28 Jul 2017
As traditional financial institutions have undertaken de-risking efforts in recent years, other avenues of lending and banking have emerged as a necessity for various regions to maintain financial freedom. One of those growing avenues is peer-to-peer lending, also known as microlending. Microlending is a multi-billion dollar a year industry that enables borrowers to build businesses and create sustainable income within underbanked and economically restricted geographies.
Microloans are small loans that are issued by individuals rather than banks or credit unions… Often, microloans are given to people in Third World countries, where traditional financing is not available. Lenders receive interest on their loans and repayment of principal once the loan has matured. Because the credit of these borrowers may be quite low and the risk of default high, microloans command above market interest rates making them enticing for some investors.
Simply, money flows from source to recipient with low expectation of repayment, little oversight for end use, often to high risk regions. What could go wrong?
No identification needed
Sending money through a microloan platform sounds simple enough, so I tried it…
First, I signed up for Kiva, one of the most popular microlending sites. They requested the following information from me:
- My name
- My email address
That was the entire lender information requirement.
When I attempted to submit the loan, I was given the option to pay by PayPal or a Kiva gift card. Depending on the recipient, I could choose to send loans of up to $500 USD that could be sent to areas considered high risk for AML/CFT. At no point was any identifiable information requested by the site from me, other than a PayPal login. Although $500 is small change in the AML/CFT world, FATF explains that “according to a Norwegian Defence Research Establishment report on small cell terrorist financing, roughly 75% of the 40 violent extremist terrorist plots in Europe (between 1994 and 2013) cost less than the equivalent of $10,000.” Essentially, Kiva (and its users) is relying on PayPal to conduct all of its customer due diligence and KYC screening, but transferring that responsibility isn’t foolproof.
In a 2015 report, FATF highlights social media fundraising, non-profit organizations, and small wire transfers as key funding methods for ISIS. Microlending platforms can be used to facilitate all three of these typologies.
For law enforcement, regulators, and financial institutions who have microlenders in their client pool, risk considerations include:
- Transfers to, from, and between high risk geographies (and adjacent areas) with little oversight
- The minimal due diligence required for microloan donors and recipients
- Assuming a legitimate business purpose as a mitigating factor for transaction review
- The nature of microloans… small amounts transactions that inherently fall below reporting thresholds
- No collateral backing required for loan transactions creates high default rates, an appealing prospect for terrorist financiers
- Potential for diversion of funds once they reach the destination
- False representation of loan recipients
- Use of correspondent banks with complex, non-transparent ownership structures in high risk geographies to disburse funds
Kiva’s transfer of responsibility to monitor these risks to an intermediary, PayPal, is an essential failure to balance the company vision with its duty to asses the actual and potential outcomes of their business practices. It is unlikely that Kiva is the only microlender with this issue.
Assuming that a microlender adequately screens their customers or monitors the end use of raised capital is a risky proposition to be sure. Certainly, microlenders provide a valuable service to underbanked and developing populations, but using a beneficent intent to mitigate the realities of terrorist financing methods is a faulty concept. Applying AML/CFT standards used in evaluating non-profit organizations would be a useful framework in assessing microlending risks at origin and destination. Before you “lend now”, make sure you know where your money will end up.
Michael Carter is an expert consultant and thought leader in the area of financial crimes that includes the Bank Secrecy Act, Anti-Money Laundering, OFAC programs, export compliance, and counter terrorism financing. His Twitter feed curates the latest in #AML, #ITAR, #FCPA, #EAR, and #WhiteCollar crime & #compliance news.
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