Financial Watchdogs: FinTechs And Neobanks Under Regulatory Scrutiny As Money-Laundering Avenue!

Charlene Lensburg
Thu, 10 Aug 2023 07:56:15 +0000
Compliance, Money Laundering, 3AC, Binance, Celsius, FTX, N26, Revolut, Solaris, Unzer

In 2007, the European Union introduced a directive promoting payment service providers as a competitive alternative to traditional banks. However, in the post-Wirecard era, where the German financial watchdog BaFin faced criticism for its oversight, there’s a renewed focus on regulating these entities. The rationale is clear: FinTechs and neobanks are increasingly seen as potential avenues for money laundering.

FinTech, Crypto, And Money-Laundering

Collapsed FinTech Wirecard

Globally, regulators are grappling with the challenges posed by FinTechs and emerging payment service providers. The concerns aren’t limited to the crypto space. Traditional FIAT-related financial services are also under the lens. Take the case of FinTech giant Revolut, which has been navigating regulatory hurdles for a banking license in the UK. The UK regulators are evidently reluctant to approve the request for a banking license. Recent reports suggest discrepancies in its financial statements, with auditors unable to validate its declared revenues and profits.

The US watchdog SEC is best known for its fight against crypto companies such as Binance or Coinbase. The regulator believes that they do not comply with regulations and are vulnerable to fraud and money laundering.

In Germany, while BaFin has been open to granting banking licenses to FinTechs like N26, Solaris, and Unzer, the shadow of the Wirecard incident looms large. The regulator is now more cautious, aiming to preempt another financial scandal. This heightened scrutiny has led to regulatory audits revealing lapses in the fintechs’ fight against money laundering. N26, Solaris, and Unzer have been under BaFin investigations. Such revelations, publicly announced by BaFin, have dented the reputation of these entities. Moreover, growth restrictions have been imposed, with N26 now limited to onboarding 50,000 new clients monthly since November 2021.

The Closing-Down Option

An interesting provision to note is Section 35 (2) No. 4b of the German Banking Act. It empowers BaFin to shut down a financial institution if it witnesses a 10% equity decline for three consecutive years, endangering creditor funds. This is particularly relevant for growth-oriented fintechs, which often have high cash burn rates, reliant on continuous capital infusion. While BaFin isn’t mandated to act, it holds the discretion to revoke licenses, giving it significant regulatory leverage.

Since the start of the FinTech bear cycle in early 2022, we have already seen several FinTechs go bankrupt. It all started in the crypto space in the U.S. with the collapse of large crypto schemes like 3Arrows Capital, Celsius, and FTX. FinTechs from the traditional FIAT segment followed. Many startups are simply running out of money. It is, therefore, understandable that regulators are under pressure.

Share Information

If you have information about fintechs and money laundering, please let us know through our whistleblower system Whistle42.