With EMI licences being dished out to companies whose executives or shareholders were linked to money laundering scandals in Eastern Europe, concerns have been growing over the regulations of this highly innovative market.

The UK’s fintech sector is a world leader, with a broad range of innovative businesses growing at pace. But is there a danger that opportunistic criminals are taking note? That’s certainly the view of Transparency International, which worries particularly about one corner of the fintech sector – the campaign group says it has spotted potential money laundering red flags at 38% of the UK’s electronic money institutions (EMIs).

That’s a real worry, given that the UK has set the pace on electronic money. E-money is cash, denominated in currencies including sterling, dollars and euros, that people store on payment cards or in electronic wallets. To offer such services under European Union and UK law, organisations must register as EMIs with their local regulator – and the UK is home to more than 250 such businesses, more than half of all those in operation across Europe.

Indeed, UK EMIs include some household names – most notably Revolut, the fintech unicorn business – as well as some much smaller organisations. There is real demand amongst customers for e-money services, and on the supply side, fintechs recognise that securing authorisation from the UK’s Financial Conduct Authority (FCA) to act as an EMI is a much less arduous process then obtaining a full banking license.

This is not to suggest that there is anything inherently suspicious about e-money services. They represent a genuinely useful addition to the range of services available from financial institutions – and it would be unreasonable to expect them to be subjected to the same level of regulation as full-scale banking, particularly since they do not typically involve the offer of credit.

Nevertheless, there have persistently been concerns about the possibility of criminals exploiting this new market. As long ago as 2015, the UK Government’s National Risk Assessment (NRA) warned that the emergence of the e-money industry posed risks from a money laundering perspective – and that there were gaps in watchdogs’ understanding of the issues.

In 2020, the Treasury’s updated NRA repeated such warnings, identify e-money services as a medium risk area for money laundering. It said the rapid growth and development of these services made it “difficult to detect and identify money laundering methodologies, compared with criminal activity using traditional retail banking services”.

Such alerts have kept on coming. Last summer the campaign group openDemocracy claimed EMIs were “being touted as a replacement for networks through which billions of dollars of dark money moved in and out of the former Soviet Union”. In recent weeks, Bloomberg has published stories revealing that the FCA has given EMI licenses to companies whose executives or shareholders have been linked to money laundering scandals in Eastern Europe.

It is these sort of links that Transparency International highlights. It looked at every EMI authorised to do business in the UK and found potential problems at 100 of them. The group did not claim to have identified instances of actual money laundering. But it did point to red flags including “being named as having poor anti-money laundering controls or processing criminal wealth; having owners, directors or senior members of staff named in money laundering investigations; or owners, directors or senior members of staff having worked previously for institutions alleged or proven to have anti-money laundering failings”.

Now, it should be said that while EMI regulation is not as stringent as supervision of the banking sectors, there are still some demanding money laundering and know-your-customer rules. For example, EMIs must meet the Strong Customer Authentication regime introduced by the FCA in 2019. The UK has also adopted European Union laws limiting the amount of money that can be stored in anonymous e-money accounts.

Nevertheless, the alarm bells sounded by organisations such as Transparency International are worth taking seriously. The evidence it presents of the money laundering risks posed by EMIs may be circumstantial, but there appears to be a substantial body of it. And intuitively, the idea that criminals would target an emerging area of financial services, where understanding is still lacking, makes perfect sense, particularly given regulators’ ongoing efforts to tackle wrongdoing in more established parts of the industry.

There is also a danger that EMIs could fly under the radar, given the growing alarm about the risks posed by the cryptocurrency movement. Certainly, the blockchain-enabled digital currencies that are growing so quickly outside of the established global financial system could prove appealing to financial criminals. But that doesn’t mean regulators should take their eye off the ball elsewhere.

For the FCA, this is a balancing act. The regulator is keen not to stand in the way of innovation – it has been widely praised for an open and engaged stance that has enabled fintechs to flourish. It would be unfortunate, however, if this flexibility proves to have enabled criminal activity too – not least since it will inevitably mean regulators take a much less encouraging approach in the future.


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