The year 2021 saw more and bigger deals closed in Africa. Interestingly, the tech ecosystem in Africa raised over $5 billion, with about $1.49 billion invested in African Fintech companies. This amount was twice the previous year’s investment and nine times what was raised five years ago, indicating how much the startup scene has transformed over the last few years.
However, with more investments in Fintechs, there is growing uncertainty about how this space will be regulated and, more importantly, how founders can comply with regulations in countries with a presence. This is illustrated in the recent Ping Express saga, which resulted in the Nigerian founders receiving 27 months of jail time from the Texas Department of Justice.
Thus, this short piece delves into the importance of compliance, the Ping Express Saga, and how you can build the right anti-money laundering compliance program as a fintech startup. Let’s dive in!
Ping Express Compliance Problem Overview
Although Anslem and Opeyemi are Nigerians, their startup, Ping Express, is a Texas-based FinTech startup helping customers remit money from the United States to Africa. Undoubtedly, their initiative was laudable, and they seemed to be doing great until news of their arrest and court filing broke the startup ecosystem. In a statement by the U.S. Department of Justice (DOJ), the management of Ping Express, led by Anslem and Opeyemi, failed to maintain anti-money laundering controls on their platform.
Within three years, the U.S. Department of Justice disclosed that the company had conducted $167 million in money transmission services. $160 million was transferred to Nigeria, and the company did not verify the funding source and purpose.
According to the DOJ, their failure allowed Ping Express’s customers to remit colossal sums of money illegally gotten into Nigeria. Ping Express was also charged with operating in certain U.S. states where they could not work. Having pleaded guilty to these charges, Anselm and Opeyemi were given 27 months in prison, and Ping Express will be subject to 5-year probation and will pay $500,000.
Mixed reactions trail these events as many FinTech startups and founders wonder what the future is for them. While many blame the Nigerian government for making it difficult for Nigerian FinTechs to thrive, it is essential to note that there is a provision on the ground called the Anti-Money Laundering (AML) Compliance Act, which helps startups avoid cases where their startups are used for money laundering and terrorist financing.
This article will discuss the AML laws in Nigeria and USA, their influence on Fintech Startups, and why compliance with the AML is essential.
How Does the Anti-Money Laundering Law Relate to FinTech Startups?
The Anti-Money Laundering law regulates almost all institutions, including financial institutions, advisory firms, jewelers, chartered accountants, legal practitioners, hotels and casinos, supermarkets, tax consultants, car dealers, and more. However, there is a greater emphasis on compliance among FinTech startups as they have become choice destinations for people looking to transfer sizable sums of money through legal and illegal sources. Consequently, there is an increased demand from the government for FinTechs to ensure compliance.
One of the advantages of FinTech startups is the creation of innovative, convenient, low-cost solutions. Generally, most FinTechs allow customers to conduct transactions from one country to other parts of the world and vice versa. Hence, when FinTech companies comply with the anti-money laundering law, it helps them be on good terms with the government. Consequently, AML compliance must avoid operational issues like we just saw from the Ping Express saga.
General Tips on How FinTech Companies Can Avoid Legal Problems
If the Ping Express saga did not teach any lessons, it led FinTech startups to ensure compliance with anti-money laundering laws in whatever country they operate from; else, they will face legal issues. On this note, it is essential to know how FinTech startups can avoid legal problems like those of Ping Express as regards AML.
FinTech startups can primarily avoid legal problems by understanding the demands and provisions of the anti-money laundering law. For example, in Nigeria, the Banks and Other Financial Institutions Act (BOFIA) requires FinTechs to adopt policies that indicate their commitment to adhering to AML/CFT requirements.
They are also expected to set up internal control measures to prevent any conduct that goes against the AML/CFT requirements provisions.
The AML/CFT requirements include:
- Financial institutions must have policies on AML/CFT and appropriate Know Your Customer (KYC) requirements and record keeping.
- Financial institutions must implement in-house regulations that prevent using their platforms for money laundering and terrorism funding.
- Reporting of any suspicious activity and transaction to the appropriate authorities
- FinTechs must comply with other laws on financial crimes, including the Money Laundering Prohibition Act and the Terrorism Prevention Act.
