For any merchant selling products or services online, it’s always a good idea to allow customers to make payments on their platform itself—instead of redirecting them to a third-party website or gateway. Not only is this inconvenient for customers but also risky.
For obvious reasons, the issue is even more pronounced for businesses in the financial services industry such as insurance companies or money services businesses. With the global economy moving online, corruption, fraud, trafficking, and other illicit activities continue to rise. According to a UN report, money laundering activities of about $1.6 trillion took place in 2020, accounting for about 2.7% of global GDP.
The US, therefore, requires financial institutions as well as financial services firms to have anti-money laundering (or AML) compliance programs in place. In this article, we’ll discuss everything you need to know about ensuring AML compliance as a payment facilitator (or PayFac).
Let’s get started.
TL;DR
- An anti-money laundering (AML) program is a set of laws and procedures that seek to uncover attempts to disguise illicit money as legitimate. The Bank Secrecy Act (BSA) establishes AML program requirements for financial institutions in the US while the USA Patriot Act lays down which entities are required to comply.
- An effective AML compliance program must include Know Your Customer (KYC) protocols, transaction monitoring and reporting, risk assessment and categorization, and training and awareness for staff.
- Best practices for ensuring AML compliance as a PayFac include continuously updating your AML policies, utilizing advanced technologies for monitoring, periodic internal reviews and audits, and engaging with AML experts and consultants. However, be mindful of challenges like rapid technological advancements, evolving money laundering techniques, diverse clientele, varying risk profiles, cross-border transactions, and varied regulations.
Understanding AML Basics
With money laundering, perpetrators try to hide criminal activities ranging from small-time bribery or tax evasion to drug trafficking or organized crime. Often, it’s also used for the financing of terrorism making the world highly unsafe.
Launderers usually funnel illicit money using an associate’s cash-generating business or inflating their invoices. Using a technique called “layering,” funds are transferred while completely concealing their source. Likewise, with smurfing or structuring, large amounts are transferred in small chunks to avoid raising alarms in AML scrutiny.
An anti-money laundering (AML) program is a set of laws and procedures that seek to uncover attempts to disguise illicit money as legitimate.
As such, the Bank Secrecy Act (BSA) establishes certain AML program requirements for financial institutions in the US. It mandates ongoing monitoring of suspicious activity, recordkeeping, and submitting suspicious activity reports (SARs) to the government. The USA Patriot Act lays down which entities are required to do so.
An effective AML compliance program must include the following:
- Internal procedures to ensure compliance as well as ongoing staff training
- Appointing a BSA/AML compliance officer to manage and monitor day-to-day compliance
- Independent testing (by third parties)
- Taking a risk-based approach to customer identification
- Employing risk-based procedures for ensuring beneficial ownership compliance—per the Financial Crimes Enforcement Network (FinCEN)’s rules—and conducting customer due diligence (CDD)
The need for strong anti-money laundering programs was felt as the global economy opened up and paved the way for unbridled financial transactions. With AML legislation, financial institutions are required to follow strict protocols for money laundering risk management. Non-compliance can have major implications.
Key AML Requirements for PayFacs
Now that we’ve covered the basics of AML compliance and its role in the financial system, let’s dive deeper into how PayFacs can help.
1. Know Your Customer (KYC) protocols
Compliance starts with establishing and verifying the identities of a business’s customers. A SaaS company looking to facilitate payments for its sub-merchants needs to have a Know Your Customer (KYC) or customer identification program (CIP) in place. You need to know the nature of their businesses or activities and ensure their money comes from legitimate sources only.
You’ll also need to screen sub-merchants based on crime suspicion, economic sanctions, and the US Treasury’s Office of Foreign Asset Control’s (OFAC’s) or the Financial Action Task Force’s (FATF’s) sanctions lists, etc. With proper KYC protocols in place, you can effectively unearth the deposition of illicit funds, layering, and acquisition of assets like real estate.
