In the United Kingdom, the financial regulator fined local digital lender Starling Bank for 29 million pounds ($38.5 million).

The mentioned measure of material liability was applied to the specified financial institution operating in a virtual format because failures were recorded in its crime prevention systems. It is worth clarifying that in this case financial crimes are implied.

On Wednesday, October 2, London’s Financial Conduct Authority released a statement noting that Starling Bank was fined for financial offenses related to the screening of financial sanctions. Also, in this statement, it is separately underlined that the digital lender has repeatedly ignored the requirements prohibiting the opening of accounts to customers with a high degree of risk.

Starling Bank, commenting on the decision of London’s Financial Conduct Authority on the fine, expressed sorry for the shortcomings that were detected by the regulator. The digital financial institution also noted in the relevant context that it had conducted a detailed screening and in-depth backbook review of customer accounts.

David Sproul, chairman of Starling Bank, apologized for the shortcomings that were revealed by the regulator and said that the lender had invested heavily to put things right, including strengthening board governance and capabilities. He also assured customers and employees that these are historic issues. According to him, the digital financial institution has learned lessons from the investigation conducted by the regulator and is currently demonstrating confidence that the changes made and the strength of the franchise will allow it to continue implementing a strategy of safe and sustainable growth, supported by robust risk management and control framework.

Starling Bank is one of the most popular UK challenger banks operating only in the virtual space. Currently, this digital financial institution is considered by many experts as a potential candidate for an initial public offering (IPO) of shares in the coming year. It is worth noting that Starling Bank has already announced its intentions to become public. Initially, it was expected that the digital financial institution would conduct an IPO in 2023, but the corresponding debut of the virtual lender has not yet taken place.

In a statement, London’s Financial Conduct Authority noted that the number of digital bank customers has increased from 43,000 in 2017 to 3.6 million in 2023. In this context, the regulator noted that the measures of the virtual lender to combat financial crimes did not keep pace with the growth of the mentioned indicator.

It is worth noting that recently the issue of ensuring security in the virtual space has become more relevant. To a large extent, this state of affairs is associated with the active development of artificial intelligence technologies. Scammers also have access to relevant technologies, which is why their activities have become more sophisticated. One of the tools to counter this threat in the cybersecurity area is digital literacy. For example, a query in an Internet search engine, such as how to know if my camera is hacked, will allow anyone to get information about signs of unauthorized access to the device. The actions of fraudsters who commit crimes in the virtual space have become more complex in terms of detection, but this does not mean that methods of dealing with relevant threats are not being improved. For example, the startup Reality Defender, which last year managed to raise investments worth $15 million, is developing tools for detecting deepfakes and other content generated by artificial intelligence. It is worth noting that scammers sometimes use the mentioned content to deceive their victims.

London’s Financial Conduct Authority began looking at measures to combat financial crimes at digital challenger banks in 2021. The regulator is concerned that fintech brand systems designed to counter crimes of the mentioned category and to comply with the requirements of Know Your Customer are not reliable enough to do so to ensure effective moves against fraud, money laundering, and sanctions evasion.

It is worth noting that after London’s Financial Conduct Authority launched an investigation, Starling Bank agreed to stop opening new bank accounts for high-risk customers. In this case, it was provided that the digital lender could resume the mentioned practice under the condition of improving internal controls. The regulator claims that the virtual financial institution has not fulfilled this requirement. London’s Financial Conduct Authority said the digital lender opened more than 54,000 accounts for 49,000 high-risk customers between September 2021 and November 2023.

In January last year, it became known that the automated Starling Bank system checked customers controlled only part of the full list of individuals and entities subject to financial sanctions. This was announced by the regulator, separately noting that the digital lender had identified systemic problems in its sanctions framework during an internal review. According to London’s Financial Conduct Authority, since then Starling Bank has repeatedly notified the relevant authorities of potential violations. In this case, breaches of financial sanctions are implied.

The regulator also said that the digital lender has already established programs to remediate the identified violations and enhance its broader system of combating financial crimes.

The investigation by London’s Financial Conduct Authority into Starling Bank has been completed for 14 months from the beginning. It is worth noting that the average duration of the relevant processes is 42 months. In this case, the indicators within the framework of cases completed in the 2023/24 calendar year are taken into account.

It is worth noting that the problem of financial crimes is becoming more and more sensitive in terms of the damage caused, which has recently been on a consistent growth trajectory. For example, data published by the Federal Trade Commission of the United States indicates that last year US consumers lost more than $10 billion due to fraud, which is a record figure, albeit in a negative sense. It is also worth paying special attention to the fact that the corresponding indicator increased by 14% compared to figure 2022.

Last year, US consumers lost significant amounts because of the scams in the investment sector. In this case, the damage in monetary terms exceeded the $4.6 billion mark. The corresponding figure increased by 21% compared to the data for 2022.

Imposter scams also caused significant damage to US consumers last year. In this case, the amount of losses amounted to almost $2.7 billion.

Samuel Levine, Director of the FTC’s Bureau of Consumer Protection, said that digital tools make it easier than ever to attack hardworking residents of the United States, the consequences of which are reflected in information about losses as a result of financial crimes.