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How to tackle the hidden financial compliance risks of supply chains



Gabriel Hopkins, Chief Product Officer at Ripjar


Supply chains are the backbones of modern business. The recent delays demonstrate the importance of efficient end-to-end chains in enabling the flow of goods and services across borders and ensuring that firms and markets around the world continue to function smoothly. While they deliver crucial resources and connections that organisations require, they also expose them to an increased degree of third-party criminal risk.

Whilst a bank or financial organisation may be confident that it understands the immediate compliance risks that it faces from its customers and the industry, it’s less likely that it is familiar with the risks that suppliers and other third parties along the supply chain face. However, it’s important that firms familiarise themselves with the risks, as many anti-money laundering (AML) and counter-financing of terrorism (CFT) regulations. These require firms to ensure that third parties involved in their supply chains are not involved in criminal activity. If they fail to do this, they may face both criminal and reputational penalties.

To detect and address the AML/CFT risks associated with third parties, businesses can start with six key considerations for enhancing supply chain compliance performance.


Mapping supply chain risk exposure

To manage supply chain risk, firms must understand not only who their suppliers are, but who those suppliers work with. This requires greater visibility into all components of your supply chain, including the transport routes, manufacturing plants, storage facilities, and managerial personnel that it involves.

Assessing each of these elements in detail will enable firms to determine the AML/CFT risk they present, and then track them on an ongoing basis to capture any changes in that risk profile.


Relevant supply chain risk factors to monitor include:

Operational risk: The industry in which a third-party operates will affect the level of AML/CFT risk that it presents. Examples of high-risk industries include payment services, art, shipping and logistics. These are industries which may offer criminals opportunities to commit crimes such as money laundering.

Geographical risk: Supply chains that cross borders may encounter high-risk AML/CFT jurisdictions.

Sanctions risk: Cross-border supply chains also carry an increased risk of international sanctions compliance concerns. Firms should screen those involved in their supply chain against relevant sanctions lists on an ongoing basis.

Corruption risk: Foreign supply chains are often vulnerable to corruption, stemming from transactions involving politically exposed persons (PEP). With that in mind, firms should be aware of the political risks that their supply chain entails, and whether changes to the political landscape have impacted this.


Understanding Criminal Methodologies

Criminals are always developing increasingly sophisticated methods to evade AML/CFT controls and exploit regulatory blind-spots. When implementing an effective risk management solution, it’s important that you understand the criminal methodologies used to target supply chains. These include:
• Misrepresenting goods on official documentation or letters of credit
• Misrepresenting the value or quality of goods being transported
• Transporting illegal goods
• Unauthorised unloading of goods


Building risk management solutions

Once organisations have gained a perspective of their supply chain risk liabilities, they should develop and implement a risk management framework so they can effectively respond to potential AML/CFT alerts. The framework should align with a firm’s risk appetite, allow it to gauge the impact of the potential risks, predict the likelihood of those risks becoming a reality, and set out the compliance measures that can deal with them.

Economic conditions, new technologies, or political upheaval are all factors which mean third party business relationships change constantly, in turn altering a supply chain’s risk exposure. To stay on top of emergent risks, firms need to implement a persistent monitoring solution for every relevant aspect of the supply chain so that changes can be detected when they happen, and adjustments made to risk management solutions in a timely manner.


Conducting supply chain due diligence

Supply chain due diligence should be an important part of risk management solutions. In addition to understanding who is involved in the chain from end-to-end, that information must be verified to properly assess compliance risk exposure. Effective supply chain due diligence means gathering the following information on third parties:
• Identifying information such as supplier names, addresses, company incorporation documents, and beneficial ownership details
• Financial information such as cashflow, expense details, growth projections, and debts and liabilities
• Historical financial performance
• Regulatory environment and AML/CFT compliance performance


Recognising red flags

Once the supply chain risk management solution is implemented, it’s important that compliance employees understand how to spot the relevant indicators of AML/CFT threats in practice. Key red flag characteristics of supply chain risk include:

Corporate structures: Suppliers that have needlessly complex corporate structures present a higher risk of money laundering. Red flags include the use of shell companies or incorporation in a high-risk country.
Online activity: Suppliers without a website or have an unusual online presence that does not match their business operations.

Trading behaviour: Suppliers that trade in goods that do not match their business profile or engage in needlessly complex trade deals.

Trade routes: Suppliers that organise their shipments in needlessly complex routes between their ports of origin and destination.

Documentation: Suppliers that submit insufficient documentation for their shipments or that submit documents with inconsistencies or deficiencies.

Transactional activity: Suppliers that make frequent or last-minute changes to their financial arrangements or engage in unusually high or low volumes of transactions.


