Financial technology (FinTech) has revolutionized the management of money, investing, and doing transactions. This growth has raised questions about privacy and anti-money laundering (AML) controls that financial institutions and consumers are now worried about. It has been so important to balance robustness in AML compliance with the protection of personal data.
We will discuss how FinTech companies can easily navigate AML compliance and take care of data privacy at the same time.
What is AML compliance in FinTech?
AML compliance is the process that financial institutes follow to avoid money laundering and other such unlawful activities. Money laundering refers to the process of converting illegitimate money into legal money. According to the FATF (an intergovernmental organization), $800 billion to $2 trillion are laundered a year worldwide, which makes up a significant portion of world GDP.
In the world of FinTech, AML compliance is the use of technology to monitor all transactions, identify suspicious activity, and report it to the right authorities. This typically involves money laundering (AML) checks to verify the identity of the real customers and the validity of the financial transactions. AML regulations protect the financial system, but most of the time, FinTech companies have to collect and analyze big amounts of personal data.
Balancing Data Privacy and AML Checks
The main issue for FinTechs is to comply with AML while keeping security and privacy concerns. AML regulations require the collecting and storing of personal data, and this can put the privacy of individuals at risk since these days when data breaches and cybercrime are on the rise.
Regulations around data privacy have raised the bar in how personal information is captured, stored, and shared with laws like the European Union’s (EU) General Data Protection Regulation (GDPR) and the California Consumer Privacy Act (CCPA) in place. These laws were designed to uphold the user’s rights to privacy and the ownership of their data. However, AML requirements have sometimes proven to conflict with these privacy laws, requiring such a large amount of data collection.
FinTech companies need to gather sensitive data from their customers, like full names, addresses, dates of birth, and more of their financial records. While they have to make certain that this data is stored correctly and is kept secure, simultaneously, they make sure that customer privacy is not breached. It is a complex landscape in which FinTech companies have to navigate the AML regulations and maintain customer privacy.
AML Regulations and Their Impact on Privacy
AML regulations exist to prevent crimes that involve financial black money, among which are money laundering, fraud, and terrorist financing. Customer Due Diligence (CDD) is a part of these regulations, and financial institutions have to verify their customer’s identities and the nature of financial transactions.
In the digital era, AML checks are mostly about real-time monitoring of large quantities of financial data. Although this is needed to prevent improper activities, there can be some reasons for concern about how personal data is handled. For instance, there are transaction monitoring systems that will vigilantly watch certain financial actions and then flag them, resulting in the requirement for more investigation and frequent collection of even more personal information.
Technology in Compliance and Data Protection
To acquire a solution to tackle the complex intersection between AML compliance and data privacy, FinTech companies have been increasingly relying on technology. To keep the data secure, AML checks are being automated by advanced software tools, AI, and machine learning (ML).
FinTech companies may use AI and ML to find suspicious activities without breaching privacy. Patterns that can be identified in transaction data can be analyzed by these technologies, which can help identify unusual behavior without the need to collect invasive data.
Bonus: FinTech companies can adopt privacy-enhancing technologies like encryption and anonymization of customer data so that they can protect their customers’ data while conforming to regulatory operations.
Challenges for FinTech Companies
While the FinTech industry has come a long way with advances in technology, there are still some hurdles FinTech companies have to face in order to balance AML compliance with privacy concerns. The cost of implementing the required systems to comply with AML regulations as well as privacy laws is one major challenge. For example, data security systems that prevent compliance are very expensive (and costly) for smaller FinTech firms with small financials.
How FinTech Companies Can Navigate This Balance
In order for FinTech companies to bridge AML compliance and data privacy, a risk-based approach must be adopted. Thus, this should be done by implementing AML, which is suitable to a certain level of risk for the specific customer or transaction. For instance, they can screen up significantly more rigorous AML checks against the customers of high risk and limit the data collection for the other customers of lesser risk.
