The increasing digitalisation of finance has brought us numerous advantages. For example, we can conduct many of our payments via mobile phones or avoid financial institutions to conduct transactions.
However, fintech companies also play a major role in online anti-fraud and anti-money laundering activities.
Fintech companies now play a crucial role in combating financial crime. They do this by leveraging advanced technologies to detect and prevent money laundering in the online world. This article explores online money laundering and the importance of fintech in combating this.
Online money laundering explained
Traditionally, money laundering is the process of “filtering” illegitimate money through a business to seem legal. A great example of this would be criminals depositing money in casinos and gambling until they are eligible to withdraw their funds.
Online businesses in finance opened up a world of possibilities for laundering money. Fintech services like mobile wallets, cryptocurrency platforms, peer-to-peer payment apps, and online casinos have provided new avenues for laundering money.
Online money laundering often involves:
- Layering transactions: Breaking large amounts into smaller ones to avoid detection.
- Use of cryptocurrency: Transferring money through unregulated digital assets.
- Fake identities and accounts: Exploiting weaknesses in customer verification processes.
While the decentralisation and anonymity that the internet, and many online platforms, offer are their great advantage, there are many bad actors that can manipulate this.
The risk of money laundering for fintech businesses
Legitimate online businesses that operate in the finance sector are exposed to individuals with bad intentions, such as money laundering. They can exploit online services that offer anonymous transactions or investments to make their money “clean”.
Many fintech businesses have a hard time recognising money laundering because of:
- High transaction speeds – Rapid digital transactions make it difficult to monitor suspicious activity in real-time.
- Anonymity of digital payments – Some fintech services allow users to create accounts with minimal identity verification.
- Global accessibility – Fintech platforms operate across multiple jurisdictions, making compliance with different regulatory frameworks complex.
Some of the most important advantages of online financial services can be exploited without proper regulations. According to many cybersecurity experts, the best financial service is the one that offers the middle ground between anonymity and total control.
Regardless of the decentralised, altruistic, or privacy-first nature of the online business, some level of customer verification and intrusion must exist. Mainly because failure to detect money laundering can lead to heavy fines, reputational damage, and even regulatory shutdowns for fintech firms.
Role of technology in preventing online crime
While there are numerous risks to online businesses, especially the ones in fintech, there are many solutions that aim to minimise the risk of online fraud and money laundering.
These are some of the most useful and important methods of preventing money laundering and protecting your business, whether it’s a fintech solution, an online casino, or an e-commerce store.
Why transaction monitoring features are crucial for AML compliance
Keeping an eye on financial transactions is essential for stopping money laundering and other illicit activities. Without the right tools in place, institutions can easily overlook warning signs that indicate fraudulent behavior.
You can check out this article for a deeper dive into the technical side of transaction monitoring and fraud detection, but here’s a quick rundown. A solid monitoring system continuously scans financial activity, looking for anything out of the ordinary—like unusually large transfers, frequent cash movements, or transactions linked to high-risk locations. Features like automatic alerts allow compliance teams to step in quickly before suspicious activity slips through the cracks.
One major benefit of a well-designed system is that it cuts down on false alarms. Traditional methods often flood teams with unnecessary alerts, making it harder to spot real threats. More advanced approaches use pattern recognition and risk scoring to improve accuracy, ensuring that only truly questionable transactions are flagged for review.
Beyond just spotting potential fraud, transaction monitoring also plays a key role in regulatory compliance. Financial institutions are expected to keep thorough records, document their investigations, and report any suspicious activity. A system with the right features makes this process smoother, reducing compliance costs and helping businesses avoid hefty fines.
As financial crime continues to evolve, having strong monitoring capabilities isn’t just about following regulations—it’s about protecting businesses from risk and ensuring a safer financial ecosystem.
Blockchain and distributed ledger technology
Blockchain’s initial idea is to be a decentralised and anonymous alternative to financial institutions. While many criminals benefit from the anonymity of blockchain, it can also be an advantage for online businesses.
Key features of blockchain, such as immutable transactions and their transparency, ensure that anyone has an insight into an individual’s transaction history. For example, a notable criminal creates a wallet, and institutions verify their ownership.