2. Transaction monitoring and reporting
Onboarding sub-merchants following thorough KYC isn’t enough. PayFacs must also monitor their transactions continuously for any suspicious behavior and report them to the authorities immediately.
For instance, a merchant with steady transaction volumes suddenly sees a spike of, say, 200% in two days, which then goes down again. This could be a possible case of illicit funds being pumped into the business for laundering.
3. Risk assessment and categorization
The first step towards mitigating risk is to assess it. To that end, PayFacs must detect, manage, and categorize risky accounts. They can then be dealt with with appropriate levels of scrutiny and caution.
To make your risk assessment and categorization effective, you must conduct exhaustive AML screening. For this, you might require data from government sources, international regulators, and law enforcement agencies. Categorization also enables you to dedicate the right amount of human and technological resources to riskier accounts.
4. Training and awareness of staff
Your employees also need to be aware of your company’s policies, protocols, and procedures and have a thorough understanding of the legal landscape surrounding AML. They need to be given regular training to deal with novel techniques used by money launderers.
But training can’t be a one-off practice. Since the AML landscape changes rapidly, training needs to be conducted regularly to keep your staff always a step ahead of fraudsters.
Best Practices for Maintaining an AML Compliance Program
As mentioned earlier, a lot of action goes on behind the scenes to ensure the effectiveness of an AML program. Here’s what you need to ensure as a PayFac.
1. Continuous updates to AML policies
Once drafted and implemented, AML policies can’t be expected to serve you forever. As the nature of money laundering risks, fraud, and techniques evolve, so should your AML policies to tackle them effectively. Reviewing and continuously updating your AML policies is therefore necessary.
2. Utilizing advanced techniques for monitoring
Automation and predictive analysis technologies can help manage risk much better than manual processes. The latter can be a serious waste of time and resources, and leave plenty of loopholes in the compliance process.
Repetitive tasks are best handled by automation to free up human resources for critical decision-making only. Although compliance does require complex technologies and ideas, good solutions are flexible and can be effectively adapted into existing workflows.
3. Periodic internal reviews and audits
Regular internal reviews and audits are necessary to plug all the loopholes. As technology advances and launderers evolve, the review net must become tighter as well. The best option would be to hire an independent or third-party expert for compliance reviews and audits. This will provide an effective and unbiased view of your policies and contribute more significantly towards improvement.
4. Engaging with AML experts and consultants
AML is an ever-evolving field. To stay updated with all the latest developments in the field, engaging with AML experts and consultants can be extremely helpful. The exchange of learning and best practices can take place at regular conferences, keynote sessions, and industry summits.
PayFacs may also invite experts to work with their team on various critical steps of the AML compliance process such as drafting policies. This can also result in a great deal of rich learning for the in-house team.
Challenges Faced by PayFacs in AML Compliance
All said and done, there will always be several challenges in AML compliance. Here are the things to keep in mind.
1. Rapid technological advancements
Technology is always going to be a huge part of a PayFac’s AML efforts. But the problem is that launderers are always changing and evolving their technology chameleon-style. This can pose a serious challenge as you must dynamically dedicate resources and personnel to catch up.
2. Evolving money laundering techniques
With increasing innovation and skills, PayFacs may find it quite challenging to keep up with evolving techniques in money laundering. Continuous research and gaining deep insights into the ever-evolving techniques alone can help unearth suspicious transactions.
3. Diverse clientele and varying risk profiles
PayFacs onboard and deal with a diverse merchant base. This means different payment patterns and a diverse range of laundering techniques in play. Keeping all of these in check and detecting suspicious activities can be quite challenging.
4. Cross-border transactions and varied regulations
As a PayFac, you may need to process transactions for merchants across national borders. This means you’ll operate over a diverse AML regulatory and legislative landscape across the globe. Adapting to different AML regulations and laws can be quite complicated, confusing, and conflict-ridden.
Final Words
As a PayFac, you may have to deal in transactions worth billions every day. In other words, glaring opportunities for money launderers to sneak in and exploit. This can be a source of serious threats like global organized crime, terrorist financing, drug and weapons trafficking, and other financial crimes. To create a safer, crime-free world, PayFacs, therefore, have a responsibility to ensure strict AML compliance.
