[Editor’s note: This is a guest post from Charles Delingpole, CEO of ComplyAdvantage. ComplyAdvantage is an exhibitor at LendIt Fintech USA 2018, which will take place on April 9-11, 2018 in San Francisco.]
Lending money comes with a many risks: risk of default, interest rate risk, FX risk and credit risk to name just a few. But what about the risks no one dares to think about? What if you lent money to someone who used it to finance an act of terrorism? Or to disguise the proceeds of drug dealing. How would this make you feel and what would it mean for the reputation of your growing business?
Managing financial crime risk is one of the biggest issues facing companies today. Threats evolve quickly, and law enforcement and regulators are expecting businesses to do much more to stay ahead of the threats. For lenders and FinTechs it’s essential to protect themselves or risk high fines and lose their banking relationships. Today’s generation of FinTechs however, face huge technology and operational challenges – they interface with banks and therefore need ‘bank-grade’ solutions for KYC/AML but existing technology solutions struggle to fit with their unique needs. Increasingly, they are looking to new technology to help them comply with global KYC/AML standards, maintain banking relationships and ultimately fight financial crime.
What are the financial crime risks for lenders and FinTechs?
Lenders spend billions of dollars a year on compliance solutions trying to combat their financial crime risk, which broadly fall into two categories: anti-money laundering / terrorist financing (AML/CTF) risk and fraud.
AML/CTF risks present themselves throughout the client lifecycle for lenders and FinTechs. At the onboarding stage businesses have to ensure that they are dealing with a client who is who they claim to be, and that they present no risk of illicit dealings. As more and more lenders move their services completely or partially online, risk can increase as identification isn’t carried out in person. To make matters more difficult, lenders are under pressure to offer a fast and efficient service for customers meaning that onboarding needs to happen as swiftly as possible, leaving little time for lengthy AML/CTF checks.
Once onboarded, lenders need to watch out for various behaviors that could indicate that their customer is committing a financial crime. This could include a customer paying back a loan more quickly than expected, to a bank account which is registered with a zip code which is associated with gang or drug activity, a strong indicator of someone laundering drug money. Customers could also be using loans to ‘park’ illicit funds on the investment side. Lenders, especially those that specialize in crowdfunding, need to be aware of new AML/CTF risks coming from social media, where criminals or terrorists can pose as a cause to either clean money or raise funds.
Fraud-related risks encompass anything from taking out a loan that a person has no intention of paying back to stealing someone else’s identity to take out a loan. Fraud risk can be especially difficult for lenders to identify. How do you know when someone has no intention of paying back a loan, especially if they have the means to do so? This is an area where terrorist financing risk and fraud can come together and present a significant challenge for lenders. In 2015 a couple from London were arrested for planning a terror attack on a shopping centre, they had paid for the explosives they planned to use by taking out payday loans, which they obviously had no plan to pay back. When fraud and terrorist financing intersect a lender’s reputation can be at risk. To prevent any damage and the facilitation of terrorism, lenders need to have intelligent and agile compliance solutions in place that can detect sophisticated threats.
How can technology reduce risk for lenders?
Finding a compliance solution that is right for today’s lenders and FinTechs is no easy task. Legacy compliance tech, built in the early 2000s, was typically created with the needs of large banks in mind and hasn’t kept up with the innovation we see in the FinTech market today. Regulators are also increasingly seeing AML and fraud as complementary, suggesting a holistic approach is needed to compliance that increases efficiency across KYC, AML and transaction monitoring processes.
More and more, online lenders need near real-time screening, analysis and dispositioning to onboard customers faster and process payments instantly. Finding a solution with flexible, real-time APIs to embed within their compliance ecosystem will allow lenders to deliver high-levels of automation and a seamless customer service. Lenders should also look for solutions that allow them to easily configure the right rules and scenarios to fit their specific risks of the loans or funding they offer. Data agnostic solutions that can incorporate and leverage KYC and external data to flag suspicious/high-risk behavior will allow more accurate screening and reduce false positive alerts.
Gone are the days where compliance teams need to wade through the noise from old-school media archive tools in the hope of finding risk-relevant and actionable insights on alerts. The latest approaches to generating Adverse Media data produces rich, real-time and structured insights to spot money laundering, fraud and terrorist financing risks much faster and more accurately, also allowing lenders to screen proactively rather than reactively.
AI and machine learning are also impacting the future of compliance for lending. These technologies can dramatically improve AML risk data collection; spotting new risks faster and digging deeper for hidden risks. Systems that are powered by machine learning can learn from risk decisioning, improving the quality of alerts over time.
Staying ahead of evolving risks and customer expectations
By using new technology for compliance FinTechs and lenders can sustain their own innovation with an equally innovative approach to back-end processes. As businesses scale rapidly, risks evolve and customers expect more responsive lending services. Having a compliance solution that is technology-driven will become essential.
To learn more, join ComplyAdvantage CEO, Charles Delingpole at Lendit USA for his talk on using the latest data and technology to help lenders fight financial crime.