In the future, online businesses will be able to restrict account creation or transactions with wallets that belong to known criminals. Besides wallets, exchange platforms like Binance and Coinbase use blockchain analytics tools (e.g., Chainalysis) to track suspicious transactions.
Blockchain also has an advanced verification system. Even if a user’s password gets stolen, no one can steal their account without their passphrase.
Know-your-customer verification
One of the most important ways of mitigating money laundering risk is through properly verifying your customers. The KYC process requires each customer to verify their identity by providing you with their ID card or passport.
Some may consider this intrusive, but for a legitimate business with years of experience, there aren’t many reasons to avoid this. KYC verification should be extensive. If you run an online casino, for example, you’ll have to verify your customers before they make any deposits or withdrawals.
However, advanced KYC verification also includes proper user data management. You’ll need to implement more robust data security and encryption measures to protect your customer’s data and privacy.
On the business side, the verification can be streamlined through AI scan. On the other hand, Optical Character Recognition can be utilised. Regardless, this process should be conducted manually unless you’re dealing with hundreds of verifications daily.
Some firms even require users to complete a video call for identity verification, reducing fraud risks. However, this is possible only with a smaller workload.
KYC also helps recognise politically exposed persons (PEPs) who may be at risk of corruption or notable international criminals.
Advanced authentication
To minimise the chances of accounts being exploited for money laundering and other online crimes, it’s important that you implement robust authentication.
Traditional passwords aren’t enough to prevent account theft. As a decision-maker in a business, you must adopt policies that enforce advanced authentication measures.
Advanced authentication methods like biometrics and multi-factor authentication (MFA) add additional layers of security and make accounts unhackable in many cases. One of the additional verification types could be biometric authentication.
This process requires fingerprints, facial recognition, or iris scans to verify users. On the other hand, you can use one-time tokens via email, SMS, or token-generator hardware and apps to verify a user’s identity.
The last and most complex line of defense is the use of behavioral biometrics. This includes the analysis of keystroke dynamics, mouse movements, and device usage to detect fraud. This field is still in development, but it aims to recognise unusual, bot-like behaviours and flag certain accounts or transactions as suspicious.
Process management for minimising fraud
While less technical, understanding processes that are a part of your business is essential for pinpointing weak points. This is especially important for recognising internal threats, whether they occur purposefully or not.
Through the use of task management tools for overseeing business processes, recognising problems can be much easier. However, it’s important that the managers responsible for this understand what’s suspicious behavior.
Furthermore, process management is also important for streamlining operations and making the business more efficient.
Importance of compliance with anti-money laundering regulations
Online fraud isn’t a joke. While many laws and regulations online can be used as guidelines, AML laws are also legal requirements. They safeguard against financial crime, and regulators can enforce significant penalties on businesses that don’t ensure adequate AML measures.
Some of the recognisable international regulations include:
- Financial Action Task Force (FATF) – Sets international AML standards.
- U.S. Bank Secrecy Act (BSA) – Requires transaction monitoring and reporting.
- EU 6th AML Directive (6AMLD) – Expands liability for financial crime.
- FinCEN Regulations – U.S. Treasury guidelines for fintech AML compliance.
If you fail to comply, you’re at risk of having your license to operate revoked. Furthermore, if your customers suffer any consequences, such as losing their funds, you can be eligible for a lawsuit from multiple individuals and institutions.
Eventually, if your business experiences such a case, it’s unlikely that your customers will ever regain their trust.
Preventing money laundering is made easier with fintech
Fintech companies are not just at risk of money laundering, they are also part of the solution. With AI-driven fraud detection, blockchain transparency, and strict regulatory compliance, fintech firms can create a safer financial environment for all users.
Of course, criminals will find a way to exploit whatever type of technology and innovation there is, but the prevention methods will follow soon after. Businesses that handle customer’s money can significantly benefit from implementing the right solutions.
Veljko is an IT student who has successfully combined his passion for technology with his exceptional writing skills. As an emerging specialist in cybersecurity, he has completed several courses and has been published in notable blogs in the industry. In his free time, Veljko enjoys weightlifting, reading, and programming.
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