Sergey Kondratenko: Fraud, sanctions and money laundering. How do sanctions affect the fintech industry?
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Fintech expert Sergey Kondratenko notes that sanctions – fines or bans imposed on individuals and organisations – significantly affect the Fintech sector.
The fintech industry, which uses technology to improve or automate financial services and processes, is highly sensitive to the global regulatory environment.
In 2023, challenges related to fraud, money laundering and economic sanctions compliance have become even more serious. According to statistics, between 800 billion and 2 trillion dollars are laundered around the world every year, which is approximately 2% to 5% of global GDP. Despite the scale of the problem, only about 0.1% of laundered money is recovered, indicating that current anti-money laundering methods are ineffective.
With the rise of financial technology and increasing cyber threats, both governments and companies are faced with the need to strengthen measures to comply with economic sanctions. This has become increasingly challenging due to the increasing number and complexity of sanctions. Multinational companies must implement sophisticated technologies to ensure compliance and avoid serious financial and reputational losses.
“Sanctions compliance remains an important part of global economic and political strategy, but it also poses challenges for companies that must comply with multi-layered and frequently changing regulations,” comments Sergey Kondratenko.
This increases the responsibility of companies and requires them to actively work to implement risk management systems and adapt to new regulatory changes.
Overall, these challenges highlight the need for a more proactive and adaptive approach to financial risk management and regulation to ensure stability in a rapidly changing global economic landscape.
Sanctions can be divided into several types, each designed to apply pressure in different ways:
- Economic sanctions. These include trade barriers, tariffs and restrictions on financial transactions and assets.
- Diplomatic sanctions. Reduction or cessation of diplomatic relations such as embassies or diplomatic missions.
- Military sanctions. These include military intervention or arms embargoes.
- Sports sanctions. Banning countries from participating in international sporting events.
- Environmental sanctions. Restrictions on trade in materials harmful to the environment.
Countries such as the United States, members of the European Union and the United Nations often take the lead in imposing economic sanctions. Penalties for failure to comply with these sanctions can be severe, including large fines, restrictions on business activities, and damage to the reputation of the company that does business with sanctioned customers.
Sergey Kondratenko: How do sanctions affect the development opportunities of the fintech market and other companies?
Sanctions designed to punish specific countries or organisations often ripple throughout the global economy, inadvertently affecting untargeted businesses.
Fintech companies, in particular, face a difficult environment where even honest companies that are not sanctioned can be subject to excessive scrutiny, regulatory pressure and scrutiny. This climate of increased vigilance can hinder growth by slowing operations, increasing compliance costs, and limiting market opportunities.
Institutional problems of strict sanctions policy – impact on honest business
The side effects of sanctions can create serious obstacles for fintech businesses. These problems include:
- Access to international banking networks. Sanctions could limit access to critical international banking services, making transactions such as cross-border payments more difficult.
- Increased compliance costs. Companies must invest in sophisticated compliance solutions to monitor and prevent potential violations.
- Operational delays. Increased inspections and audits can slow down routine operations, impacting customer satisfaction and competitive advantage.
- Market limitation. Companies are often not allowed to enter or expand into sanctioned markets, limiting growth opportunities.
“These challenges require that fintech companies not only comply with existing regulations but also remain flexible enough to adapt to the rapidly changing international legal landscape,” comments Sergey Kondratenko,
Regulatory requirements for fintech companies in the context of sanctions – Sergey Kondratenko
Financial Action Task Force (FATF) guidelines and European Commission (EC) regulations set strict requirements for customer sanctions screening, known as Sanctions Screening. This regulatory framework requires that individuals, companies and countries be subject to rigorous screening to ensure compliance with international sanctions regimes.
Sanctions Screening is required to identify individuals and organisations that may be included in sanctions lists, such as the UN, EU, OFAC (US Office of Foreign Assets Control), etc. The FATF emphasises the importance of this procedure as part of a comprehensive program to combat money laundering and terrorist financing. FATF Recommendations require financial institutions to implement policies and procedures that ensure that transactions associated with sanctioned persons or entities are identified and blocked.
On the other hand, EU regulations oblige financial institutions within the bloc to conduct detailed analysis and monitoring of transactions in order to identify and prevent any attempts to violate established sanctions. These measures are aimed at preventing the European Union’s financial system from being used for illegal activities.
Sergey Kondratenko notes that Sanctions Screening is a mandatory procedure that emphasises the responsibility of financial institutions to comply with international sanctions, supporting global efforts to maintain peace and security.
Fintech companies must navigate a complex array of regulations aimed at preventing money laundering, fraud and other financial crimes. These include:
- Know Your Customer (KYC), including Sanction screening – checking the identity of clients to ensure that they are not included in any sanctions lists.
- Implementation of monitoring and reporting systems for suspicious activity.
- Compliance programs. Develop internal policies and training programs to educate employees on regulatory requirements.
Compliance with these rules is critical not only to legal practice but also to maintaining corporate integrity and client trust.
Prospects for the fintech sector in harsh sanctions conditions – problems of excessive regulation
While regulation is necessary to maintain the safety of financial systems, over-regulation can create serious obstacles. In a highly regulated environment, fintech companies may face:
- Stifling innovation. Over-regulation can limit creative solutions and technological advances.
- Diversion of resources. Significant resources can be redirected from product development to compliance infrastructure.
- Competitive imbalance. Smaller firms or start-ups may find the regulatory burden too heavy, benefiting larger players who can afford the costs.
Despite these challenges, the harsh sanctions environment also presents opportunities for fintech companies that excel in compliance and adaptation. Those who are able to effectively navigate a complex regulatory environment can gain a significant competitive advantage and establish themselves as trustworthy and reliable players in the global marketplace.
“While sanctions pose various challenges for the fintech industry, they also contribute to the development of regulatory technologies and compliance strategies. Fintech companies that prioritise adaptive compliance mechanisms and innovative solutions can not only survive but thrive, turning potential obstacles into paths to growth and development,” summed up Sergei Kondratenko.