For a complete breakdown of what AML compliance entails, startups must read the Financial Reporting Council of Nigeria Act, which contains every detail you must follow for submission.
AML Compliance in the United States
The United States has a multifaceted policy regime to counter anti-money laundering (AML), combat the financing of terrorism (CFT), and counter illicit financial threats. They know that the misuse of the international monetary system can result in serious economic, political, and security problems nationally and internationally.
In the United States, the Bank Secrecy Act and the Anti-Money Laundering framework mandate that banks and financial institutions file a range of reports with the Treasury’s Financial Crimes Enforcement Network (FinCEN) when their clients engage in suspicious economic activity, large cash transactions, or specific other financial behavior.
Passed into law by the Congress of the United States in 1970, the Bank Secrecy Act (BSA) demands that banks and financial institutions keep records of cash purchases of negotiable instruments, file reports of cash transactions exceeding $10,000 (daily aggregate amount), and report suspicious activity that might indicate money laundering, tax evasion, or other criminal activities.
The framework emphasizes the accurate, timely, and complete reporting of such action to FinCEN, which flags situations that may warrant further investigation by law enforcement. Other reports must be submitted to FinCEN by individuals transporting large amounts of cash internationally, people with certain foreign financial accounts, and non-financial entities conducting large cash transactions.
How Much Should Be Reported for Transactions in the United States?
The United States has a higher transaction limit for FinTechs, banks, and financial institutions. While the treasury departments stipulate a limit of $2,000, the United States has placed a $10,000 limit. Only transactions that exceed the $10,000 limit should be checked and reported.
Other requirements of the BSA/AML must be adhered to by Nigerian FinTech startups that will be operating in and with clients in the United States.
Agencies in Charge of AML Compliance in the United States
The following are some of the agencies in charge of ensuring AML compliance in the United States and places where FinTechs are required to submit their reports for suspicious transactions:
- The Federal Reserve
- Federal Deposit Insurance Corporation
- National Credit Union Administration, and
- Office of the Comptroller of the Currency
These agencies are mandated with the responsibility of conducting oversight and examining entities under their supervision for compliance with BSA/AML requirements.
What is the AML Law in Nigeria?
The Anti-Money Laundering law in Nigeria is a cluster of regulations designed by the Nigerian government to discourage the use of financial service platforms and banks from financing terrorism and money laundering. These regulatory clusters include
- The Money Laundering Prohibition Act
- The Banks and Other Financial Institutions Act (BOFIA)
- The 2012 Terrorism Prevention Act (as amended)
- The Regulations on Terrorism Prevention (Freezing of International Terrorist Funds and Other Matters), 2013
- The Economic and Financial Crime Commission (Establishment) Act of 2004
- The Banks and Other Financial Institutions Act (BOFIA) of 1991 regulates financial institutions
- The Anti-Money Laundering (AML) and Combating the Financing of Terrorism (CFT) Banks and Other Financial Institutions in Nigeria Regulations of the CBN, 2013
- The CBN Act of 2017
- CBN Risk-Based Supervision Framework for AML/CFT, 2011
- CBN Circulars and other regulatory messages
- Financial Reporting Council of Nigeria Act
- The Drug Enforcement Administration’s National Drug Law Enforcement Act (1990).
In essence, the AML law in Nigeria seeks to regulate the practices and usage of FinTechs in the country and from other parts of the world into the country. It is a known fact that there is hardly a government policy that does not seem to be limited in scope. Still, the AML has proven to be a helpful regulation and compliance tool that will favor Fintech startups and keep those transacting from other parts of the world in good books.
CBN Regulations for FinTechs, Banks, and Financial Institutions
Another essential regulation for banks, financial institutions, and FinTechs is the Central Bank of Nigeria’s regulation concerning money laundering and financial services. The Central Bank of Nigeria is the apex bank of Nigeria and the governing body for all financial institutions and designated non-financial institutions in the country.
