With payments increasingly becoming available at the click of a button, money launderers have long seen online payments as an easy way to wash their illicit funds.
The hard truth is that as the volume, speed and sophistication of digital payments grow, so will the anti-money laundering (AML) vulnerabilities of payment service providers (PSPs).
With the global payment processing market expected to nearly double to $2.9 trillion by 2030, PSPs need to act before the problem becomes insurmountable.
PSPs are well-publicised offenders for non-compliance
With the growing popularity of digital payment services comes the increased risk of financial crime and the PSP sector has suffered heavily in recent years.
Wirecard hit the headlines in 2021 when a man was charged with 26 counts for allegedly attempting to launder €22 million of embezzled Wirecard funds. While another scandal involving laundered funds through provider Allied Wallet has rumbled on through much of the last decade.
Even more worryingly, high profile terrorists such as ISIS have been financing their activities through well-known PSP and e-commerce scams.
The PSP sector is under attack from a wide range of criminal activities and as a result it is incumbent upon every business to identify and mitigate these threats.
AML vulnerabilities for PSPs are hiding in plain sight
Money laundering through PSPs can take many forms. Typical approaches include blending funds, smurfing (breaking down funds into smaller amounts), invoice fraud and offshore accounts that hide beneficial owners.
However, more recently the emphasis has been on two particularly severe threats that exploit the vulnerabilities of PSPs:
- Money muling. Fraudsters transfer illicit funds to another person’s account – a ‘mule’, who may be unaware of their criminal actions. The withdrawn funds can then be withdrawn and transferred back to the fraudster as clean funds. Through PSPs, money muling has been upscaled as a “crime-as-a-service” on the darknet, exploiting cross-border transactions and the use of cryptocurrencies to hide the identities of both the criminal and the mule.
- Transaction laundering. Criminals exploit payments through e-commerce websites by cleaning their dirty money through their own legitimate e-commerce stores (a virtual ‘front’) or by ordering goods or services via others at extortionate prices which the unwitting collaborators never receive. Transaction laundering is believed to account for around one fifth of all laundered money, affecting large businesses including Amazon and eBay.
Financial crime in the payment services sector is an international issue
The very nature of digital payments and their ability to facilitate cross-border transactions places the sector firmly under international scrutiny.
Regulators were initially slow to react to the scandals and revelations in the sector, but over the last few years they have strengthened their approach significantly.
Globally, the PSP regulatory framework is covered by the Financial Action Taskforce (FATF) Guidance for a Risk-Based Approach for MVTS, published in 2016. This lays out an AML and counter-terrorist financing (CTF) structure for countries and providers.
Even so, the regulatory inconsistencies across countries and regions, presents significant compliance challenges, as specific AML rules are outlined by each jurisdiction’s respective regulatory bodies.
In the European Union, PSPs must adhere to several AML rules including the money laundering directives, the sixth of which (6AMLD) came into force in June 2021. To bolster the EU’s AML and counter terrorism defences, EU PSPs must also comply with the revised Wire Transfer Regulator (WTR).
In the UK, since Brexit, PSPs must now comply with both the Financial Conduct Authority’s Money Laundering Regulations, as well as the EU’s WTR.
And those are just a few examples of regulations that PSPs must adhere to, multiply this by the numerous jurisdictions that a PSP operates in, and the problems keep mounting.
Identifying AML vulnerabilities is a crucial step in the battle to combat money laundering
Through rigorous risk management, PSPs can more easily identify and counter the threat from opportunistic financial criminals.
With this in mind, we have put together an in-depth report on the AML Vulnerabilities of Payment Service Providers.
In this spotlight report we cover:
- What PSPs are and how they are exploited
- The money laundering red flags for payments companies
- Global AML rules for PSPs
- How automation can help manage risk
For your free copy of this valuable analysis click here.
Automation is essential if PSPs are to mitigate risk
Financial crime in the payments sector is evolving rapidly.
As digital payments become faster and more sophisticated, any compliance deficits will make PSPs increasingly susceptible to criminal attacks.
As a result, automated technologies will be crucial to ensuring that PSPs keep on top of the challenges that lie ahead and manage both existing and future threats.
Furthermore, given the dynamic state of the industry, non-bank PSPs are often in a rapid state of growth. Any AML technology must be able to scale with them through organic growth, expansion to new markets, or acquisitions.
For each provider, the balance between security and flexibility will be different. So, it’s critical that any integrated risk-based technology can be configured to meet their own risk appetite and internal control environment.
The chosen technology also need to provide a clear audit trail with conclusions that are easy to understand and explain to regulators, as opposed to the black box approach some offer.
The solution is just a click away
Whether it’s the occasional check of a few hundred names a year, or the overnight screening of millions of entities, RiskScreen has the screening solution that will meet the needs of your organisation exactly.
Our 3D risk-based approach ensures that false positives are minimised with no compromise on true matches, while our focus on ease-of-use and customer service means you will be up and running from day one.
RiskScreen’s intelligent automated screening solutions are being adopted by increasing numbers of PSPs to help them to more effectively counter the threat posed by money launderers.
For a no-obligation demonstration of how our solutions can benefit your organisation, contact us today.
