Are fintechs winning the fight against money laundering? An honest look at the effectiveness of current AML strategies

This article is part of our Opinions section.

When it comes to money laundering and other forms of financial crime, the stakes couldn’t be higher. Globally, criminals are laundering as much as €1.8 trillion a year, according to the United Nations Office on Drugs and Crime (UNODC). For fintechs, the challenge isn’t just about keeping up with regulations; it’s about staying one step ahead of an increasingly sophisticated and resourceful criminal ecosystem. But after decades of regulatory change and significant investment in Anti-Money Laundering (AML) technology, the question remains: Are we winning the fight against money laundering?

Let’s take a look at the current state of AML efforts in the fintech sector, how effective these strategies are, and consider what needs to change to keep pace with the growing complexity of illicit financial activity.

An overview of the AML landscape 

Fintechs operate in a space that is inherently different from traditional financial institutions. They prioritise speed, convenience, and accessibility, often using digital platforms and tools to deliver services to underbanked or underserved communities.

However, this very accessibility can sometimes make fintechs more vulnerable to money laundering activities. Unlike traditional banks, fintechs may lack the extensive compliance resources and infrastructures that larger institutions have been able to develop over decades.

In the UK, AML legislation is primarily governed by the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017, alongside the Proceeds of Crime Act 2002 (POCA). These laws form the foundation of the UK’s AML framework, mandating due diligence, record-keeping, and reporting obligations for financial institutions and other regulated firms, including fintechs.

Despite these stringent rules, money laundering remains rampant. Criminals are exploiting loopholes in the system, using everything from shell companies to cryptocurrencies, making the detection of illicit funds increasingly complex.

This leaves fintechs with the challenge of working out how to maintain the agility and user experience that makes them successful while building comprehensive AML defences to fend off increasingly sophisticated criminals.

Are we outpacing criminals?

One of the primary goals of AML strategies is to prevent and detect money laundering activities before they cause significant harm. The continued proliferation of sophisticated organised criminal networks, however, raises concerns that these strategies may be lagging behind the very threats they are designed to combat. 

Take the high-profile case of Danske Bank, for example. Between 2007 and 2015, the bank’s Estonian branch became the focus of a money laundering scheme of around $160 billion in suspicious transactions, much of it stemming from Russian and former Soviet Union clients. Despite the scale of these operations, it took years before the scandal was uncovered and reported. By the time regulators were involved, much of the damage had already been done. 

This case highlights a common oversight in even the industry’s largest players: many AML processes are often reactive rather than proactive. 

While regulations demand that firms identify and report suspicious activity promptly, they rarely prevent the activity from occurring in the first place. As a result, criminals are exploiting the delay between detection and enforcement to move vast sums of illicit money across borders, often through complex networks and shell companies designed to frustrate compliance professionals.

The balancing act of technology and human expertise

Many fintech firms are already making use of cutting-edge technologies to enhance their AML efforts, onboard customers, monitor risk in real-time, detect anomalies, and flag suspicious activity. 

However, a strong compliance culture requires not only advanced technology but also a skilled and dedicated team of professionals who can interpret the results and make informed judgments. 

Just last week, Starling Bank was handed a nearly £30m fine by the Financial Conduct Authority (FCA) for its ‘shockingly lax’ financial crime and sanction screening controls. 

Starling experienced rapid growth, increasing its customer base to 3.6 million by 2023, but the bank’s AML controls failed to keep pace with this expansion. Although the firm had promoted its technology-first approach to compliance, the reality was that a lack of human oversight, coupled with subpar client onboarding and monitoring processes was leaving it “wide open to criminals and those subject to sanctions,” according to the FCA’s Joint Executive Director of Enforcement. 

Despite warnings from the FCA and being issued with a Voluntary Requirement (when a firm agrees with the FCA to put certain controls or changes in place to fix compliance issues, like tightening up AML measures) in 2021, the bank did not adequately monitor or enforce onboarding controls, resulting in more than 54,000 accounts being opened for high-risk customers.

Starling’s failings highlight that AML success depends not just on having the right technology in place, but on well-trained compliance teams who can ensure strong governance and oversight to ensure compliance frameworks are fit for purpose and actually work. 

For fintechs, AML compliance is often seen as a technology-driven exercise, and for good reason. Technology allows firms to collate and analyse vast amounts of data to detect red flags faster than ever before, identifying suspicious patterns in risk profiles and financial activity that would otherwise go unnoticed.

But technology still demands the expertise of the people behind it, forming a two-pronged attack in fighting financial crime with talented compliance teams who can respond quickly to any suspicious activity flagged by AML systems.

Are fintechs winning the battle against financial crime?

So, are fintechs winning the fight against money laundering? The short answer: it’s a work in progress.

While fintechs have made great strides by investing in technology to detect suspicious activity and stop bad actors, they continue to face significant challenges. The fast-paced nature of the industry, the rise of digital assets, and a fragmented global regulatory environment all create vulnerabilities. 

However, fintechs have a unique advantage: their agility. They can quickly adapt to new threats, update their systems and processes, and implement cutting-edge technology much faster than traditional financial institutions. The key for fintech compliance leaders will be to strike the right balance between innovation and regulation, ensuring that technology is complemented by human expertise and a strong culture of compliance.

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