The New Risks in Town: Adapting AML for Crowdfunding and other Online Lending Risks

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1 The New Risks in Town: Adapting AML for Crowdfunding and other Online Lending Risks Tuesday April 4 1:30 PM Moderator: Megan Davis Hodge, Executive Compliance Director, BSA/AML Officer, Ally Financial Speakers: Holly Sais Phillippi, Manager of Proposition, Customer & Third Party Risk Americas, Thomson Reuters Brian Stoeckert, JD, CAMS, CFE, Managing Partner, Stratis Advisory Joseph A. Valenti, Esq., CAMS, Associate Lawyer, K&L Gates LLP

2 Crowdfunding Basics Crowdfunding is by definition the practice of funding a project or venture by raising many small amounts of money from a large number of people, typically via the Internet. Numerous online platforms dedicated to crowdfunding. The purpose of these online platforms is to match parties looking for financing with investors. Global Crowdfunding fundraising volume in 2015: $34 Billion ( 2

3 Types of Crowdfunding Peer-to-peer lending Often referred to as banking without banks Online companies offer consumers the opportunity to lend money directly to others. The platform collects amounts from various lenders and once there is enough to cover the required amount, the loan is originated and paid to the borrower. The lender will earn interest on the outstanding loan. 3

4 Types of Crowdfunding Equity-based Investment through an online platform in exchange for a stake in the company. Each company decides how much money it wants to raise in exchange for what percentage of its equity; investors equity interest will be proportionate to the size of their investment. The platform holds the shares for the investor as their nominee. The platform takes care of the administrative work involved in being a shareholder. Attractive for entrepreneurs since they don t need to give up high-equity interest and they have the possibility to raise funds in a short period of time. 4

5 Types of Crowdfunding Donation-based and Rewards-Based Provide people and projects the opportunity to raise money via online donations or prepurchasing of products. Contributors are not investors or shareholders. Project creators will retain 100% control over their products and services. Most common forms of crowdfunding currently taking place in the US; Kickstarter and Indiegogo are considered the two most popular donation and rewards based crowdfunding sites. 5

6 Risks of Early Stage Companies Operating capital is from investors Understand where is the startup in the funding lifecycle Objective is growth and scale through market share Pressure (indirect or direct) from investors Founders may not make good executives Heavy on developing and marketing Lag in doing something vs. what to actually do 6

7 What is Marketplace Lending? The U.S. Treasury Department defines Marketplace Lending ( MPL ) as the segment of the financial services industry that uses investment capital and data-driven online platforms to lend to small businesses and consumers[.] The role of a marketplace lender is to provide an efficient platform to link an applicant seeking a loan with a party (or parties) willing to fund it. 7

8 Marketplace Lending Risks: Legal v. Business Marketplace lenders advantage over traditional lenders: use of technology to increase efficiency and the consumer experience Excludes unnecessary cost centers (e.g., brickand-mortar location, manual input and evaluation of information) Also likely excludes more useful cost centers (e.g., compliance programs) 8

9 Managing Risks of Marketplace Lending BSA requires any funding bank to: Perform sanctions screening; Report CTRs & suspicious activity; and Implement an AML and information-sharing program (e.g., APPLICATION VELOCITY!). BSA may apply to MPLs, depending on their role in funding and servicing loans. To date, no enforcement actions against MPLs. BEST PRACTICES TIP: Obvious scenarios may be stopped with safeguards: Car loan applicant has a driver s license Student seeking loan in college directory 9

10 Takeaways Startups maintain unique risks that usually do not fit into traditional boxes KYC and sanctions screening may not be required by law depending on business model Within marketplace lending, underwriting process may be thin when compared to traditional expectations Fraud first, money laundering second 10