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November 12, 2021

KakaoBank in hot water for money laundering shortcomings

By Eric Johansson

South Korea’s financial market watchdog has warned KakaoBank, the country’s leading neobank, that it must fix its money laundering shortcomings as pressure from regulators mounts on challenger banks around the world.

The Financial Supervisory Service (FSS) told the digital lender on Friday that the startup’s weak anti-money laundering (AML) practices has meant it has failed to take action against several cases of suspicious transactions, the Korea Herald reported.

KakaoBank was slammed for not providing its teams with a monitoring process, meaning they could only action potential cases of money laundering if other teams not only noticed them, but also told the AML team about the transactions.

The shortcomings included a lack of measures such ensuring business transactions were transparent and failures to asses the risk of new services being used to launder money.

KakaoBank has said it will look into ways to improve its money laundering practices. The digital lender is a subsidiary of South Korean internet company Kakao. It was launched in 2017.

KakaoBank floated on the country’s stock exchange in August, marking one of the nation’s biggest initial public offerings (IPO) in years.

Before the IPO, KakaoBank had dismissed concerns that the challenger bank was overvalued.

KakaoBank not alone with money laundering problems

This is not the first time the banking subsidiary of Kakao has found itself in hot water. In December 2020, the FSS ordered KakaoBank to beef up its ability to respond to emergencies, such as shortage of capital.

Other challenger banks around the world – such as Revolut and Monzo – have also been criticised for their AML capabilities, or lack thereof.

The news comes as regulators are putting financial services firms under mounting pressure to comply with increasingly tough regulations.

A recent thematic research report from GlobalData noted that banks can no longer afford to remain non-compliant when it comes to things like fighting money laundering, protecting users’ data or environmental, social and governance issues.

“Financial services providers carry a heavy compliance burden,” the researchers said in the report. “It is not unusual for 50% of all spend by incumbent banks to be regulatory-driven. The pandemic has increased that cost further, as banks must now report on a wider range of metrics, while taking on entirely new tasks, such as disbursing government  loans. Fair treatment has come into particular focus, with CEOs brought in front of US Senate hearings on a regular basis.”

Failing to comply with these rules can be expensive. In the first half of 2021 alone, regulators in the UK and the EU issued 17 AML-related fines with a combined value of almost $1bn.

Several digital lenders are now diversifying their offering by getting into the highly lucrative buy-now-pay-later market or by launching travel insurance products. As they do, the pressure to comply with AML and other regulations will only increase, GlobalData’s analysts warn.

“The next regulatory challenge is the blurring of industry lines,” analysts wrote in the report. “As non-banks diversify into banking and banks diversify out, there is no single regulatory body to regulate across all sectors. This creates regulatory loopholes and arbitrage opportunities across sectors while exacerbating those that already exist (such as differing regulations for niche fintechs versus incumbents).

“As such, having the experience and judgement to anticipate what is the true spirit of the current regime – as well as where regulators are likely to be prescriptive going forward – can help steer banks towards more sustainable business models.”