The U.K. Should Secure a Risky Back Door Against Money Launderers
(Bloomberg Opinion) -- Britain is among world leaders in the growing fintech industry — unfortunately this may keep the country a leader in money laundering, too. The U.K. doesn’t commit enough resources to fighting economic crime despite its very large financial sector and the rapid growth of digital payments and money transfer firms.
The country is especially attractive to money launderers for several reasons: It’s an open economy, a global hub for financial flows, has a big gambling sector and lax company creation rules. Britain has the right regulations, but they aren’t applied rigorously enough, especially with the hundreds of electronic money institutions (EMIs), according to Transparency International.
The pressure group has analyzed 260 U.K.-based EMIs, all regulated by the Financial Conduct Authority, and found nearly 40% raised red flags for potential links to money laundering. Its concerns range from some owners and directors not being fit and proper, to some companies having links with Russian finance and others having weak money laundering standards.
Many of these fintechs are still small, but others like Revolut Ltd. are becoming significant players. The privately-owned online bank was valued at $33 billion in a capital raising this summer, which is more than NatWest Group PLC and not far behind Barclays PLC. The company, which is based in London but runs services across Europe on a Lithuanian banking license, has suffered hiccups with its own anti-money laundering systems, according to reports, which is why it was named in the Transparency International study.
Revolut said it continually invests in technology and people to meet its regulatory obligations and that it complied with financial crime prevention and detection requirements. It also argued that EMIs historically generated more suspicious transaction reports because they previously had to report dubious payments below 250 pounds, which big banks don’t.
Still, it’s unsurprising that companies focused on technology-driven growth might slip up in meeting the kind of compliance standards that even the world’s biggest banks still sometimes fail to meet. In recent months, NatWest and ABN Amro Bank NV have paid hundreds of millions of dollars in fines related to money laundering, while Danske Bank A/S of Denmark is still waiting to learn how much it might have to pay to U.S. authorities for one of the biggest ever such scandals.
At the same time, it’s an open secret in the payments industry that new companies often boost revenue in their early days by taking on so-called high-risk business. Much of this is legal — transactions where the risk of demands for refunds is high, such as travel bookings, gambling and pornography. But it’s also an area that lends cover to dubious activity or outright scams and frauds. Wirecard AG of Germany, which collapsed in an alleged corporate fraud last year, dealt with a lot of high-risk payments business in its brief existence, according to reporting by the Financial Times and Wall Street Journal.
Revolut said it won’t work with a whole list of industries as payment clients and has always had this policy.
Money laundering often involves cross-border transactions, which are harder for regulators to track in part because they require international cooperation and time-consuming requests to foreign banks. The international gambling industry has endemic levels of money laundering and fraud, according to Lexis Nexis Risk Solutions bi-annual cybercrime report.
Easy rules on company formations — online agents offer the service for less than 20 pounds and say it can be completed in just three to four hours — also abet fraudsters; the U.K.’s National Economic Crime Centre says criminals exploit this primarily to move illicit funds. The NECC says money laundering costs the U.K. about 100 billion pounds a year, but the money laundering intelligence taskforce it runs jointly with banks, the FCA and other agencies has seized just 13 million pounds since it was set up in 2015.
The lack of resources put into financial crime reflects political priorities, according to money laundering expert and author, Oliver Bullough. “The U.K. runs enforcement like a normal European country, but has a financial system that moves money like the U.S.,” he says. The FCA says it has done substantial work on raising anti-financial crime standards at digital money and payments firms, including reviewing systems and controls at about 50 firms in 2019. That led to business restrictions being placed on four firms.
The ease with which U.K.-licensed EMIs can apparently be bought and sold by offshore owners is also a cause for concern. Money laundering is a global problem and what’s needed are global agreements on sharing financial intelligence among financial institutions as well as law enforcement.
Criminals will spot and exploit any easy gateway into the bigger financial system. There’s no point looking proudly at the defenses your biggest banks are trying to bolster if you’re leaving a back door poorly guarded.
More From Other Writers at Bloomberg Opinion:
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Paul J. Davies is a Bloomberg Opinion columnist covering banking and finance. He previously worked for the Wall Street Journal and the Financial Times.
©2021 Bloomberg L.P.