FinTech and Terrorist Financing – a major RegTech issue

By Christine Duhaime | January 27th, 2016

The news last month that the couple responsible for the San Bernadino shooting had received a P2P loan for $28,000 from an online lender, Prosper Marketplace, was cause for concern among financial crime regulators.

It was cause for concern because some financial regulators were of the view that a typology for terrorist financing is the liquidating of financial assets in the West in anticipation of a flight to the Middle East to join the jihadist movement. But that is not necessarily so. Would-be terrorists actually do the opposite – they borrow money to fund acts of terrorism, and sometimes make false welfare claims for money – but they do so usually only from what they view as unsympathetic (enemy) institutions, FinTechs or governments.

Other forms of FinTech besides P2P lending, have been used for terrorist financing – an American crowdfunding platform called GoFundMe was used by a Canadian man in Montreal to raise funds purportedly to free teenage girls held captive by ISIS in Iraq. GoFundMe shut down the campaign but only after $502,000 was paid by people around the world for the campaign who may not have realized that the law prohibits fundraising for terrorist groups, regardless of the reason. It is not known whether GoFundMe disbursed any money to the Montreal organization for terrorist financing.

Australian and French police have noted the increased use of store-value cards, lines of credit, small loans and credit cards by foreign fighters to fund terrorism. In Australia, regulators reported that cases of terrorist financing increased 300% in 2015, most of it from FinTech.

There is a growing problem of the lack of financial regulatory understanding on the part of FinTechs, which leads to failure of financial crime compliance, which in turn places the financial system at risk. Other RegTech issues include privacy law compliance and consumer protection.

The reality is that there is no FinTech in the world that comprehends the law of financial crime (whether it be anti-money laundering law, counter-terrorist financing, and sanctions) and therefore is capable of complying with it.

I often test this with FinTechs by asking any of them to explain how they conduct beneficial ownership due diligence for, lets say, a share pledge debt financed client or if they can tell me if Mei Wang Li is a politically exposed person, or if they can tell me whether one faxes the RCMP or CSIS in cases of the receipt of sanctioned funds in Canada. Try it — you will receive a blank look from every FinTech who believes that the acronym  “KYC” stand for anti-money laundering law and that they are compliant in respect thereof.

You can learn more about RegTech and FinTech at FinTech 2016 on April 14, 2016 in Vancouver.

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