AML and Compliance Solution for The P2P Industry

Blog / AML and Compliance Solution for The P2P Industry

The rise of peer-to-peer (P2P) transactions has led to a growing need for effective anti-money laundering (AML) and compliance measures. Regulators are introducing new laws to prevent financial crimes in the P2P industry, putting the burden on platforms to conduct proper customer due diligence, monitor transactions, and report suspicious activity. To meet these obligations, a range of AML and compliance solutions have emerged to help P2P platforms protect themselves and their customers from financial crime. 

The Peer-2-Peer Industry: An Overview

The P2P industry has emerged as a significant disruptor in the financial sector, offering individuals the ability to transact directly with one another without intermediaries. The industry has experienced significant growth in recent years, driven by the rise of digital technologies and changing consumer behavior.

The premise is that P2P lending is less expensive than traditional lending since services are generally provided online, where overhead expenses are much lower. When compared to traditional banking, rates of interest on P2P lending are greater for lenders/investors but less for borrowers, given the nature of the business.

Since the investment risk is larger, the P2P business can achieve significant profits by operating independently of major financial institutions. One of the FCA regulation goals is to provide additional protection for those who use P2P lending, such as providing clear information regarding borrowing/lending and ensuring that businesses can deal with consumers who are in trouble financially.

There are several types of P2P platforms, including P2P lending, crowdfunding, and P2P payments. Each type serves a different purpose, and some platforms may offer more than one service. The key players in each segment include platforms like LendingClub, Kickstarter, and Venmo.

However, the P2P industry has also faced challenges, including regulatory scrutiny and concerns about fraud and data security. As the industry continues to evolve, it will be interesting to see how it adapts to these challenges and continues to shape the financial landscape.

digitalization of the financial sector brought with it new money laundering threats, especially with mobile devices

Money Laundering in the P2P Industry

The Crown Prosecution Service (CPS) defines money laundering as the practice of cleaning the financial benefits of illegal conduct in order to disguise its illegitimate origins. As a result, the offenders might escape punishment by concealing the source of unlawfully obtained funds. The Proceeds of Crime Act of 2002 defines the most common money laundering offenses.

The Money Laundering, Terrorist Financing, and Transfer of Funds Regulations 2017 apply to all regulated businesses, including banks, raising societies, and credit unions, in order to safeguard customers. These rules demand these businesses do sufficient risk-based client due diligence to ensure that the financial institutions' services are not being used to launder money.

In reality, this means that banks must do adequate and proportional background checks on their customers to ensure that they are not involved in any illegal financial activity or are utilizing lawful money. Banks are only permitted to provide pooled client accounts under the 2017 laws if certain conditions are met, which often include risk assessments, policies, and proof of due diligence. Many banks are worried that P2P lending platforms frequently use pooled customer accounts and fail to do the necessary checks as required by the 2017 legislation. The increased anonymity provided by the P2P sector increases the risk for individuals engaged.

What Are The P2P Money Laundering Risks?

The invisibility relating to online financial services, as well as the absence of regulation in what are still relatively new forms of financial services, are the primary sources of P2P money laundering threats.

Criminals may be able to disguise their identities and avoid triggering AML safeguards by asking for loans or sending cash to crowdfunding initiatives online. Money launderers may employ deception in their applications to utilize the services, or they may hire proxies to do it on their behalf.

Criminals may be able to utilize crowdfunding platforms to sell stocks for an apparently legitimate firm while also selling illicit items to investors. Peer-to-peer lending services, meanwhile, might allow money launderers to move illicit cash to receivers with no regulatory oversight.

Fund transfers across international borders are common in both crowdfunding and peer-to-peer lending platforms. Money launderers may be able to take advantage of regulatory differences, such as identification verification or suspicious activity reporting criteria, in this scenario. The practical issue of tracking illicit payments across jurisdictions may make money laundering prosecutions more challenging for financial institutions.

To participate in "structured" transactions, peer-to-peer lending and crowdfunding techniques can be employed. In practice, this entails transferring money across various platforms via multiple transactions. Because of the simplicity and speed of crowdfunding and peer-to-peer lending, fraudsters may more readily engage in structured transactions and give illicit money a more accurate look.

Compliance in the P2P Industry

Following requests to better safeguard lenders and consumers in this business, the FCA issued new regulations for peer-to-peer lending and investing platforms. Following a significant spike in defaults, Lendy, a website established to crowdsource loan money to property developers, failed. Prior to Lendy's demise, any electronic system connected to lending was regulated under article 36H of the Financial Services and Markets Act 2000. This was the primary method of regulation because it encompassed the majority of P2P systems.

The FCA began reviewing how this industry was regulated in 2016 and consulted on reforms in 2018. These modifications started to take effect on December 9, 2019. The following are some of the policies that P2P systems will be obliged to follow:

  • Customers will be unable to spend more than 10% of their account on P2P investments without first speaking with a representative.
  • P2P networks will be required to conduct an appropriate evaluation of a client's financial knowledge.
  • In order to have an adequate risk-management system, the price of credit risk on the debts that are supported through the system must be able to be determined.
  • Platforms are obliged to ensure compliance through a permanent and suitable independent role. Unless the platform can demonstrate that doing so would be unreasonable, this is required.

Anti-Money Laundering and Compliance Solution for the P2P Industry

o address these challenges, Sanction Scanner offers an AML and compliance solution designed specifically for P2P platforms. By leveraging artificial intelligence and machine learning, Sanction Scanner's solution allows P2P platforms to perform AML screening on their customers, just as banks are required to do.

Sanction Scanner's solution provides real-time screening against global sanctions, Politically Exposed Persons (PEPs), and other high-risk individuals and entities. This screening helps P2P platforms verify the identity of their customers and ensures that they are not involved in money laundering or other financial crimes.

The solutions also include transaction monitoring and suspicious activity reporting features, allowing P2P platforms to identify and flag potential money laundering risks. By automating these processes, the solution makes AML compliance as easy, secure, and compliant as possible for P2P lending platforms.

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