AML or Anti Money Laundering: how to ensure your crowdfunding platform is compliant?

Thinking about launching a crowdfunding platform? Alternative financing platforms are on the rise (+62% in 2020, according to a Mazars study) and are strongly regulated, whether they deal with donations, investments (crowdequity) or loans (crowdlending). All crowdfunding platforms, no matter what they raise money for, must comply with the AML/CTF (anti-money laundering and counter-terrorist financing) regulations that govern the relationships between donors, investors or lenders and project holders as well as financial intermediaries.

AML: What are we talking about?

Anti Money Laundering (AML) is an international designation referring to European laws, regulations and guidelines preventing conversion of illegally obtained funds into legitimate income. Guided by the Financial Action Task Force (FATF), regulators around the world are enacting new laws to prevent financial crimes and the financing of terrorism.

AML regulation stems from successive European directives to prevent the use of the financial system for money laundering or financing of terrorism. These directives include a set of mandatory procedures that crowdfunding platforms must carry out to identify their customers (KYC – Know Your Customer). 

What should be checked to ensure your crowdfunding platform is compliant?

All crowdfunding platforms must comply with the regulations applicable to financial activities. Crowdfunding platforms that collect funds on behalf of third parties must be approved by the local and independent administrative authority responsible for the approval and supervision of banking and insurance institutions. Platforms can be licensed either as a payment institution (PE) if they provide payment services themselves, or as a payment service provider’s agent (APSP) if they use the services of a licensed payment service provider (PSP).

After obtaining the regulatory approvals and registrations required to start operations, the crowdfunding platforms must fulfill daily mandatory AML/CTF compliance procedures:

• Identification of all project holders and their beneficial owners, if any, by applying the KYC/KYB procedure, which involves obtaining a set of official identification documents (personal ID, incorporation documents, bank details, etc.).
• Additional control procedures (database or press checking, for example) to detect transactions involving Politically Exposed Persons (PEP) and ensure that the funds do not originate from illegal or corrupt activities.

• High risk transactions monitoring based on 5 criteria: customer relationship, type of customer, type of products or services traded, sales terms and geographical area.

• Unusual amounts and transactions monitoring.
• Applying the strong customer authentication (SCA) processes required by PSD2.

Crowdfunding platforms: what are the risks of money laundering and financing of terrorism?

Crowdfunding platforms are particularly vulnerable to money laundering due to dematerialised financial flows and because they feature projects that may be excluded from traditional financing channels. This, and the anonymity of the transactions facilitates terrorism financing, fraud, and embezzlement. Illegal funds can be discreetly reinjected into the regular economy.

The pandemic has also fueled an increase in scams ranging from the sale of uncertified protective equipment to the embezzlement of funds collected for health care workers. This has led to an increase in AML/CTF compliance requirements for crowdfunding platforms, and in particular for those that provide payment services themselves. Where larger platforms generally have a compliance department, the burden of mandatory procedures isn’t too heavy, but smaller ones tend to have difficulties mitigating the risks.

Choosing a payment service provider to ensure AML/CFT compliance

Compliance obligations may seem like an excessive burden, but the penalties for not complying are even more so: the crowdfunding platform is liable for all illegal transactions. Therefore, in order to be able to focus on their core business, an increasing number of crowdfunding platforms get support to ensure compliance by using a Payment Service Provider (PSP).

The PSP provides a secure link between the platform and the banks involved in each transaction. As a payment service provider approved by the local regulator, the PSP must fulfill all the compliance obligations related to the AML/CTF mentioned above, although the platform remains bound to perform its own due diligence. 

A PSP will generally use tools to facilitate the identification of project owners for KYC and KYB purposes and screen restricted or politically exposed persons. It also has algorithms to identify unusual or suspicious transactions.

Lemonway is a licensed payment institution that supports crowdfunding platforms and marketplaces to manage payments and regulatory compliance. Want to know more? Contact us now!