AML Compliance and Its Role in the Banking-as-a-Service Sector in 2023

5 mins

Anti-Money Laundering (AML) Compliance is a critical aspect of the financial services industry, aimed at detecting and preventing money laundering and financing of terrorism activities. In recent years, the banking-as-a-service (BaaS) sector has emerged as a prominent player in the financial landscape, enabling traditional financial institutions to offer digital banking services through APIs. As the BaaS sector continues to grow and evolve, its essential to ensure that AML compliance remains a top priority.

AML compliance helps financial institutions ensure that their services are not used for illicit activities such as money laundering or financing of terrorism. The financial sector is at the forefront of the fight against financial crime and the importance of AML compliance in the BaaS sector cannot be overstated. In this blog, well explore the role of AML compliance in the BaaS sector and how it can help ensure the stability and security of the financial landscape in 2023 and beyond.

Understanding the Banking-as-a-Service sector

The BaaS sector is a relatively new and rapidly growing segment of the financial services industry. BaaS refers to a model where third-party providers offer a range of banking services to their clients through a technology-based platform. The services offered by BaaS providers include account management, payments processing, lending, and other traditional banking services. According to research, the global BaaS market size was valued at USD 19.65 billion in 2021 and is expected to expand at a Compound Annual Growth Rate (CAGR) of 16.2% from 2022 to 2030. 

The role of BaaS providers in the financial services industry is to offer a simplified and more accessible way for clients to access a range of banking services. BaaS providers partner with traditional banks to provide their services, leveraging the banks' regulatory and compliance capabilities, while at the same time providing their clients with the benefits of a technology-based platform. This creates a win-win situation for both the BaaS providers and their clients, as the clients can access a range of services without the need for a full-service bank, and the BaaS providers can offer their services without the need for a banking license.

AML Regulations and Standards in the BaaS sector

In the BaaS sector, AML regulations are put in place to ensure that BaaS providers are taking adequate measures to prevent money laundering activities in the financial services they offer.

AML regulations applicable to BaaS providers vary depending on the country and jurisdiction in which the provider operates. Some of the key regulations that BaaS providers need to adhere to include the Bank Secrecy Act (BSA), the USA PATRIOT Act, and the European Unions Fifth Anti-Money Laundering Directive (5AMLD). The BSA requires financial institutions to report transactions that exceed a certain dollar amount and transactions that are suspected of being associated with illegal activities. The USA PATRIOT Act expands the definition of a financial institution to include money services businesses and requires them to implement anti-money laundering programs. The 5AMLD establishes a common set of rules to prevent money laundering and terrorist financing activities within the European Union.

Responsibilities of BaaS Providers in Ensuring AML Compliance

BaaS providers have a crucial role to play in ensuring AML compliance in the financial services they offer. Some of the key responsibilities of BaaS providers in this regard include:

  • Customer Due Diligence (CDD): BaaS providers are required to perform CDD on their customers to identify and verify their identity, assess the risk associated with the customer, and monitor their transactions.
  • Reporting Suspected Money Laundering Activities: BaaS providers are required to report any suspected money laundering activities to the relevant authorities.
  • Maintaining Records: BaaS providers are required to maintain records of all transactions and customer information for a specified period of time.
  • Implementing and Maintaining Anti-money Laundering Programs: BaaS providers are required to implement anti-money laundering programs to ensure that they have adequate measures in place to prevent money laundering activities.

Challenges Faced by BaaS Providers in Meeting AML Requirements

Meeting AML requirements can be challenging for BaaS providers, especially in light of the constantly changing regulatory environment. Some of the key challenges faced by BaaS providers include:

  • Keeping up with changing regulations: The regulatory environment for AML compliance is constantly changing, and BaaS providers need to keep up with these changes to ensure they are meeting the latest requirements.
  • Balancing customer privacy and compliance: BaaS providers need to balance the need for customer privacy with the need to meet AML compliance requirements. This can be challenging as they need to gather and maintain a significant amount of customer information while also ensuring that it is kept confidential.
  • Managing the risk of false positives: BaaS providers need to strike a balance between being too strict with their AML compliance measures and being too lenient, as either of these extremes can result in false positives and cause unnecessary disruption to their customers financial services.
  • Cost: Implementing and maintaining anti-money laundering programs can be expensive, and BaaS providers need to find ways to keep their costs under control while still meeting regulatory requirements.

AML Compliance with Tookitaki

Tookitaki is a leading provider of compliance solutions for the fintech industry. The company offers a suite of solutions designed to help fintech companies meet the ever-growing regulatory requirements in the area of AML. These solutions are designed to be user-friendly and flexible, allowing fintech companies to customize them to meet their specific needs.

Tookitaki's Anti-Money Laundering Suite (AMLS) is a comprehensive and end-to-end AML compliance platform designed to assist financial institutions in detecting, preventing and managing financial crimes. The platform is built on a foundation of "collective intelligence" which is operationalized to enable partner financial institutions in uncovering money trails that aren’t discoverable by today’s standards. It uses machine learning and big data analytics to provide a comprehensive approach to detecting and preventing financial crime. This allows financial institutions to identify suspicious activity more quickly and efficiently.

The platform comprises of four modules – Transaction Monitoring, Smart Screening, Customer Risk Scoring and Case Manager – that are optimized for Intelligent Alert Detection (IAD) and Smart Alert Management (SAM). The Transaction Monitoring module helps financial institutions to identify and monitor suspicious transactions in real-time, while the Smart Screening module uses advanced algorithms to automatically screen customer credentials and transaction details for potential risks. The Customer Risk Scoring module dynamically assess a risk score to each customer based on their transaction history and additional layers of personal information, while the Case Manager module allows financial institutions to manage and investigate suspicious activity in a single, unified view.

Wrapping Up 

With the increasing number of regulations and standards aimed at preventing money laundering and financial crime, BaaS providers must ensure that their systems and processes are fully compliant. This requires a combination of internal controls, regulatory reporting, and technical solutions that can be used to mitigate the risks posed by money laundering and financial crime. With its cutting-edge technology and innovative solutions, Tookitaki is well placed to help BaaS providers stay ahead of the curve in this rapidly evolving landscape.

If you're a BaaS provider looking to stay ahead of the curve in AML compliance, we encourage you to book a demo of our solutions today. Our team of experts will be on hand to answer your questions and help you get started on the path to fully compliant operations.