Money Laundering and Compliance in the WealthTech Industry

Wealth technology - or WealthTech - is a subset of FinTech that focuses primarily on personal wealth management.

Posted on October 1, 2019
Written by Lauren Davison

NorthRow

Personalised wealth management creates a unique profile of a user that includes such criteria as your income, age, risk-aversion, and yield targets to show the most profitable investment options. The most innovative WealthTech platforms use artificial intelligence AI to create algorithms that offer bespoke investment advice previously only accessible to the very wealthy.

Using AI significantly reduces costs associated with employing a human wealth management advisor. These WealthTech companies have democratised the wealth management market by making advice cheaper, more accessible and reducing advisory fees. Those who could not have otherwise afforded to access advice are able to utilise these sorts of companies.

Money Laundering in the WealthTech Industry

Money-laundering, as defined by the Crown Prosecution Service, is the process whereby the financial benefits of some criminal activity are sanitised to conceal illicit origins. Disguising the origins of illegally acquired money allows the perpetrators to avoid penalty. The principal money laundering offences are captured in s.327, 328, and 329 of the Proceeds of Crime Act 2002. To protect customers, all regulated industries including banks, building societies, and credit unions are subjected to the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017. These regulations require these organisations to undertake appropriate risk-based customer due-diligence so as to ensure that the services offered by these financial institutions are not being used for money-laundering.

In practice, this means that banks are required to do appropriate and proportionate background checks to ensure that their consumers are not involved in any illicit financial activity, or using money that has been disguised as legal. Under the 2017 regulations, banks are only allowed to offer pooled client accounts in specified circumstances, usually involving risk assessments, procedures and evidence of due-diligence.

As with other areas of FinTech, money launderers may try to use WealthTech as a way to hide criminal activity. Since WealthTech relies exclusively on artificial intelligence to examine a user’s profile, it may not be easy for a computer to see information about a client who has accounts in multiple jurisdictions, particularly if they are registered with multiple firms. This makes beneficial owners difficult to ascertain, as well as the rationale for individual transactions.

Alongside this, companies with complex structures or offshore trusts maintain a curtain over the beneficial ownership of the funds held. It is not always easy for the AI to detect these funds as possibly holding criminal money. This is exacerbated if these accounts exist in countries that have cultures of secrecy in banking.

Many are concerned that WealthTech platforms may operate without undertaking the appropriate checks as required by the 2017 regulations. The added anonymity that is afforded by the WealthTech industry creates greater risk to those involved.

Compliance in the WealthTech Industry

The Association of Certified Anti-Money Laundering Specialists (ACAMS) say that a comprehensive anti-money laundering programme for high net-worth individuals looking to use WealthTech should include three components: risk identification, mitigating measures, and governance. This means being able to properly identify various risks, being able to mitigate the effects of identified risks and ensuring that the mitigation measures comply with appropriate regulations.

ACAMS identify numerous ways that individuals can fail to adhere to the anti-money laundering regulations. This can be incomplete customer information, improper documentation for evidence of sources of wealth, or business accounts that have complex multilayer ownership structures.

All of these things make it more difficult to ensure compliance in the WealthTech industry.

Balancing compliance and customer experience

Younger generations, especially the digitally native millennials now expect a friction-free client onboarding experience -remote, on mobiles, branchless. etc. WealthTech is the manifestation of this need, however, these companies need to balance compliance with client experience, which is why they are partnering with companies like NorthRow.

NorthRow Anti-Money Laundering and Compliance solution for the WealthTech Industry

NorthRow is a RegTech company set up to provide services to accelerate the capabilities of regulated organisations by digitally transforming the process of onboarding and monitoring processes for complex clients. With clients that include Blend Network, BondMason and Yielders, NorthRow uses a single API system to undertake automated customer due-diligence checks, to ensure compliance with anti-money laundering regulations. It automates the undertaking of checking client data with an international database and sends back a real-time response, which includes a risk score and supporting evidential data. Much like banks are obliged to provide appropriate due-diligence on consumers, NorthRow brings this principle to WealthTech. The services offered also remove the uncertainty of client anonymity.

The checks undertaken mean that lenders can be assured that the people, or companies, that they are looking to deal with are legitimate, and not involved in money-laundering. NorthRow’s services provide compliance with a variety of anti-economic crime measures, providing optimum verification and fully managed services – meaning that lenders can feel confident in the client that they are going to do business with.

NorthRow has recently partnered with Contemi Solutions – who provide solutions to wealth management, banking and financial institutions in the UK – to integrate NorthRow’s customer verification capabilities with Contemi’s Onboarding Platform.

This integration will enable the clients of Contemi to have a service that ensures the users of their platforms have an experience that is as simple, safe and compliant as possible. The benefits of such working can still be ascertained with added assurances that the necessary, and appropriate, verification has taken place.