Know-Your-Customer Compliance: An Emerging Concern for Fintechs and Small Banks Amidst Iran-U.S. Tensions
The escalating tension between the U.S. and Iran has cast a spotlight on the finance industry, particularly on smaller banks and fintech companies. The current geopolitical scenario is calling for a heightened level of know-your-customer (KYC) compliance, as regulatory scrutiny is expected to increase. “From a fintech perspective, there’s always been a high risk of sanctions evasion,” says Cassie Schock, Chief Operations Officer for compliance consulting firm de Risk Partners. “This war just highlights the fact that there is going to be higher scrutiny from regulators.”
Impact of Sanctions on Small Banks and Fintechs
The U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) recently added 32 Iranian individuals, entities, and vessels to its Specially Designated Nationals list, a move that comes in the wake of the U.S.’s initial strikes on Iran. This emphasizes the reality that sanction-dodging bad actors do not only target large money center banks but also smaller banks and fintechs. “The predators are really smart and they know which prey to feast upon. They very much target the smaller community banks,” observes Erin DeWitt, a de Risk partner and former community bank executive.
Nonetheless, fintech companies, despite not being officially recognized as banks, are held accountable for OFAC sanction violations committed on or through their products. An instance illustrating this was in December when the U.S. crypto wallet fintech Exodus was fined $3.1 million by the OFAC for 254 violations of its sanctions on Iran.
Accountability and Compliance in Fintech
When it comes to ensuring sanctions compliance, fintechs bear as much responsibility as traditional banks. “The fintech has to take accountability, they can’t just rely on that bank to do the work for them,” asserts Schock. Rob Farling, West Monroe’s national risk and regulatory banking lead, echoes this sentiment, stressing that fintechs need to ensure that capital is not moving in violation of applicable sanctions. “That starts with making sure sanctions lists are up to date and screening systems are working as intended,” Farling says.
Schock adds that compliance goes beyond mere name screening. It also involves scrutinizing the underlying data and the type of transaction. “Anyone involved in shipping, imports/exports or the oil industry really needs to have a deeper dive at this point, for China and Iran in particular,” she suggests. This is crucial given the strong trade relationship between China and Iran.
The Role of Cryptocurrency in Sanctions Compliance
Cryptocurrency and stablecoins have emerged as significant areas of concern for both banks and regulators. The potential use of digital currencies to evade sanctions is a real threat. “Shadow banking is a real threat, and when you layer in the complexity of digital currencies, there can’t be any ambiguity in decision-making or oversight,” warns Farling.
However, the dynamics of sanction compliance with respect to Iran may change in the near future. There are indications that the current administration may consider lifting sanctions on Iran if the new leadership proves to be a practical partner. As the situation evolves, it further emphasizes the need for fintechs and small banks to remain vigilant and compliant with the changing regulatory landscape.
For more information, refer to the source Here.
