Fintech 2021 - A Brief Insight of Global KYC Regulations (2024)

Financial services are among the most heavily regulated sectors in the world, and the number one concern of governments as Fintech companies increase. Over the years, Fintechs have achieved remarkable growth and flexibility. They are able to launch quickly, focus on scalability and adapt fast. However, the rapid growth does not come without challenges. As technology is integrated into the finance sector, regulatory problems have magnified for organizations and determining related laws can be a big task. Let’s take a look at what these regulatory challenges are and the present state of fintechs.

Key KYC/AML Regulations for Fintechs in 2021

In many regions, the Fintech sector was unregulated a few years back and became a fertile ground for scams and frauds. Due to the diversity of fintech offerings and its impact on various industries, regulatory authorities cannot develop a single approach to all the problems. For many areas, governments have updated the existing Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations. Some have imposed FATF’s risk-based approach. However, fintechs are affected in more ways than one could think of, so industry-specific customer due diligence (CDD) approach is vital.

United States

The US-based fintechs are not regulated by any specific regulations. However, they are subject to the federal and state level laws for registration, identity verification and background screening where necessary. The financial watchdog of the country – FinCEN – has issued AML/CFT policies for all financial institutions. The country’s fintech companies have to perform customer due diligence during onboarding and submit Suspicious Activity Reports (SARs) to the regulatory body.

United Kingdom

Currently, the United Kingdom does not have any specific regulatory framework for fintechs. However, any fintech that performs traditional financial services, such as banking or insurance, falls under the existing regulatory parameter set by the regulatory authorities. This means that for any fintech to operate in the UK, authorization has to be acquired from one of the UK’s financial regulator – the FCA (Financial Conduct Authority) or PRA (Prudential Regulation Authority).

EU’s Anti-Money Laundering Directive

The sixth anti-money laundering directive is found to have a more profound impact on different sectors of the Fintech industry. From cryptocurrencies to custodian wallet providers, AMLD has a more far-reaching influence and strengthens the regulatory controls across all sectors.

Cryptocurrencies

Platforms that offer cryptocurrency exchanges like Bitcoin will face more rigid regulatory controls. All virtual currency exchanges have to register with the relevant authority, conduct necessary customer due diligence (CDD) protocols and submit suspicious activity reports (SARs). Financial intelligence units (FIUs) have to maintain records with name and address of the customer dealing in digital currency.

Prepaid Cards

As per the AML directive, the threshold for prepaid cards has been set between €150 to €250, with a limit of €50 for online transactions. Furthermore, cards are only allowed in the region are unless a foreign provider that meets the AML standards issues them. Payments can only be accepted if the jurisdiction is meeting AML standards.

Beneficial Ownership

The directive now requires all the member states to maintain publicly available and interconnected ultimate beneficial ownership (UBO) registries. National authorities will have access to these registries for trusts and bank accounts.

High-value Goods

High-value goods have been in use for money laundering activities for a long time. The AML directive has extended the range of goods that are now subject to new reporting requirements with updated thresholds. The goods include art, precious metals, artefacts, tobacco, and oil.

High-risk Countries

The European Union identifies countries as high-risk that have sub-standard AML regulations. Organizations dealing in any of these countries have to perform enhanced due diligence checks to ensure legitimacy of the source of funds. According to AMLD, the EU has established legal grounds for all the states and every nation is responsible for implementing the regulations as per the directive.

Failure to abide by the laws will result in hefty penalties, damaged reputation and probably the loss of operating licenses. All sectors have been guided to design rigid policies and robust AML/CFT infrastructure and this must be an ongoing effort.

What Can Fintechs Do for Effective Compliance?

Considering the diversity of Fintech industry, every sector has to re-evaluate and redevelop customer due diligence protocols according to the updated regulations. If you are operating in the Fintech industry, it all comes down to the following questions:

• Are you complying with the country’s KYC/AML laws that you are serving in?
• What customer due diligence protocols are you currently following?
• Is your screening process providing higher customer acquisition rate or your drop-off is increasing?
• Is the process effective in all regions of the world?

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