Development of documents for compliance with AML- / CFT-regulation for a fintech project
The fintech industry is one way or another associated with many risks. One of them is the possibility of fraud through financial platforms, as well as terrorist financing. To prevent these financial crimes, all jurisdictions have a large body of AML / CFT regulation. Such legislation imposes the obligation to adopt documents on the assessment of AML / CFT risks and their mitigation. At the same time, the documents must simultaneously comply with legislative standards and be individualized for a specific fintech project. You can read about what you should pay attention to when developing these documents in our article.
Contents:
- Why does fintech projects need AML / CFT documents?
- Content of AML / CFT documents of a fintech organization
- User identification in decentralized fintech projects
Why does fintech projects need AML / CFT documents?
Financial activity is associated with high risks, therefore the legislation of almost all countries contains a block of norms, countering the financing of terrorism and money laundering. In some jurisdictions, it applies to specific organizations, since they have a “financial” license for any activity (Belgium, Malta), in other countries AML / CFT regulation is applied regardless of the presence of a license only by virtue of carrying out a certain activity (Netherlands). Therefore, when creating a fintech project, you will come across this question in one way or another. The development of AML / CFT documents should take place at the earliest stage, since they are mandatory. And if your activity is subject to compulsory licensing, then these documents will be required by the regulator along with the application for a license.
Content of AML / CFT documents of a fintech organization
AML-regulation (anti-money laundering) - anti-money laundering regulations. CFT-regulation (counter-financing terrorism) - the rules, countering the financing of terrorism.
The policy adopted by your fintech project must meet these requirements. The main content of the policy is to describe the procedures and measures that you take in order to prevent these illegal activities.
At the same time, when implementing the AML / CFT policy, all bodies adhere to a risk-based approach. The FATF, the international organization dedicated to the development of anti-money laundering measures, periodically publishes a list of high-risk jurisdictions and those under special scrutiny.
Therefore, the procedures that will be contained in your policy may also depend on the perceived level of risk.
The following universal requirements for AML / CFT policy can be distinguished:
- They must be approved by the body of the fintech project, the general meeting of the founders or the board of directors;
- There should be a position in the organization whose responsibilities include coordinating AML / CFT procedures;
- These procedures must be independently verified;
- This policy should apply to all branches and subsidiaries of the fintech project;
- The documents must provide for the period during which the received data on operations and clients will be stored.
- Procedures to reduce the risk of money laundering or terrorist financing.
What procedures can be provided for in the AML / CFT policy?
Taking into account the risk-based approach, the following procedures can be envisaged:
- Due Diligence in relation to clients:
- Low risk - basic customer identification procedure
- High risk - longer identification procedure, taking several days
- Very high risk - a deeper procedure with an analysis of an additional level of beneficiaries
- Monitoring of translations. For high-risk clients, monitoring occurs more often and on large parameters
- For high risk clients, their beneficiaries are verified, with a very high level - your user's client verification.
KYC procedures for a fintech project
One of the key measures in preventing financial crime is KYC (Know Your Customer) procedures. The essence of these measures is to identify users. For their implementation, an independent KYC policy can be adopted.
Thus, an increased risk is posed by:
- Clients, due to their characteristics, pose an increased risk
- These include foreign politically exposed persons (PEPs), as their status makes them more likely to engage in corruption. PEP family members are also at increased risk.
- Clients from high-risk jurisdictions;
- Clients making large transfers without specific goals;
- Clients who have relationships with persons or organizations that do not meet the requirements of AML / CFT regulation;
- Customers Suspected of Related Violations.
User identification in decentralized fintech projects (DeFi)
DeFi (decentralized finance) startups also need to think about user identification procedures. At first glance, the system based on decentralization directly contradicts the KYC policy, which requires customer verification. DeFi projects tend to follow anonymity and do not have any hierarchy: it is difficult to determine who is the client and who will be in charge of AML / CFT compliance. However, it is worth considering this regulation if your DeFi project plans to obtain a license, since one of the requirements will be to develop AML / CFT documents. Given the tendencies of the European and American regulators that are trying to move DeFi projects out of the gray zone, it is worth paying close attention to KYC requirements, even for systems built on anonymity.
Thus, the adoption of AML / CFT documents within a fintech organization is an important stage. Without them, the company will either not receive licenses and other documents, or will be held accountable. At the same time, when drawing up these documents, it is worth considering all the requirements of acts in the field of combating fraud and financing of terrorism. If your fintech project is related to several jurisdictions, it is better to focus on a higher standard. AML / CFT policies should be based on a risk-based approach. The basic procedure is the identification of clients, depending on the assessed level of risk. If you still have questions about the development of documents for a fintech project or you need help in drafting AML / CFT documents, please contact A4 Law Firm lawyers.
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