The Peer-to-Peer (P2P) lending market is facing a boom in its market worth. With a prediction to reach $705.81 billion by 2030, its demand and rapid adoption are sure to increase. However, it is facing a severe backlash due to Ponzi, money laundering, illicit investments, collusions, and other fraud schemes. They also raise P2P lending platforms’ AML compliance risks.
P2P platforms offer hassle-free, anonymous, and less expensive financing solutions which are becoming an attraction for criminals also. Furthermore, the risk of huge investments and high-profile projects further increases the need for them to integrate AML solutions. Being a regulatory standard, the investigation of borrowers and investors has become more crucial for P2P service providers.
Increasing Threat of Money Laundering through P2P Lending
Criminals flow their dirty money through P2P businesses. It is easier to conceal true sources of income and converting them to legitimate funds is more trouble-free. They either create shell companies that have sole existence on paper or pose as startups that need immediate lending. Both ways, P2P businesses become a target of money laundering and unknowingly breach AML compliance.
On the contrary, fraudsters reap billions of funds without even leaving a trace by hiding AML monitoring checks. High-profile criminals or Politically Exposed Persons (PEPs) abuse P2P lending opportunities to hide their unlawfully obtained money in the form of investments. Considering this, regulatory bodies are toughening anti-money laundering obligations and putting forth more stringent requirements for businesses. They are monitoring platforms to ensure there is no violation of legal obligations.
P2P lending platforms should ensure they adhere to regulations such as Proceed of Crime and 2017’s Money Laundering, Terrorist Financing, and Transfer of Funds acts.
Anonymity – Another Loophole for Money Laundering
P2P lending platforms offer anonymity to customers, which increases their chances of experiencing money laundering. It helps criminals to escape regulatory checks and bypass AML screening easily. Hence, integrating efficient anti-money laundering detection systems is a sure way to detect suspicious activities. Furthermore, P2P businesses can perform efficient due diligence and predict risk scores of every investor.
AML Screening – Countermeasures for Increasing Lending Fraud Risks
P2P lending platforms face strict regulatory scrutiny due to their inefficient crime detection checks. Other than money laundering, they encounter other equally harmful threats that can cause AML compliance risks along with hefty penalties. While they embrace digitisation, there is a surge in risk of criminal activities.
Fraudsters use advanced forgery techniques to conceal their sources of income, malicious backgrounds, and other identifying details to trick P2P lending platforms’ digital onboarding systems. Read on to grasp more information regarding the prevalent fraud risks:
Collusion
Collusion involves money lending to family members, friends, and relatives with fewer regulatory checks. P2P business owners who help their close folks perform insufficient risk assessment checks and face high monetary losses. Therefore, they should establish effective AML systems to perform due diligence on every type of investor as well as borrower.
Ponzi Scheme
P2P lending companies with criminal intentions hide the raised funds for their benefit. They then use them for their own growth rather than channelling them to online borrowers. Furthermore, these bogue lending websites look for new investors and reap hefty funds to clear their own outstanding debts. Considering this, regulatory watchdogs are strengthening AML verification obligations to stop this scam.
AML Verification Guidelines by FCA for P2P Businesses
FCA has been revamping anti-money laundering guidelines to protect lenders as well as borrowers from increasing investment scams. Therefore, it made changes in the Financial Services and Markets Act of 2000 for P2P businesses so that they can bring improvement to their internal fraud controls. According to the FCA’s AML security guidelines, peer-to-peer businesses should abide by the following requirements:
- Before onboarding individual entities, P2P lending platforms should evaluate their financial knowledge and perform due diligence to ensure they do not pose any risk.
- P2P platforms should invest more in AML solutions to create effective fraud controls and adequate risk-management checks.
- P2P lending service providers should report investors opting to invest more than 10% of their shares where respective regulatory personnel will interview them.
- To cope with diverse fraud techniques, P2P businesses should assign individual roles to their staff while integrating automated crime prevention systems.
- Performing risk assessment and due diligence for different types of funding along with ongoing monitoring, is another requirement.
Concluding Remarks
P2P businesses should consider integrating AML solutions to improve their internal fraud prevention controls and offer a secure lending experience. While making their services easily accessible and convenient, they should not overlook the prevention of money laundering and other illicit actions. Therefore, P2P lending platforms need to safeguard their digital onboarding mechanisms for more robust risk assessment and due diligence checks.
As FCA and other watchdogs toughen their stance against financial crimes, incorporating AML compliance solutions is the only way for P2P businesses to keep up with obligations.