The good news is, with a solution like Stax Connect, you can not only start facilitating payments and also onboard sub-merchants quickly while managing risk. Each merchant is verified and validated using KYC, AML, OFAC, and credit checks so you may rest easy as we do the heavy lifting for you. To learn more, contact our team today.
Quick FAQs about AML Compliance Program
Q: Do PayFacs need an AML compliance program?
Yes. Payment facilitators often onboard sub-merchants and process large volumes of transactions, which can expose them to money laundering risks. A strong AML compliance program helps PayFacs verify merchants, monitor transactions, report suspicious activity, and meet applicable regulatory expectations.
Q: What are the core components of an AML compliance program for PayFacs?
An effective AML compliance program typically includes written internal policies, a designated BSA/AML compliance officer, risk-based customer identification, customer due diligence, beneficial ownership checks, transaction monitoring, suspicious activity reporting, employee training, and independent testing or audits.
Q: How does KYC help PayFacs reduce money laundering risk?
Know Your Customer, or KYC, helps PayFacs verify the identity and legitimacy of sub-merchants before allowing them to process payments. This may include reviewing business information, ownership details, sanctions lists, OFAC checks, and other risk indicators to prevent bad actors from entering the payments ecosystem.
Q: What types of transactions should PayFacs monitor for suspicious activity?
PayFacs should watch for unusual transaction spikes, inconsistent payment patterns, structuring behavior, high refund or chargeback activity, mismatched business activity, transactions involving high-risk regions, and activity that does not align with a merchant’s normal profile. These indicators do not always prove money laundering, but they may require further review.
Q: What is a risk-based approach to AML compliance?
A risk-based approach means PayFacs apply different levels of scrutiny based on each merchant’s risk profile. Lower-risk merchants may require standard monitoring, while higher-risk merchants may need enhanced due diligence, more frequent reviews, and closer transaction monitoring.
Q: How often should a PayFac update its AML policies?
PayFacs should review and update AML policies regularly, especially when regulations change, new money laundering tactics emerge, the business expands into new markets, or transaction patterns shift. Periodic reviews help ensure the program stays aligned with current risks and compliance obligations.
Q: Why is transaction monitoring important after merchant onboarding?
KYC at onboarding only verifies a merchant at a specific point in time. Ongoing transaction monitoring helps PayFacs detect suspicious behavior that may appear later, such as sudden volume changes, unusual payment flows, or activity inconsistent with the merchant’s stated business model.
Q: What role does employee training play in AML compliance?
Employee training ensures staff understand AML policies, red flags, reporting procedures, and regulatory responsibilities. Because money laundering techniques evolve, training should be ongoing rather than a one-time requirement.
Q: What are the biggest AML compliance challenges for PayFacs?
Common challenges include evolving money laundering methods, rapid technology changes, diverse merchant portfolios, cross-border transactions, different regulatory requirements, and the need to balance fast onboarding with effective risk controls.
Q: Can automation improve AML compliance for PayFacs?
Yes. Automation can help PayFacs streamline merchant screening, sanctions checks, transaction monitoring, alert generation, and risk scoring. However, automated tools should be paired with human oversight, documented procedures, and periodic reviews to ensure alerts are handled appropriately.
Q: What is the difference between KYC, AML, and OFAC checks?
KYC focuses on verifying customer or merchant identities. AML refers to the broader program of policies and controls used to detect and prevent money laundering. OFAC checks screen individuals and businesses against sanctions lists maintained by the U.S. Treasury’s Office of Foreign Assets Control.
Q: How can PayFacs strengthen AML compliance while onboarding merchants quickly?
PayFacs can improve both speed and compliance by using automated KYC, AML, OFAC, and credit checks, applying risk-based onboarding workflows, maintaining clear review procedures, and escalating higher-risk merchants for enhanced due diligence before approval.
