Financial news

Challenger banks may be failing to successfully scan new customers against sanctions or politically exposed persons (PEP) lists; according to a new survey commissioned by digital compliance firm, SmartSearch.

In the SmartSearch survey, only 24 per cent said they always verify new customers, while 54 per cent also freely admit to performing such checks only ‘on occasions’.

The survey was conducted by Censuswide and received responses from 500 compliance decision-makers, at crypto exchanges, casinos, online betting platforms, high-street betting shops, property development firms and both traditional and challenger banks.

Around 36 per cent of challenger banks have made changes to their compliance procedures in the year since Russian sanctions began. However, incumbent banks appear to have displayed a little more urgency with 60 per cent of high street banks taking additional measures.

SmartSearch has revealed concerns that challenger banks could receive substantial fines and significant reputational damage associated with Anti-Money Laundering (AML) breaches.

The survey is the third in SmartSearch’s ongoing ‘Electronic Verification Uncovered‘ campaign, aiming to make regulated firms aware of the dangers of relying on flawed, old-fashioned methods of identity verification.

The campaign argues that regulated businesses should use digital compliance to ensure they properly identify and screen clients – as recommended by the Government in the 2020 Money Laundering and Terrorist Finance Act – to stem the flow of dirty money into the UK and protect firms from the fines and reputational damage which come with breaches.

A Financial Conduct Authority (FCA) review last year raised concerns over the weaknesses in customer due diligence (CDD) declaring that most challenger banks did not obtain details about customer income and occupation. The FCA concluded that this resulted in an incomplete assessment of the purpose and intended nature of a customer’s relationship with the bank.

Compliance problems for challengers

Martin Cheek, managing director of SmartSearch, explained that despite the difficulties of keeping up with changing compliance rules, challenger banks need to step up their efforts. He explained: “The figures reveal a larger problem with challenger banks and their unwise complacency towards compliance.

“These firms face the arduous task of keeping up with ever-changing compliance requirements, but simply screening new customers ‘on occasions’ is not enough.”

Cheek also outlined the complexities of identifying PEPs: “The truth about PEPs is that they are not all easily recognisable; many of them are faceless names on a bank account. As a result, banks need the ability to not only flag PEPs but also make informed decisions on who they choose to do business with.”

To mitigate the risks of compliance breaches, firms are urged to adopt robust digital compliance solutions that can efficiently flag PEPs and provide the necessary data to make informed decisions.

By implementing these solutions, banks could minimise compliance risks and enhance their due diligence processes, aligning with the recommendations outlined in the 2020 Money Laundering and Terrorist Finance Act.

SmartSearch’s digital compliance solution supports more than 6,000 clients and 55,000 users across the world, helping them deploy millions of complex identity checks in seconds.