Improving Digital PSPs Fraud Prevention Controls with AML Solutions

The existing anti money laundering regulations are inadequate to fight emerging financial crimes. True to some extent, with an increase in volume, speed, and sophistication of online transitions, instances of fraud are simultaneously skyrocketing. As digital payments are just a click away, criminals see this as an opportunity to wash their illicit funds. 

The global PSP market will reach $2.9 trillion by 2030. In wake of this, they are massively relying on implementing advanced AML solutions to counter criminal activities. While they believe the current international fraud prevention framework is not enough, integrating tech-driven IDV mechanisms is their only way to prevent illicit activities. This blog covers how automated AML verification solutions overcome vulnerabilities of PSPs. 

AML Vulnerabilities of PSPs – Reasons for Compliance Risks 

The growing popularity of digital financial services is exposing PSPs to a variety of crimes and in recent years, there has been a noticeable spike in fraud scandals. Similarly, high-profile terrorists, politicians, and sanctioned oligarchs are seen washing their proceeds of crimes through e-commerce scams. Hence, inadequate anti-money laundering measures lead to non-compliance, hefty penalties, and forced shutdown.   

Money laundering through PSPs takes manifolds such as tax evasion, blending funds, invoice fraud, offshore transfers, and smurfing. Shell companies use third-party payment providers to conceal their Ultimate Beneficial Owners (UBOs). Collectively, all of these instances increase illicit digital onboarding and AML vulnerabilities of PSPs. In this scenario, integrating efficient anti-money laundering solutions has become a liability for payment providers. 

More recently, there has been a considerable emphasis on the following threats that exploit vulnerabilities of PSPs:

Laundering Through Transactions

Criminals exploit online transactions by using e-commerce purchases. They consider retail e-stores as a virtual front for hiding and cleaning their illicit funds. By ordering goods, food, or other items in bulk they steer clear of AML compliance and fraud detection. Furthermore, using shell companies as a potential cover helps them make high-value purchases look legitimate. 

Transactional scams account for around one-fifth of the total money laundering exposing PSPs to serious legal repercussions. It also drives adverse effects on leading businesses such as eBay, Ali Baba, and Amazon.

Money Muling 

Fraudsters target accounts of other persons referred to as mules, for transferring their malicious money and escaping AML screening. The latter is unaware of criminal intentions and lets the former use their profiles. Later, fraudsters either withdraw the funds or re-transfer them for converting into clean cash. With the growth of PSPs, money-muling instances are also increasing. Criminals further perform cross-border transactions and crypto trading to hide AML compliance.

Changes in the AML Security Framework

Skyrocketing increase in financial crimes through PSPs is grasping the attention of international legal bodies. The nature, speed, and anonymity of cross-border transactions are driving digital payment companies under strict regulatory scrutiny. Initially, the legal actions were slow and less reactive to PSP scams, however, over the years, regulators are strengthing AML compliance for service providers. 

Financial Action Task Force (FATF)

On a global level, PSPs are subject to guidelines put forth by FATF. As per its Guidance published in 2016, digital payment providers need to adopt an effective Risk-Based Approach. Furthermore, the FATF’s standards lay out AML monitoring guidelines to counter money laundering and terrorist financing. These liabilities apply to both countries and PSPs facilitating online transactions. 

European Union (EU)’s Guidelines 

The European Union (EU) is continuously striving to enhance countries’ AML/CFT mechanisms for countering financial crimes. In wake of this, it put forth six directives over the decades with its last standards enforced in June 2021. Each regulation came up with different legal requirements aligning with the present criminal threats. Therefore, PSPs operating within or across Europe are subject to anti-money laundering directives.

The most recent is 6AMLD with the implication for payment providers to enhance their crime prevention defenses. Furthermore, PSPs need to integrate efficient AML security controls for adhering to the revised Wire Transfer Regulation (WTR). 

Automating PSPs to Ensure AML Regulatory Compliance

Digital financial services adoption is increasing at unexpected levels and so are the regulations. Considering the payment fraud and flow of illicit funds, legal bodies are enacting stricter penalties as well as anti-money laundering requirements. AI-powered AML verification solutions leverage accurate risk assessment, due diligence, and ongoing transaction monitoring. This way, PSPs can not only overcome their vulnerabilities but also provide secure digital payment services.

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Key Takeaways

Integrating AML solutions enable PSPs to counter fraud and comply with evolving regulations. Hence, to reduce fraud risks and elevate the adoption of online financial services, PSPs require robust AML systems. With their solutions such as risk assessment, real-time customer identification, due diligence, and ongoing monitoring, AI-powered anti-money laundering mechanisms effectively safeguard PSPs’ operations.