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Revolut, Allpay, Circle, Wise and 285 other electronic money institutions licensed in Britain have gained millions of clients at home and abroad in recent years, challenging the supremacy of mainstream banks and remitters in global payments and currency exchange.

But during that rise, some companies within the sector gained a reputation for failing to protect consumers and showing a high appetite for fraud- and other financial crime-related risks, enough so to prompt a public rebuke last month from the U.K. Financial Conduct Authority.

“We continue to see poor financial crime controls in some payments and e-money firms,” Matthew Long, the FCA’s director for payments and digital assets, wrote in a Feb. 21 letter published on the agency’s website.

The letter arrived weeks after Lithuania’s central bank ordered Transactive Systems, an EMI with branches in London and Vilnius, to stop onboarding new clients and handling payments for brokerages, money transmitters, cryptocurrency platforms and other financial institutions.

“The Bank of Lithuania identified significant violations and shortcomings related to the identification of the client’s [beneficial owners], the application of risk management measures to high-risk clients, business relations … and implementation of international sanctions,” the regulator disclosed in January.

Transparency International UK has identified no fewer than 100 EMIs in Britain that have made the news for disregarding anti-money laundering rules, or having owners, directors or senior employees on their books who previously worked at banks investigated for allegedly violating AML rules or laundering money.

The advocacy group also found dozens of websites with corporate services providers selling access to corporate accounts they already opened at British EMIs to potential clients in Russia, Ukraine and other former Soviet states.

Ads to sell U.K.-licensed EMIs for as little as £600,000 have even appeared on LinkedIn and overseas websites run by business consultancies and mergers-and-acquisitions advisories, raising concerns that e-money platforms in Britain could fall into the wrong hands.

A survey conducted by the FCA in 2021 revealed that EMIs and payment services providers had the lowest levels of liquidity and profitability of all U.K. financial institutions.

“It does raise questions over the business models of some of the smaller EMIs and what they are being used for,” said Kathryn Westmore, a senior analyst at the Royal United Services Institute in London. “The fact that firms are up for sale online seems [to be] a red flag.”

Overdue

The FCA issued last month’s warning two weeks before Revolut, Britain’s largest EMI, finally published financial statements for 2021, two months past deadline.

But Revolut, which holds a banking license in Lithuania and has applied for one in Britain, is far from alone in that regard.

The Times reported last month that one in 10 firms licensed by the FCA under electronic money or payments services regulations, including Circle and eToro Money UK, failed to file their annual statements on time.

Dmitrijus Apockinas, a partner with the PSP Lab, a consultancy in London, told ACAMS moneylaundering.com that auditing issues often arise from disparate and poorly designed “core” IT systems—shortcomings that also frequently degrade AML processes.

EMIs typically rely on third-party providers to screen customers, conduct adverse media screening and monitor transactions, but often fail to fully integrate these software products with their own and build a “single user interface” where compliance staff can access them.

“These integrations are often partial and fragmented, and compliance personnel [do not see] the full picture related to the customer or transaction,” Apockinas said. “There is no centralized and integrated approach to financial crime risk management.”

Despite a steady stream of negative news involving e-money and indications of a sector-wide vulnerability to financial crime, the FCA told moneylaundering.com in December 2021 that it had taken punitive action against only eight EMIs since 2019.

EPayments Systems, an EMI in London that once served more than a million customers, represents one exception to the soft touch the FCA has employed to date. In September, three years after the agency took the rare step of barring EPayments from handling any transactions until it upgraded its AML program, the platform collapsed.

However, as of that month, none of the FCA’s 38 live investigations against companies suspected of AML violations targeted EMIs. The regulator did not respond to detailed questions about its supervisory activity in the e-money sector by press time.

Ben Regnard-Weinrabe, a partner with Allen & Overy in London, said the FCA has taken a harder line over the past year when reviewing e-money license applications but focused on “a range of issues” rather than solely on AML.

“Safeguarding is always a significant area for the FCA, and no doubt they, along with HM Treasury, are also looking closely at authorized push-payment fraud and a few other areas,” Regnard-Weinrabe said. “Those are probably the flavors of the month in terms of regulatory scrutiny, whereas AML is more of a constant priority in the background.”

Contact Koos Couvée at kcouvee@acams.org