Screen for adverse media

Given the global nature of supply chain relationships, firms should seek to stay informed about AML/CFT risks by screening for adverse media involving third-party business relationships. Negative media is a particularly good indicator of AML/CFT risk because its information flows are not restricted by borders, jurisdictions, or government protocol, and stories may be broken before their confirmation by official sources.

Adverse media screening solutions should be set up to capture information about suppliers from foreign language news sources and integrate multi-language name matching tools to account for variations in name spelling or the use of non-Latinate characters. With that in mind, it is often useful for firms to integrate smart AML software tools that enhance their adverse media solution with automated speed, accuracy, and the capability to monitor breaking stories in real time.


Understanding before action

Whilst they aren’t the most obvious place to start when examining money laundering risks, it’s clear that firms would be remiss to neglect supply chains as a source of potential non-compliance.

In order to implement the most effective risk management solutions, banks and financial organisations must ensure they have a comprehensive understanding of the supply chain landscape when it comes to AML and CFT.



Demonstrating fintech resilience in 2023




Melba Montague, Head of Financial Services, Genpact 


Despite ongoing economic turmoil and a slowdown in investment, the UK has managed to retain the top spot as Europe’s financial centre, and London, as the Silicon Valley for fintechs. While 2023 looks uncertain still, fintechs are known for swift innovation and reinvention. UK fintechs in particular, will ride this wave, capitalising on the $28.2 million in capital invested in the industry in H2 2022.

However, the fintechs that come out on top will be those that focus on, and demonstrate to investors, one word: resilience.

To do this fintechs must remain laser-focused on operational basics to prove their worth. This is even more vital as the world watched the collapse of cryptocurrency exchange FTX and lender BlockFi in 2022. And with growing industry concerns around alternative finance, there is also no doubt that regulatory complexities will increase in the coming year, especially with a greater presence of Buy Now, Pay Later (BNPL) products on the market.

Access to capital will diminish sooner than you think

According to the latest Innovate Finance report, global fintech investment reached £75.6bn ($92bn) in 2022, a decrease of 30% from the previous year. The drop is the result of the macroeconomic and geopolitical disruption, but despite this, the UK fintech industry received £10.5bn ($12.5bn) in investment – only an 8% drop from a record-high 2021. This demonstrates great resilience in this space. Further, the report shows that the UK is still receiving more fintech investment than all the next 10 European countries combined and remains second in the world only to the US.

That said, for rapidly evolving fintechs looking to continue their scaling journeys across the UK and beyond, access to capital and a global slowdown in venture capital (VC) investment will test their durability in the market. Even as the cost-of-living crisis drives demand, inflation has hit BNPL companies, bringing down valuation as Klarna announced that it had closed its major financing round with an 85% decrease of its valuation, down to $6.5bn in the latter half of 2022.

This year, investors will want to see fintechs lower their reputational risks, follow regulatory advice to maintain compliance, keep customers well-protected, and make use of innovative technology to accelerate and scale their processes.

Regulatory complexities will increase

While the UK government cultivates a strong culture of innovation and boasts a strong reputation for financial services, it needs to be more proactive in its regulatory stance. This is especially true for areas of alternative finance, such as BNPL.

BNPL’s resurgence in recent years has made it an attractive alternative to traditional spending, but not without major risks. At present, BNPL is an unregulated, decentralised industry, and presents major risk to consumers borrowing beyond their means without adequate financial advice or safety nets. Arguably, BNPL has made it easier to create debt, with figures showing that 4 in 10 people will even use additional lending to pay off their BNPL debts.

With urgent calls for the FCA to advocate for new government regulations from the UK Treasury and consumer champions alike, this will begin to establish concrete guardrails for both fintechs and for shoppers looking to manage their finances. While waiting, providers must step up and protect customers as more structured regulatory models are finalised.

BNPL providers have also made growth commitments to investors. They will be expected to keep those promises this year, as well as maintain operational stability, all the while customer experience is not adversely impacted. It will be crucial for fintechs to take the high ground and look for innovative ways to both educate and protect their customers whilst preparing for regulations recommended by the FCA come into play this year.

Resilience will be critical

The FCA is expected to introduce new requirements to perform credit checks this year, fintechs, neo banks, and BNPL companies now hold a greater responsibility to identify those at risk and support them with appropriate measures.

This presents growing opportunity for fintechs to promote financial resilience to improve their valued customers’ financial health. For example, with open banking-enabled solutions, they can provide insight to customers looking to monitor and consolidate spending.

As the industry awaits these incoming regulations, the onus will remain with fintechs to ensure their products are not at risk of endangering consumer debts. As such, it is critical that a proactive approach to educate the consumer is taken to avoid exacerbating an already fragile cost-of-living crisis. This could be done in many ways, from improving financial education in schools and boosting financial literacy across the board, to turning the onus of accessibility on banks to ensure that customers can receive tailored, personal support and counsel on their finances.

