Money Laundering and Compliance in the Peer-2-Peer Industry

The Financial Conduct Authority (the FCA) began to regulate the P2P Industry, with lenders expected to implement the recently proposed changes by December 2019.

Operating separately to large financial institutions allows the P2P industry to be able to achieve high rewards, since the investment risk is higher. One of the aims of the FCA regulation is to ensure added protection for those using P2P lending, including providing clear information about borrowing/lending, and ensuring that firms are able to deal with customers who are experiencing financial difficulties.

Peer-2-Peer Industry

The Peer-to-Peer Industry, often shortened to P2P, is lending whereby individuals or businesses exchange money, via online services through which they are connected. Traditional lending tends to take the form of an individual borrowing money from a corporation or financial institution. The idea is that P2P lending is cheaper than more traditional forms of lending since services are usually offered online where overhead costs are considerably cheaper. Due to the nature of P2P lending, interest rates tend to be higher for lenders/investors but lower for borrowers, when compared to traditional banks.

Money-Laundering in the P2P 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. Many banks are concerned that P2P lending platforms often operate with pooled client accounts, without undertaking the appropriate checks as required by the 2017 regulations. The added anonymity that is afforded by the P2P industry creates greater risk to those involved.

Compliance in the P2P Industry

The FCA published new regulations for peer-2-peer loan-based and investment-based platforms following calls to better protect lenders/consumers in this industry. Lendy, a platform set up to crowdsource money to lend to property developers, collapsed following a sharp rise in defaults. Before Lendy collapsed, article 36H of the Financial Services and Markets Act 2000 (Regulated Activities Order) 2001 regulated any electronic system related to lending. Since most P2P platforms are captured by this, this was the main form of regulation.

In 2016, the FCA began to review how this sector was regulated and, in 2018, consulted on changes. These changes come into force on 9th December 2019.

Some of the policies that P2P platforms will be required to comply with are below:

  • Customers will not be able to invest more than 10% of their portfolio on P2P investments without having spoken to an authorised person.

  • P2P platforms will be obligated to carry out an appropriateness assessment on a client’s knowledge of investment.

  • The price of credit risk on the loans that are facilitated through the platform must be able to be calculated, so that an appropriate risk-management system can exist.

  • Platforms are obliged to maintain compliance by an independent function that is permanent and appropriate. This will be mandatory unless a platform can satisfy that this would be disproportionate.

NorthRow Anti-Money Laundering and Compliance solution for the Peer-2-Peer 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 P2P. 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.

Following the tightening of regulations by the FCA, NorthRow offers a service to make anti-money laundering compliance for P2P platform lending as simple, safe and compliant as possible. The benefits of such lending can still be ascertained with added assurances that the necessary, and appropriate, verification has taken place.