In brief:
- A proposed rule from the Financial Crimes Enforcement Network (FinCEN) will increase regulatory scrutiny on banks by requiring banks to prove that their anti-money laundering (AML) and financial crime prevention programs are compliant and effective.
- Fintechs should expect increased due diligence requests from their sponsor banks and proactively work to strengthen their business onboarding compliance programs to meet heightened regulatory expectations.
- Middesk’s latest eBook offers fintechs a guide to the changing regulatory landscape along with specific recommendations for enhancing onboarding strategies to maintain compliance and secure the trust of sponsor banks.
The regulatory landscape for know-your-business (KYB) has shifted significantly over the past few months. “Check-the-box” compliance programs have left banks and their fintech partners vulnerable to sophisticated fraud schemes, and standard practices that most fintechs have put in place to block bad actors and meet regulatory expectations are coming under increased scrutiny.
Sponsor banks will rely on their fintech partners to both make sense of these regulatory changes and make the necessary enhancements to their business onboarding programs to remain compliant. This article provides an overview of the changing landscape and how you can evolve your business onboarding programs to meet heightened regulatory expectations and build trust with sponsor banks, regulators, and your customers.
Top three recent regulatory changes impacting fintechs
The regulations governing business onboarding are becoming increasingly complex, and fintechs must take proactive steps to enhance their compliance programs.
By focusing on rigorous address verification, accurately identifying Ultimate Beneficial Owners (UBOs), and comprehensive sanctions screenings, fintechs can better meet these heightened regulatory expectations and mitigate risks.
1. Increased scrutiny on address verification
Traditional address verification methods are no longer sufficient to meet regulatory expectations.
For years, standard verification protocol for businesses has been a cross-check between the address provided by the would-be customer and the government-listed address for that same business. However, money laundering through virtual businesses that operate with a commercial mail receiving agency (CMRA), private mailbox, virtual office, or registered agent address are becoming more and more common. As a result, fintechs and sponsor banks must invest in scalable yet increasingly vigorous address verification and remediation strategies to prevent fraudulent businesses from opening accounts.
2. Increased focus on understanding Ultimate Beneficial Owners
Regulators are placing greater scrutiny on identifying Ultimate Beneficial Owners (UBOs) to prevent money laundering and terrorism financing.
For example, the launch of the FinCEN Beneficial Ownership Information (BOI) registry in January of 2024 emphasizes the need for businesses to understand the UBOs behind their customers. The registry helps banks cross-reference the information provided by their clients during the account opening to identify discrepancies or red flags, such as undisclosed beneficial owners or connections to high-risk individuals and entities. For fintechs, understanding UBOs is essential not only for compliance but also for building trust with sponsor banks and regulatory bodies. Implementing robust systems to verify and continuously monitor UBO information ensures that fintechs can accurately assess the risk profiles of their customers and detect any potential illicit activities early on.
3. More comprehensive sanctions screenings expected
2023 and the first half of 2024 have been extraordinarily active years for U.S. trade controls. The Biden administration has imposed sanctions at an unprecedented rate nearly double that of the Trump administration and triple the pace under President Obama.
In addition to the sheer number of new sanctions designations, the past year was noteworthy for the scale and scope of enforcement actions targeting sanctions violations. The Office of Foreign Assets Control (OFAC) that maintains the restricted party list issued record-breaking civil monetary penalties measured in the hundreds of millions of dollars and closely coordinated with the U.S. Department of Justice to mount criminal prosecutions. With the increase in sanctions designations and aggressive enforcement actions, fintechs are under pressure to have comprehensive OFAC screening tools that block Specially Designated Nationals (SDNs) and sanctioned entities from entering the U.S. financial system. This includes not only initial screenings but also ongoing monitoring to ensure that onboarded customers who end up on a sanctions list are offboarded appropriately.
Practical strategies to enhance your business onboarding program
Although direct regulatory compliance generally applies only to financial institutions, fintechs are often contractually obligated to meet the same standards as their sponsor banks. The following strategies can help fintechs proactively strengthen their onboarding programs and win the trust of sponsor banks, regulators, and their customers:
- Conduct an address risk audit
- Link individual and business data
- Invest in ongoing and dynamic onboarding controls
Get the full guide to learn more about how to implement these onboarding solutions for your business.
Strengthen your business onboarding program with Middesk
At Middesk, our goal is to help fintechs onboard more good customers while denying fraudsters and criminals. Middesk’s Business Verification solution helps fintechs move beyond check-the-box compliance and improve their business onboarding programs with enhanced address insights, KYC checks, watchlist screenings, and more—without compromising customer experience. Download the complete guide to Navigating Regulatory Changes and Mitigating Risk in Business Onboarding, or contact our sales team for a demo today.
