The Peer-to-Peer (P2P) lending industry is seen as experiencing tremendous growth after being valued at $407.2 billion in 2022. However, it is also facing several collapses due to high fraud risks. The proliferation of money laundering, Ponzi, collusion, and other criminal schemes is exposing P2P businesses to legal consequences. Furthermore, they increase financial and reputational losses along with AML compliance failure.
P2P platforms provide less expensive lending options by assisting customers through online sites. Due to higher investment risk, these providers need to safeguard their services against criminals. As per regulatory standards, AML monitoring of both investors and borrowers has become a liability. This article covers Financial Conduct Authority (FCA)’s anti-money laundering regulations and how IDV solutions help overcome financial troubles.
The Proliferation of Money Laundering Within the P2P Businesses
Criminals target P2P lending platforms for concealing their source of funds and flowing it through financial systems to change their status from illegitimate to clean money. Moreover, fraudsters use shell companies to indulge in false investments and reap millions from investors. Due to a lack of AML solutions, P2P businesses leave more space for criminals. They further escape legal proceedings and penalties by hiding their unlawfully obtained funds under cover of investments.
In order to prevent the flow of illicit resources through P2P lending, regulatory watchdogs are bringing in strict anti-money laundering requirements for businesses. For this, they are monitoring platforms to ensure they comply with regulations such as Procced of Crime and 2017’s Money Laundering, Terrorist Financing, and Transfer of Funds acts. These standards mandate AML screening of investors and borrowers. Furthermore, P2P platforms should perform risk assessment, client due diligence, and cross-verification of individuals prior to their onboarding.
P2P lending platforms offer anonymity to customers which increases their chances of experiencing money laundering. Therefore, these service providers need to integrate efficient AML solutions for outlining the risk scores of clients as well as validating their source of funds. This way P2P businesses can stay in line with regulatory standards and ensure secure financial dealings.
AML Screening – Outlining Other Types of Fraud Risks in P2P Lending
Along with money laundering, P2P lending platforms also undergo other fraud risks that subject them to strict regulatory monitoring. In worse scenarios, this can lead to legal repercussions and hefty anti-money laundering non-compliance penalties. While moving their operations to online platforms, P2P businesses are attracting more criminals.
With advanced tools at their disposal, fraudsters easily hide their true identities and register as imposters. More fraud types P2P lending platforms deal with include:
Ponzi Scheme
This type of fraud involves hiding the funds that P2P lending companies raise. They then use them for their own growth rather than channeling them to online borrowers. Fake investment players often use this scheme and rely on new entities to pay the older ones. In order to stop this scam, regulatory bodies are placing strict AML verification standards in place.
Indeitty Theft
Fraudsters camouflage identities to escape anti-money laundering checks. By using information along with documents of other individuals such as salary slips, ID cards, and others, they easily conceal their true identities. To prevent this fraud, P2P lending platforms require robust KYC and AML solutions.
Collusion
This process involves lending money to relatives, friends, or other close members without implementing proper KYC procedures. P2P platforms facilitating this type of lending need to integrate efficient digital onboarding controls to assess risk of both investors and borrowers. With AML compliance solutions in place, lending sites can further mitigate flow of illicit funds.
FCA’s Guidelines Regarding AML Verification for P2P Platforms
In order to safeguard borrowers and lenders from scams, FCA issued new anti-money laundering guidelines for P2P businesses. Following an increase in investment fraud and other such criminal activities, this authority made amendments to its Financial Services and Markets Act 2000 which encompassed the majority of digital lending platforms. These reforms came into force on December 9, 2019, with the following AML verification obligations:
- P2P businesses should conduct an enhanced evaluation of individuals’ identities and their financial knowledge prior to registration.
- Lending platforms need to bring in AML solutions for establishing adequate risk-management systems.
- Investors looking forward to spending more than 10% of their share through P2P lending should be interviewed by the respective official.
- In order to ensure AML compliance, P2P businesses should perform permanent and suitable independent roles while monitoring every type of funding.
In Summation
For making their operations secure, easily accessible, and convenient, P2P businesses need to invest more in building anti-money laundering measures. By integrating efficient digital onboarding solutions, these lending platforms can identify high-risk entities at the time of registration and restrict their access. Furthermore, regulatory watchdogs such as FCA are toughening their stances on fraud prevention. Hence, P2P lending platforms should incorporate AML solutions to better address criminal risks.