By Mohammad Noor Zraiqat
It's not uncommon to hear about financial institutions being investigated by regulators for a variety of misdeeds.
And we often hear about reporting entities being subjected to investigations, local or international, for financial crimes.
But what about mobile payment providers? Are they being scrutinized as closely as financial institutions? Or will they undergo painstaking “know your customer” policies and enhanced due-diligence procedures?
You may think mobile payment providers aren't targeted by money launderers or terrorist financiers yet.
For many years this sector was left behind during the global war against money laundering and terrorist financing.
Although we believe in the high priority given to other sectors such as financial institutions, we have to admit the money launderers are always a step ahead in seeking new, less-regulated entities to launder their ill-gotten gains.
In 2006, the Financial Action Task Force issued its report on new payment methods of money laundering, including mobile payment vulnerabilities to money laundering and terrorist financing, as a benchmark for both regulators and reporting entities.
In 2010, the task force updated this report to cover a comprehensive risk-based approach and related risk factors. But the major addition was the money laundering typologies and study cases associated with these types of payments, including three cases related to mobile payment schemes over the last four years.
The main reasons for these results were:
- Third-party funding (including straw men and nominees);
- Exploitation of the non-face-to-face nature of new payment method accounts; and
- Complicit new payment method providers or their employees.
Mobile payment systems vary among nations based on a variety of factors. A 2008 World Bank working paper classified mobile payment services into four categories:
1. Mobile financial information services. Through these services, subscribers can request general financial information from personal accounts. There are low or no anti-money laundering/counter-terrorism financing (AML/CTF) risks associated with these types of services.
2. Mobile bank and securities accounts. With this service, the mobile account will be bounded with a bank or security account with a facility to make transactions through the mobile phone.
Thus, the service will be like an Internet banking service that uses the mobile phone instead of the Internet.
This service poses AML/CTF risks, but it’s strictly overseen due to regulations and surveillance deployed by banks and securities companies.
In addition, the outsourcing business keeps the door opened for additional risks for non-face-to-face account opening procedures.
Additional risks may occur when the bank pools the funds into one account held in the name of mobile payment provider.
3. Mobile payments. These allow nonbank accountholders to make payments for their purchase, utility bills, or services using their mobile phones. For this service, the mobile payment providers play the role of a financial institution. Using the mobile phone as a prepaid card or an electronic purse form a risk for AML/CTF.
4. Mobile money. With this service, the subscriber may store money in the mobile phone and may make payments or transfers through his/her phone. This poses an extreme risk due to lack of regulations and oversight.
As shown above, AML/CTF risks associated with mobile payment/money services threaten the country’s systems and weakens the mobile payment provider’s reputation.
Following are some recommended best practices that will help to mitigate AML/CTF risks associated for both countries and mobile payment providers.
Next: Regulatory framework and legislations