The Fintech Startup’s Guide to AML: A Cheatsheet from Sila

Financial technology, or “fintech,” startups are on the rise. These companies come up with innovative technologies that revolutionize the financial services industry. However, with new financial innovation comes risk – and one of the most significant risks for fintech startups is compliance with anti-money laundering (AML) regulations.

In this guide, we’ll help to take a practical approach to AML compliance in the early period of your company’s growth. We’ll take the time to explain what anti-money laundering is and why it matters for fintech startups, as well as describe the regulations that might apply to your business, and provide suggestions on building an effective AML compliance program.

So if you’re a fintech startup looking to stay ahead of the curve, read on!

What is AML Compliance, and Why is it Important?

To put it simply, AML compliance is a set of federal regulations used to detect and prevent money laundering. AML stems from the Bank Secrecy Act (BSA), also known as the Currency and Foreign Transactions Reporting Act, which was passed in 1970 to help a financial institution detect potential terrorist or criminal activity through suspicious transactions.

With the BSA, AML regulations have become more stringent as regulators seek to crack down on fraud, money laundering and terrorist financing. Failing to comply with AML regulations can result in heavy fines and even criminal prosecution.

An AML policy demonstrates to banks or regulators that the fintech company checks clients’ eligibility and activity for possible misconduct.

Many small business owners try to do it themselves because hiring a lawyer for AML compliance can be expensive. However, this may result in an increase in errors due to a lack of the necessary compliance expertise. And unfortunately, this can result in exorbitant fines and business shutdowns.

If you want to start a consumer banking or payments app, it’s essential that fintech businesses comply with financial crime constraints such as those required by US law.

What does an AML Policy Include?

An AML policy should possess several key components, including:

  • Identification and verification procedures for customers and beneficial owners
  • Transaction monitoring: You’ll need to develop systems for detecting and reporting suspicious activities
  • A process for reporting suspicious activities
  • Regulatory compliance procedures for employees
  • A risk assessment matrix to help identify high-risk transactions
  • AML regulation training requirements for all employees

Because most jurisdictions have implemented mainly FATF standards, it is easy to build an AML policy using a template. However, there are drawbacks associated with templates. For example, many templates do not reflect the specific risks associated with a company’s industry or sector.

Why do You Need an AML Policy for Your Fintech Startup?

The American fintech industry is highly regulated to protect customer data, sensitive banking information, and to prevent money laundering activities. Most fintech services are tightly regulated, but if you want to be involved in financial solutions, then you must have AML compliance included.

Most AML policies include 5 key components:

  • Built-in operations: When compliance is designed into your organization or product, then it becomes a priority to each internal operation.
  • User processing policies: User processing includes onboarding, KYC, payments managment, and account management.
  • Accounts monitoring: Fintech companies need to monitor high-risk customers and revoke their access when it presents too much of a risk. A risk assessment should be performed regularly, during onboarding, and throughout the customer’s lifecycle to understand threat tiers.
  • Reporting of money laundering incidents: Effective reporting is the most powerful part of the anti-money laundering system. When reported to the relevant regulator bodies, like the Federal Reserve, fintech companies can stop high-risk individuals and protect consumers.
  • A compliance officer on the team: Having a compliance officer within your organizational structure will ensure that reporting and monitoring procedures are followed effectively. They should possess expert knowledge of regulatory data, tools, and regulations proficiency. They should also have extensive experience in the financial sector in AML compliance, legal or internal risk audits, and have CAMS, CAFP, or CRCM certification.

Fintech startups essentially need to provide constant vigilance when it comes to potential money laundering activities.

What is Customer Due Diligence (CDD)?

Customer due diligence (CDD) is the process of identifying and verifying your customers. This includes collecting information about your customers’ identities, their source of funds, and business activities. It also involves conducting ongoing monitoring to ensure no changes in the customer’s risk profile.

CDD is a crucial part of AML compliance for fintech startups because it helps identify high-risk customers and deter money laundering activities. Depending on the risk of the customer, fintech companies may need to apply enhanced due diligence.

How to Ensure Your Business Stays Compliant with the New Regulations

Strict AML regulations have introduced a number of changes that will affect fintech startups. One of the most noticeable changes is that all money service businesses (MSB)—including digital currency exchanges—must register with FinCEN as of 2020. This includes both existing and new businesses.

Although the AML Act and BSA are wide-reaching, they primarily function as a foundation for reporting to US government agencies to detect red flags related to money laundering. Record-keeping of cash or negotiable transactions greater than $10,000 (daily aggregate amount) and filing reports of suspicious transactions that might indicate money laundering, tax evasion, or other criminal activities are all required by FinCEN in the United States.

A final noteworthy change is the introduction of huge fines for AML violations. This is a clear sign that regulators are taking AML compliance seriously and are prepared to levy heavy penalties for non-compliance.

Streamline Your AML Processes With Sila

It might be difficult for fintech businesses to establish an AML compliance strategy. The more you learn, the more complicated it gets to figure out how to fill each part of the form and what data should go in each section. Fintech entrepreneurs should concentrate on developing their business while nevertheless following necessary US financial regulatory requirements.

So, to make the process easier, Sila is here and offers the following benefits:

  • A smart payments platform builder designed with AML laws and customer due diligence (KYC/KYB) in mind
  • Other embedded compliance features in the code for BSA and AML
  • Client support for compliance regulations and best practices
  • Fulfills SARs filings and other AML reporting
  • Its third-party partnerships for identity verification and bank account linking offloads data storage for personal information

Sila’s importance in the equation cannot be overstated when it comes to banking infrastructure technology. Sila is a powerful suite of financial technology that allows fintech firms to easily and securely build the next greatest fintech app with AML compliance and blockchain technology strongly considered.

As an innovator and fintech startup, you likely do not have the time or resources to develop this technology in-house as a startup. Sila offers an outsourcing solution so that you can focus on other things.

Sila can help your startup develop an effective AML compliance program that meets all US regulatory requirements, so you don’t have to. Learn more about Sila’s powerful technology in our weekly demo, or start your app in the sandbox today!