UK e-money sector passes AML test

Anti-money laundering is a hot topic for the fintech industry. And many fintech firms are e-money institutions. The FCA has recently probed how the e-money sector meets AML rules. Its report is broadly positive but suggests where there might be room for improvement.

What has the FCA found?

The FCA has completed its thematic review into AML risks in the e-money sector. The report concludes that most e-money institutions have effective AML systems and controls.

For example, the FCA found that AML policies were up to date, customer due diligence processes were adequate, and firms were monitoring transactions effectively.

The report sets out examples of good and poor practice that the FCA saw in its review. These relate to AML policies and procedures, risk assessments, due diligence, transaction monitoring, management information and communications. The FCA also considered the impact of firms outsourcing the distribution of e-money to third parties.

Areas for improvement identified by the FCA include:

  • Tools used for individual customer risk assessments which were not always effective for flagging higher risk customers
  • Assessments of business-wide risks which were not tailored to the firm’s specific business
  • Failing to assess the purpose and intended nature of the business relationship, making it harder to identify suspicious transactions.
What is e-money?

E-money is an electronic store of monetary value that can be used for payment transactions. For example, prepaid payment cards might be e-money.

UK issuers of e-money need to be either registered with, or authorised by, the Financial Conduct Authority. Those e-money institutions must then comply with money laundering regulations.

Why did the FCA review the e-money sector?
The FCA’s concern – which was also flagged in a Treasury report last year – is that e-money may be attractive to criminals or terrorist financiers. For example, rather than being restricted to certain retailers, “open loop” prepaid cards can be used anywhere the card network is accepted. Like cash, they are anonymous and are easily transportable. AML controls imposed by the e-money issuer can mitigate some of these vulnerabilities.

What happens next?
The FCA encourages all e-money institutions to review the report and consider whether their systems and controls could be improved.

The report comes at a time when AML is a hot topic in the fintech industry. For example, a recent parliamentary report called for increased regulation of crypto-assets partly because of the risk that they could be for laundering money.