Some of these CBN regulations include:
- Verifying a customer’s identity before establishing any business relationship with a customer and scrutinizing the transactions undertaken by the customer from time to time
- Implementing risk management systems before establishing business relationships with customers
- Organizing anti-money laundering programs and designating internal officials who would be responsible for supervising such tasks
- Organizing periodic training programs to train employees on anti-money laundering practices
- They are reporting any single transaction of funds exceeding $2,000.
A heavy emphasis is on reporting single transactions exceeding $2,000 for outbound (international) and inter-bank transfers. Banks and FinTechs are mandated to report any transaction that exceeds $2,000 or its equivalent in Naira.
Financial Regulatory Bodies in Nigeria
In 1994, the Central Bank of Nigeria decided to begin the complete oversight of activities in the Nigerian financial sector. To do this, CBN established the Financial Service Coordinating Committee (FSCC), which later became the Financial Services Regulation Coordinating Committee (FSRCC).
Consequent to the amendment of Section 38 of the CBN Act 1991 and the formal inauguration by the CBN governor at the time in May 1999, the Financial Services Regulation Coordinating Committee (FSRCC) was accorded legal status. They started to oversee the operations of banks, individuals, and financial institutions in the country. They hold everyone and every financial agency in the government accountable.
These institutions include:
- Bureau of Public Enterprises (BPE)
- Federal Ministry of Finance
- Federal Office of Statistics (Email)
- National Assembly (Email)
- National Insurance Commission (NAICOM)
- National Planning Commission
- Federal Ministry of Commerce
- Federal Ministry of Foreign Affairs
- Ministry of Cooperation & Integration in Africa
- National Maritime Authority
- National Orientation and Public Affairs, The Presidency
- Nigerian Communications Commission
- Nigerian Corporate Affairs Commission
- Nigerian Deposit Insurance Corporation (NDIC)
- Nigerian Investment Promotion Commission
- Nigerian National Petroleum Corporation
- Nigerian Postal Services
- Security & Exchange Commission (SEC)
- The Government of Nigeria On-line
- The Nigerian Stock Exchange
- Nigerian Export-Import Bank (NEXIM)
- All Banking Institutions (including Banks, BDCs, etc.) in Nigeria
- National Identity Management Commission
- National Pension Commission
- Chartered Institute of Bankers of Nigeria
For FinTechs operating in Nigeria but serving customers in the United States, the following are trade and investment partners in the United States that Nigeria has partnered with regarding AML laws.
- Africa Growth & Opportunity Act: (at the U.S. Trade Representative Office)
- Overseas Private Investment Corporation
- Trade & Development Agency
- U.S. Commercial Service in USA and Nigeria
Having discussed AML compliance in Nigeria, it is essential to note the odds in the United States. Most Nigerian founders have FinTech startups in the United States, and others will be trading from Nigeria to the U.S. Understanding the AML compliance demands in the United States is therefore essential.
Lessons Fintech Can Learn From the Ping Express Saga
Essentially, Anti-money laundering (AML) refers to the web of laws, regulations, and procedures aimed at uncovering efforts to disguise illicit funds as legitimate income. So you see where the problems come in?
Ping’s anti-money laundering policy claimed it limited first-time customer transactions to $499, daily transactions to $3,000, and monthly transactions to $4,500. Consequently, Ping Express was supposed to report any suspicious transactions contrary to its policy to regulators.
According to the U.S. court filings, the fintech company violated the law by failing to make a single report on anti-money laundering in 3 years of operation. Furthermore, a statement released by the U.S. attorney for the Northern District of Texas, Chad E. Meachan, disclosed that the firm admitted that it failed to maintain an effective anti-money laundering program and that it operated without a license in at least 5 U.S. states.
This shows that it is hazardous for a fintech startup to circumvent regulations or even operate and facilitate transactions in states where the United States does not license it. This could lead to civil as well as criminal liabilities. So the question is, how do you ensure you are compliant?
The Ping Express saga is a case that FinTechs should learn from. AML compliance is not a demand by the Nigerian government alone but by governments worldwide. When Nigeria’s FinTech landscape is experiencing rapid growth and innovation continues to thrive, FinTechs need to study the requirements of the Anti-Money Laundering law and enforce immediate compliance for safer, unrestricted operations.