NBFIs Under the Microscope: Highlights from the ECOM21 Event


The strangeness of life during the COVID-19 pandemic means that events such as the e-commerce conference ECOM21, which took place in Latvia in March, now feel like an age away.

 This year, ECOM21 focused specifically on the implementation of artificial intelligence (AI) in the field and I had the privilege of talking to the audience about the benefits and realities of applying AI techniques in financial crime screening.

One of the things I was most struck by during the event was the number of delegates that represented non-bank financial institutions (NBFIs). There was a common theme in the conversations we had; they felt under increasing pressure from regulators and industry bodies to make sure their anti-money laundering (AML) processes were up to scratch.

This is a growing global trend. For years, banks have been the primary focus for regulators and governments in the worldwide fight against money laundering.

The Baltic region has been no exception, and the states are working hard to tighten the effort against money laundering following a series of scandals.

In 2018 the Latvian bank ABLV was closed down after being accused by the U.S. Treasury of money laundering, and more recently Swedbank was fined for its failure to uphold stringent compliance processes with Baltic operations. So deep were the concerns, that in March 2019, Baltic and Nordic financial regulators called for a pan-European law enforcement authority to combat money laundering in the region.

Regulators and governments have worked hard to counter the threat. The Financial Action Task Force’s (FATF) 2019 progress report on Latvia found that it had made significant headway in strengthening its AML/CFT measures.

This was swiftly followed in 2020 with a decision by FATF not to add Latvia to the grey list of countries that fall short of properly combatting money laundering and terrorist financing. Had the country been added, its economy and international standing  could have been damaged significantly.

Criminals Target NBFIs

As tighter AML and counter terrorism-financing (CFT) requirements have been introduced in banks across the world, criminals have begun to target other, less tightly-regulated elements of the financial network, particularly those NBFIs involved in money transmission, investment, and the cashing of cheques.

As a result, NBFIs are increasingly under the regulators’ microscope. The size or financial circumstances of an NBFI is not relevant to their scope of investigation. If the business is subject to AML law (the 6th AML Directive sets out the requirements for NBFIs in the European Union, for example), it must comply with requirements. Regulators will not accept ignorance as an excuse.

In practice this means that NBFIs need to know where third party payments are coming from, and who is making them. As organisations they are extremely diverse and can range in size from a multinational insurer to a small independent grocery business. The range of services offered to customers are equally broad. Some NBFIs are high risk, some are low risk – the challenge for NBFIs is to find a reliable and effective solution that reflects and manages their own individual requirements and risk profile.

KYC processes should be robust enough to establish the customer’s identity and the nature of their activities, but in some cases (depending on the risk profile of the customer), enhanced due diligence will be needed to established. For example, enhanced due diligence might look into:

  • The ultimate beneficial owner of an entity making a payment or opening an account – i.e. any individual who ultimately owns or controls more than 25% of the shares or voting rights of a company, or 25% of the capital or profits of a partnership
  • Whether a customer is a politically exposed person (PEP)
  • The source of their wealth or source of funds.

The complex nature of international business, combined with the endless creativity of money launderers, means that establishing the source of payments and the identity of customers is rarely straightforward. Criminals will attempt to hide behind a company structure, or intentionally provide false information.

Automation is the Answer

While most NBFIs are well aware of the need for thorough screening, processes vary considerably between organisations.

Many of the smallest companies rely on manual screening, which is time-consuming, often unreliable and does not leave a clear audit trail in the event of an investigation by regulators.

Larger NBFIs may have automated processes in place, but in some cases the algorithms produce multiple false-positive results that must be checked by staff, without holding up payment for bona fide customers.

Fortunately, advancements in technology mean that a range of affordable automated screening solutions, including comprehensive databases of PEPs, are available that are suitable for businesses of all sizes. These solutions allow NBFIs to meet their AML compliance obligations effectively and efficiently, without damaging customer service.

While stringent AML compliance will increasingly be required by regulators, there are many potential benefits for NBFIs:

  • Better working relationships with banks
  • Protection from reputational risk
  • The opportunity to expand into higher-risk jurisdictions, confident that risks are being properly managed
  • A better customer experience through faster onboarding and transaction processing.

The increasing regulatory pressure on all organisations of all sizes to comply with AML/CFT requirements has created a boom in compliance solutions. It is essential that the selected solution matches the individual needs of a NBFI today but also allows it room to grow.

Key questions for organisations such as NBFIs to ask when looking for solutions include:

  • Which kind of screening technology will meet the needs of the business?
  • Does the business have high-risk clients or engage in business in high-risk jurisdictions?
  • What processes are needed for the ongoing monitoring of customers?
  • Would the organisation benefit from cloud solutions that can be accessed remotely?
  • Does the solution need to be scalable to allow for business growth?
  • How much training is required for staff?

The ECOM21 conference provided me with great insight into the Baltic region and the unique challenges it faces, as well as the opportunities that exist for the firms that take their AML-CTF responsibilities seriously. Having the opportunity to share knowledge and learn from others in the industry not only makes events like this incredibly enjoyable, but also serves to fuel our market-led innovation at Accuity.