Digital bank Monzo is under investigation by the Financial Conduct Authority (FCA) over anti-money laundering rules. The probe will likely result in stricter financial crime requirements and may come with civil or criminal penalties depending on the outcome.

The home of ‘banking made easy’ was founded in 2015 and 4.3million people across the UK now use their easily recognisable coral bank cards. The accompanying app helps users track where their money is going and stay on top of their budget. Unfortunately, it would seem things are not quite picture perfect at Monzo HQ.

Unexpected charges

Monzo is being investigated for potentially breaching anti-money laundering and financial crime controls set out by the FCA. Monzo was notified of the inquiry in May and the digital bank has agreed to cooperate fully in the investigation. The potential breaches took place between October 2018 and April 2021.

It came to light in their annual report that they were under ​​investigation for compliance with UK money laundering regulations. According to Sky News, the beginnings of this issue were noted in the previous year’s annual report.

In the recent 2020 report, Monzo noted that they were aware of the increased risk of fraudulent or criminal activity the pandemic posed, and the potential for their services to be used to these ends:

‘There’s a risk that criminals will use our products and services for financial crime. This is especially true as the UK enters an economic downturn that could see an increase in the number of people engaging in criminal activity.’

The increase in financial crimes is something the FCA had anticipated. They have provided advice to firms about what they can do to minimise these risks, including ensuring their identity verification processes are secure and seeking out authorised third-party identity verification services if required. ‘In May, the FCA sent letters to chief executives of the UK’s retail banks, warning that some lenders needed to assess potential gaps in their anti-money laundering checks.’

Monzo has introduced a ‘confirmation of payee’ feature in the app that warns users when the name they have entered does not match that of the account they are about to send money to in an effort to protect users from fraudulent transactions. Despite these efforts, ‘Monzo paid £9.5m in the most recent financial year to compensate customers who fell victim to financial crime – up from £2.7m the previous year.’

The digital bank has assured its customers that they do not need to worry about their accounts and emphasised the efforts they have made to protect customers from financial crime:

‘​​Over the past year we have made major investments in our controls in this area as a priority and will continue to invest heavily in this part of the business. The FCA’s investigation remains at an early stage. Our operations are unaffected and we remain committed to serving our customers.’ 

It is unsurprising that they have put so much work into this area over the past year given last year’s unflattering headlines:

Monzo in the news

Last year Monzo suddenly froze the accounts of hundreds of users with no warning. This occurred in the middle of a lockdown and left the customers stressed and without access to their money at a time where the FCA expected banks to do all they could to support customers through the ongoing crisis. Monzo uses automated systems to track and identify any suspicious transactions and has ‘returned millions of pounds to victims of fraud in this way’ but, in this instance, the bank caught a few unsuspecting customers in its net.

Monzo has faced a few smaller hitches in recent days too, like double-charging some customers when they used their cards with certain retailers. These double charges were always automatically refunded within 24 hours, but it has seemed to be a recurring issue.

A rocky year

On top of these charges, Monzo has had an otherwise tough time; according to their annual report for 2020–2021 the company saw £114m in pre-tax losses last year. The company also saw a similar loss rate the year before and their accountants have voiced ongoing concern about the ‘material uncertainty’ of the company’s future.

The FCA’s investigation is not going to help their currently unstable financial footing, Monzo has admitted in a statement: ‘this could have a material negative impact on our financial position, but we won’t know when or what the outcome will be for some time.’ Despite financial difficulties, Monzo continues to pour money into improving its financial crime controls to ensure it can meet, and then exceed, the expectations of regulators.

It isn’t just the financial side of things that have made this a rough year for Monzo. Founder and CEO Tom Blomfield quit back in January which will have undoubtedly shaken up the team. In light of the current investigation, Blomfield will undoubtedly come under scrutiny alongside the company. Blomfield left the company because he’d found he was no longer enjoying the role – he’d loved the early ‘scrappy’ startup days but as they became a larger public presence he began to feel less and less passionate about his project.

Final thoughts

The investigation remains in very early days and the FCA are unable to comment on ongoing investigations. The pandemic made digital financial crimes the go-to for fraudsters as most transactions and banking moved online. Fraudsters have focused on digital platforms over the past year and it would seem that this digital bank has not tightened its protections enough to combat the increased efforts of financial criminals.