monitoring should flag if a merchant’s transactions appear unusual, for example, a sudden increase in activity or a high number of refunds could suggest fraud or money laundering.

Platforms for online lending and credit⁸ are subject to distinct Anti-Money Laundering (AML) vulnerabilities despite not being traditional deposit-taking institutions. A significant concern is the potential for digital lending to be utilized for the concealment of illicit financial origins. Criminals may use synthetic identities or stolen personal information to obtain loans, then repay those loans with illicit funds, effectively converting illicit funds into apparently legitimate funds via the repayment process. This technique takes advantage of fast and remote onboarding in fintech lending. Such schemes make it imperative for lenders to verify each borrower’s identity⁹ stringently and confirm that the funds used for repayment come from legitimate sources. Implementing robust identity checks and validating borrower information can shut out launderers before they access the platform.

Another challenge is the ease with which borrowers can misrepresent financial information in a purely digital application. Income falsification and fake documents¹⁰ are common tactics used to fraudulently obtain loans, so fintech lenders must conduct thorough checks on borrowers’ stated income and repayment capacity. Integrating Customer Due Diligence (CDD) and KYC¹¹ steps into the loan origination process helps authenticate identities and weed out suspicious applicants before funds are disbursed. For instance, lenders should verify income claims through bank statement analysis or credit bureau data and perform background checks on borrowers with large or inconsistent claims of wealth. By confirming that a borrower’s financial profile is legitimate and making sense for the loan amount, online lenders reduce the risk of inadvertently lending to front companies or individuals looking to launder money under the pretense of normal loan transactions.

Even after loans are issued, fintech lenders should continuously monitor red flags¹² in loan repayment behavior and account activity. Unusual patterns such as early, lump-sum payoffs of loans that are not consistent with a borrower’s profile, or multiple loans being rapidly repaid from the same external account, could indicate money laundering or collusion among a group of fraudsters. In some cases, organized fraud rings coordinate to take out and repay loans using illicit funds, making it vital to detect links between accounts or common funding sources behind repayments. Lenders need systems that can flag these anomalies and escalate them for investigation. Promptly reviewing and acting on such alerts, online lending platforms can stop laundering schemes before they scale up. A multi-layered AML approach, from upfront identity verification to ongoing transaction monitoring, is essential to protect digital lenders from being used as unwitting tools for financial crime.

Because Neobanks¹³ operate entirely online with no physical branches, the risk of identity fraud during customer onboarding increases. Without face-to-face interaction, there is a greater chance that criminals or fraudsters might attempt to open accounts using stolen identities or forged documents. Indeed, these app-based banks have seen an increased identity fraud risk in recent years. To mitigate this, neobanks must implement strong electronic KYC¹⁴(eKYC) protocols that leverage advanced verification technologies. This can include biometric ID checks, liveness detection via video selfies, database checks against government IDs, and other tools to reliably authenticate new users’ identities. Robust identity verification at onboarding helps ensure that the person opening an account is real and authorized, preventing fraudsters or money mules from easily accessing the platform with fake credentials.

Neobanks that cater to small businesses face the added complexity of verifying corporate customers and their ownership structures. Without proper checks, shell companies could open bank accounts to launder funds, hiding the true beneficiaries behind layers of corporate registrations. Thus, digital banks need to apply stricter Beneficial Ownership due diligence for business accounts, especially for high-risk clients like cash-intensive small enterprises or foreign-owned firms. This means identifying and verifying the ultimate beneficial owners¹⁵(UBOs) of corporate accounts, not just the front-facing representatives. By confirming the real individuals in control of a company and assessing their risk, neobanks can stop criminals from misusing business accounts as a front for money laundering.

Neobanks must invest heavily in their compliance infrastructure and cannot sacrifice oversight for rapid user acquisition, as regulators expect them to meet the same AML and KYC standards as traditional banks and will impose significant penalties if they do not. By proactively building robust AML programs, neobanks can satisfy regulators, protect their reputation, and safely sustain their fast growth in the banking sector.

The development of an Anti-Money Laundering (AML) compliance program from the beginning can present significant challenges. However, adherence to established best practices is likely to ensure the success of the fintech enterprise.
Modern fintech compliance is greatly aided by tech tools, utilizing regtech solutions to make the AML program efficient and effective. Some examples include:

• Use of services that can verify IDs and perform document authentication automatically, sometimes within seconds. Many solutions also cross-check selfies with the ID photo using biometrics. This reduces manual review time and forgeries.
• Rather than manually checking lists, integrate an API¹⁶ that screens new customers and regularly rescreens the database against updated sanctions and politically exposed persons (PEP) lists.
• Implement a monitoring system¹⁷ that can ingest multiple transaction data and apply rules or machine learning models to flag suspicious patterns. Good solutions allow fintechs to customize rules for their business. Some fintechs start with rules-based systems and later supplement them with AI that learns typical customer behavior to detect anomalies.

Embracing technology early on will help to scale compliance requirements. However, it is important to exercise prudence: Technology should be regarded as a tool to assist, rather than as a comprehensive solution in itself. The configuration and interpretation of these tools require the expertise of knowledgeable individuals. In addition, it is imperative to ascertain that any outsourced solution is compliant with data security standards and, where relevant, GDPR or other privacy requirements.

By following these best practices, early-stage fintechs in payments, lending, and neobanking can build an AML compliance program that not only meets regulatory obligations but becomes a business enabler. A strong compliance program builds customer trust, keeps the company out of legal troubles, and opens doors with banking partners and investors.