min read

The anonymity of P2P lending comes with risks

Published on
March 28, 2024
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Peer-to-peer (P2P) lending was introduced in 2005 and is a modern way for individuals to obtain loans directly from other individuals while cutting out financial institutions. It has seen growth in popularity because of the promise of better returns on savings but is facing a challenge to keep up with regulations and prevent illicit financial activities which derive, from the anonymity it offers.

P2P lending 

Peer-to-peer lending (P2P lending) is the practice of lending money between individuals (or businesses) through an online platform while, cutting out financial institutions. P2P lending platforms connect borrowers directly to individuals willing to give loans and then base interest rates on the creditworthiness of the borrowing applicant. It has seen growing popularity because P2P lending in general has promised better returns on savings than simply placing money in bank deposits.

Financial and regulatory crime risks with P2P lending

As with anything pertaining to the financial sector, there are always risks with online transactions. The same applies to P2P loans. The main risks associated with P2P lending involve:

  • Anonymity: It’s possible to conceal an identity when applying for loans or transferring funds to crowdfunding projects through P2P platforms.
  • Money laundering: P2P lending platforms open the possibilities of laundering illegal funds through the loans and being paid back with legitimate money.
  • Cross-border transfers: P2P lending often involves transfers across international borders. Criminals may be able to exploit differences in regulatory standards while tracking transactions across jurisdictions making it difficult for authorities.

Structured transactions: Utilizing P2P lending may also engage in “structured” transactions. Meaning, moving funds through multiple transactions across multiple platforms. This makes it convenient for criminals to deepen the legitimate appearance of illegal funds.

The need of robust KYC workflows

KYC is not only important to keep customers protected and satisfied, it’s also the law. All banks, and financial institutions must comply with regulated sets of AML/CFT regulations to detect illegal activities and report suspicious activity to the authorities. Something that starts with identifying the client, therefore KYC policies are the first step in a holistic AML approach. KYC helps to protect against identity theft and ensure that P2P lending platforms aren’t involved, knowingly or not, with money laundering, terrorism financing, human trafficking, or other criminal organizations.

A robust KYC workflow helps financial companies establish customer identity, understand the nature of the customers' activities, and assess money laundering risks associated with that customer. In short, there are three pillars to take into account for financial institutions to know their customers and help them comply with required regulations:

  • Customer Identifications Programs (CIP) – To identify that the client is whom they claim to be.
  • Customer Due Diligence (CDD) – The assessment process to determine whether a client is trustworthy or not.
  • Ongoing monitoring – Monitoring of ongoing transactions to better get to know the client.

Managing KYC and AML compliance

Managers and owners of P2P lending platforms may think that this is hard to maintain without scaring users off with complex and long onboarding processes. This may be true, but only if it’s dealt with the wrong way. In fact, we would say that a correctly implemented KYC workflow builds trust by following strict regulations.

A KYC policy that answers to the financial risks and takes the three pillars of a robust KYC workflow into account may sound like a “compliant and technical headache”. To avoid complex technical infrastructure and spending time reading up on regulations, the obvious solution is to utilize an ID Verification platform, like ZignSec. A platform from which you can cherry pick the best-of-breed ID verification solutions on the market and can help digitize, automate, and optimize a powerful end-to-end KYC workflow suited for your business. Built with user experience in mind offering ID verification in real-time and easy implementation options.

If P2P lending platforms today, and in the future, wish to be or become competitive, then contributing to the fight against money laundering is inevitable. It benefits the platform, their client, as well as the financial sector in general.

Let us show you what we can do

Contact us today at sales@zignsec.com or book a demo to learn more about how you can protect yourself, your business, and your customers with our robust KYC solutions.

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