BNPL providers must also ensure their collection process engages empathetically with its customers navigating through financial hardship. Providers should leverage data-driven insights and segmentation from data, technology, and AI (artificial intelligence) to align with BNPL users’ specific communication preferences and chosen payment methods.

In addition, machine learning, AI, and automation of complex manual processes will enable secure operations with consistent quality and controls, while finding new ways to pre-empt risk and meet compliance and reporting obligations.

Persevering in today’s financial landscape

Not only do fintechs need to demonstrate resilience to their investors this year, but they must encourage and enable financial resilience amongst their customers. Fintechs participating in BNPL schemes must be made aware of the potential pitfalls that come with unregulated short-term lending, as practice shows that it increases individual risk as consumers borrow beyond their means without sufficient financial advice and regulation.

Implementing advanced technologies, such as AI/ML and data analysis into fintech operations also improves efficiency, enhances the user experience, and saves cost, particularly vital during a time when companies are confronted with record-high inflation and a volatile stock market.

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E-commerce marketplaces have become more than third-party platforms



By Luke Trayfoot, CRO, MANGOPAY


E-commerce marketplaces have become an essential driver of e-commerce growth. As found by Ascential in their annual Future of Marketplaces Report, by 2027, third-party sellers using marketplaces will capture 59% of global e-commerce sales. A trend accelerated by the pandemic. Marketplaces are helping more brands cater to the ever-changing needs of consumers.

As businesses are continually being challenged to provide a seamless shopping experience, marketplaces can support this venture. Without the added costs of warehousing, supply chain and logistics for additional products, marketplaces can help to alleviate some of those pressures, especially as consumer demand grows.

Now, marketplaces need to further evolve their offering through payments infrastructure, whilst remaining compliant with payment regulations.


The marketplace offering – lowering barriers to entry

 Beyond access to the best deals, seamless checkout and quick deliveries, marketplaces also exceed consumer expectations for an intuitive one-stop shopping experience. Through marketplaces, retailers can continue to evolve their proposition, collecting data on what their customers want and need and continually refining their offerings at the right time and in the right place (web/app).

Marketplaces can also support businesses entering new markets or competing with bigger players in their respective fields. Entering a marketplace network allows small businesses to quickly gain influence, benefiting from larger audiences and quickly generating high sales volumes.

With multiple sellers, many with an international presence, implementing a sophisticated payments environment is much more complex than building one for an e-commerce website. Trading globally has different rules and regulations to adhere to per country which means payments environments must be multi-layered, accepting various forms of payments, which can be an inhibitor to businesses scaling at pace. Marketplace’s innate customer-centredness must be maintained end to end, including the purchase journey, so a sophisticated environment is essential.


Building the right payments environment

 A crucial part of the customer experience, it is important that merchants provide a choice of payment methods at checkout. As payments have evolved, marketplace operators should consider what options they provide to sellers, and subsequently, their end consumers.

The number one expectation is of course payment security, which is a key step in building a long-term relationship based on trust. Increased control points, however, generally means more friction being introduced into the payment process, so this is a balancing act.

As the retail landscape continues to grow, so does competition and as new players enter the market, businesses must find new ways to innovate, and the creation of payment options is one of the most important avenue to do so.


Considering regulation at every step

 Increased marketplace activity has led to the introduction of regulation for the platform economy. In the UK, HMRC has implemented changes to VAT reporting requirements for digital marketplaces and their third-party sellers, especially for overseas sales. Across Europe, KYC (Know Your Customers) regulations intended to protect customers from data breaches on a marketplace and identify the persons (legal or natural) with whom the marketplace does business, as part of anti-money laundering and terrorist financing directives, have also been enacted.

As online platforms continue to play an increasingly significant role, the implementation of the Digital Services Act supports creating a safer, online experience for citizens. This regulation enables the expression of ideas, communication, and online shopping by reducing exposure to illegal activities and dangerous goods. Regulation can seem extremely daunting, especially for those looking to enter the market. However, its purpose is to protect both the business and users.

Marketplaces need to work with payment infrastructure specialists that can support providing methods for local users, as well as options that are familiar and trustworthy for a global audience. Additional flexibility also needs to be built in to adapt to different demographics to ensure that a variety of consumers are appropriately catered for. If a brand wants to establish itself in a new market, varied payment methods are not a nice to have, but a must.

Despite the current economic climate, global e-commerce will continue to grow in the years ahead. Those that will be able to stay ahead of the curve will ensure that their customers’ experience is balanced with greater choice and varied payment options, in tandem with regulatory compliance.







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