12 compliance questions to ask your payout provider

Licences

Licensing of payout providers is required by governments to protect the consumer and to potentially prevent fraud and other financial crimes such as money laundering and terrorist financing.

In the United States, payout providers typically need to be licensed as money transmitters by most states where their clients operate, as well as where they operate or offer services.

Money transmitters form a part of a larger group called Money Services Businesses (MSBs) which also includes currency exchange firms, prepaid access providers, monetary instrument sellers, and check cashers. All these organizations need to be registered as MSBs with the federal government, specifically with the Financial Crimes Enforcement Network (FinCEN).

Money transmitters are regulated across most states within the US. It is worth checking the individual laws in each state, as they may vary. In most states, money transmitters have to maintain surety bonds in amounts between $25,000 and several million dollars and are subject to minimum capital requirements. Some states also require internet and mobile-based payout providers to have a state license if they have customers within that state. There is also additional protection for US consumers sending money electronically to foreign countries via the Dodd-Frank Act (2012).

Money laundering and terrorist financing are some of the biggest threats facing cross-border payments, and every payout provider needs to be working continually to avoid and prevent their platform being abused for these purposes.

Money laundering involves hiding or disguising illegal money by converting it to funds that seem legitimate. The less of a paper trail there is, the more successful this process is likely to be, as it becomes increasingly difficult for law enforcement to follow the trail of the money.

Therefore, to prevent money laundering, strict rules for record keeping and reporting of financial transactions by financial institutions (FIs) and payout providers have been set up by regulatory authorities.

Terrorist financing, on the other hand, is less concerned with where the money has come from, and more interested in what the money will be used for. After the attacks on September 11, 2001, the US government passed the USA PATRIOT ACT to try and stop the financing of terrorism, among other things. It forces financial institutions (FIs) to focus more on monitoring for terrorist financing, while ensuring that non-US banks doing business with US banks have adequate AML/CTF processes in place.

AML/CTF: Questions to ask

Sanctions screening

As previously discussed, watch lists compiled by regulators are essential for financial sanctions. A commonly applied sanctions list is published by the Office of Foreign Assets Control (OFAC). As part of the US Department of the Treasury, OFAC administers and enforces economic and trade sanctions based on US foreign policy and national security goals. In Europe, both the EU Commission and the UK Government HM Treasury issue a consolidated list of targets subject to UK and EU sanctions.

These sanctions are then used against targeted foreign countries, terrorists, international narcotic traffickers, and those engaged in activities related to the proliferation of weapons of mass destruction or against any other threats to the US, EU and UK and their national security and economic interests.

OFAC publishes the Specially Designated Nationals List (SDN), which identifies individuals, groups and entities designated under a Sanctions Program as terrorists, narcotic traffickers, proliferators of weapons of mass destruction, and transnational criminal organizations, among other bad actors.

If a payout provider initiates payments to US companies, or to companies with a US connection, all beneficiaries have to be screened against the SDN list. If a name is flagged, payments to the entity are then blocked.

Sanctions screening: Questions to ask

Know your customer (KYC)

Developed to help prevent identity theft, financial fraud, money laundering and terrorist financing, a Know Your Customer policy is aimed at enabling banks and financial institutions to know and understand their customers better. With this knowledge, risks can be managed more prudently.

The process of KYC includes identifying the customer and verifying the identity using reliable information. When accounts are initially opened, data and documents may be collected for identification purposes. This is a legal requirement by banks and financial institutions to show that KYC procedures have been performed.

KYC also includes screening names against lists of known sanctioned parties, and determines the risk of the customer in relation to the probability of committing money laundering, identity theft or terrorist financing. KYC formats an anticipation of the transactional behaviour of customers, and then monitors their real life transactions against the expected behaviour, as well as that of their peers.

Although KYC requirements have been in place for decades, the guidelines were recently revisited in accordance with recommendations made by FAFT regarding Anti-Money Laundering standards and Combating Financing of Terrorism. KYC standards have been enhanced in line with international benchmarks, and as such are regulatory requirements. Every payout provider needs to continuously administer a strong KYC program to prevent the risk involved with financial transactions.

Know your customer (KYC): Questions to ask:

Transaction monitoring: Questions to ask