Fintechs face an especially grave risk of money laundering – FINTRAC

This is largely because the sector has a poor understanding of its anti-laundering obligations

Fintechs face an especially grave risk of money laundering – FINTRAC

Fiscal watchdog FINTRAC has warned that fintech companies are at greater risk of money laundering due to a lack of mitigating measures on their part, according to documents obtained by The Globe and Mail through an Access to Information request.

Among the most susceptible sub-sectors were alternative lending, electronic payments, virtual currencies, and online gambling – all of which have vulnerabilities that have yet to be addressed by further legislation.

“[Peer-to-peer] payments will remain one of the most important money laundering/terrorist-financing vulnerabilities to monitor in this segment,” the documents reported.

“While recognizing that not all transactions that use mixing services are illicit and that some users have legitimate reasons to seek greater anonymity, the capacity of mixers to break and hide the links between users and their transactions make them attractive tools for illicit actors,” a FINTRAC spokesperson told The Globe and Mail in an e-mail.

This is especially because at present, fintechs possess a “limited understanding” of their duties under Canada’s anti-money laundering regulations, FINTRAC stressed in the documents.

The most important of these rules mandate financial institutions and companies to ensure that clients are readily identifiable, to maintain strict compliance programs, and to report any suspicious transaction that takes place under their auspices.

Crucially, tightened policing of electronic transactions is still a ways off: Virtual currency exchanges will fall under FINTRAC’s jurisdiction only by June 1, 2020.

And even the expanded scope will not be enough if the FINTRAC continues to suffer from a lack of proper support.

“FINTRAC’s resources for examinations are largely constrained,” according to Matthew McGuire, co-founder of anti-laundering think-tank The AML Shop.

Canada has approximately 30,000 reporting entities, but the FINTRAC is able to conduct only around 300 examinations annually.

“You could continue operating as a fintech for a very long time before you run into the regulator.”