Nigerian Fintechs Must Strengthen KYC Amid Growth Surge

A Kenyan court account freeze order and Texan court jailing of Ping Express founders for money laundering have shocked Nigerian financial technology companies. The charges are the highest number of allegations in one month in Nigeria’s fintech ecosystem.

Now, the courts decisions could have a negative impact on the image of Nigerian startups looking for foreign investors. Experts indicated that many startups would need to strengthen weak Know-Your-Customer (KYC) and anti-money laundering (AML) practices.

KYC refers to the checks banks and financial institutions must do on customers before accepting their business. These checks are to prevent corruption, financial fraud, and identity theft. They also aim to stop money laundering, and terrorism financing.

Fintech Founders Plead Guilty

In July, Anslem Oshionebo and OpeyemiOdeyale, the Nigerian founders of Texas-based Ping Express, pleaded guilty. The charges against them were for not adequately guarding against money laundering. The pair was charged as their fintech company facilitated the sending of more than US$160 million to Nigeria over threeyears.

Oshionebo and Odeyale received 27-month prison sentences. Another executive received a 42-month prison sentence. Their company also faces a five-year probation and a fine as high as US$500,000.

Fintech Companies Fight For Account Access

Flutterwave, Kandor Technologies, and Korapay Technologies are fighting for access to their accounts. Their acounts were frozen by Kenya’s Asset Recovery Agency (ARA). Flutterwave was the worst affected with all 56 of their accounts frozen.

The accounts include 29 accounts with Guaranty Trust Bank, 17 accounts with Equity Bank, and six accounts with Ecobank. Altogether, the accounts held approximately US$56 million.Kandor is struggling to gain access to two frozen accounts holding a combined US$126,841.Korapay is battling for access to one frozen account worth US$249,565.

All three companies insist they upheld every KYC practice and followed due process. However, money laundering cases usually happen because an employee might have ignored KYC.

Kenyan anti-money laundering laws allow ARA to freeze accounts until investigations are complete. This can take 45 days in the lower court and 90 days in the higher court.

The companies are considering asking the court to compel ARA to place those funds in interest bearing accounts or assets. They want to then be allowedto access that interest. If the court grants their request the interest will help them to fulfil their obligation to merchants who gave them those funds.

According to tech PR expert Victoria Crandal, fintech companies often neglect KYC. They do this because they prioritize user experience and growth. Edo Innovates chairman Victor Asemota said KYC should not be a fintech problem as the government owns identification. Instead, fintech companies should make KYC a priority because they don’t control identification.

Merchants Abuse The System

Other experts said that anti-money laundering issues happen when fintech startups try to outwit regulators. One example of this is how merchant category codes (MCC) get abused. An MCC is a four-digit code that credit card companies use to classify businesses. Every merchant has a unique I.D., and there is a code for every transaction. Some codes raise red flags, such as those for online sports betting or gambling, and pornography.

The Nigerian Interbank Settlement System (NIBSS) is supposed to get informed of merchanttransactions. However, this doesn’t always happen. This system gets abused when merchants want to help people transfer funds. They do this by changing the originating transaction’s code to another code that diverts attention.

Not every company that engages in those abusive practices gets away with it. Many countries including Nigeria have strong anti-money laundering policies. The Nigerian Financial Intelligence Unit oversees Anti-Money Laundering/Combating the Financing of Terrorism. Some jurisdictions have much stricter enforcement of such policies.

How strictly those policies get enforced depends on a jurisdiction’s regulatory focus on cross-border payments. One of the problems that can creep in is that, even though Nigerian fintech companies have made great strides, public data on their activities is not forthcoming from the CBN or NIBSS. Another potential problem is that other strict jurisdictions might not tolerate the lax domestic regulations and incentives driving Nigerian fintech companies.