13 Nov Starling Bank ‘Shockingly Lax’ AML Controls

Starling Bank, a prominent digital bank in the UK, was fined £29 million by the Financial Conduct Authority (FCA) due to severe failings in its financial crime controls. The fine comes after the FCA found that the bank’s anti-money laundering (AML) and sanctions screening measures were inadequate, leaving the system exposed to high-risk activities. These shortcomings highlighted significant vulnerabilities in Starling’s compliance framework, prompting concerns over the effectiveness of challenger banks in managing financial crime risks.

Starling’s Growth and AML Compliance Failures

Starling Bank, established in 2014, grew rapidly, attracting millions of customers with its digital-first approach. By 2023, it had expanded to 3.6 million customers from just 43,000 in 2017. However, this swift growth led to compliance issues, with the bank’s systems unable to keep up with the increasing regulatory demands.

In 2021, the FCA identified major concerns during its review of challenger banks, including Starling. The review revealed weaknesses in Starling’s AML measures and sanctions screening systems, prompting the FCA to impose restrictions. These included prohibiting Starling from opening new accounts for high-risk customers until its compliance procedures were improved. However, Starling went on to open over 54,000 accounts for high-risk customers between 2021 and 2023, violating these restrictions.

Sanctions Screening Failures

One of the critical issues that led to the fine was Starling’s failure to adequately screen its customers against the full list of sanctioned individuals and entities. Since 2017, the bank’s automated system had only checked a fraction of the required sanctions list, leaving significant gaps in its risk management process.

Sanctions are an essential tool to prevent certain individuals and groups, often linked to criminal or geopolitical threats, from accessing financial systems. Starling’s oversight allowed at least one person on the UK sanctions list to open an account, posing risks not only to the bank but also to the financial system. This failure raised questions about how effectively financial institutions, particularly fast-growing digital banks, are implementing and maintaining sanctions compliance.

Financial and Operational Consequences

The FCA’s initial investigation had recommended a higher fine of £41 million, but Starling’s willingness to cooperate led to a 30% reduction. Despite this, the £29 million penalty is a significant financial hit. Beyond the monetary fine, Starling’s reputation has suffered due to its compliance failures. As a leading challenger bank, this incident has cast doubt on its operational integrity.

David Sproul, Starling’s chairman, issued a public apology, acknowledging the bank’s shortcomings and outlining steps taken to correct the situation. Starling has since rescreened customer accounts, identified potential breaches, and implemented additional safeguards to strengthen its compliance measures.

FCA’s Increased Scrutiny of Digital Banks

The fine against Starling Bank reflects the FCA’s growing focus on digital banks and their ability to manage financial crime risks. As neobanks gain popularity, the FCA is emphasising the need for these institutions to have strong systems in place for AML, fraud detection, and sanctions screening. The regulatory body has already extended investigations into other digital banks, including Monzo, which is under scrutiny for similar concerns regarding AML controls.

The rapid expansion of these banks has brought convenience to millions, but it has also highlighted challenges in maintaining compliance frameworks that can effectively combat financial crime. The Starling case underscores the need for digital banks to invest in strong compliance and governance structures as they scale.

Corrective Actions Taken by Starling

Since the FCA’s findings, Starling has implemented a series of corrective actions. These include conducting an internal review, rescreening transactions, and improving its risk management framework. The bank has also strengthened its board governance and enhanced its oversight of compliance measures. These steps aim to prevent future lapses and restore confidence in Starling’s operations.

Starling’s new CEO, Raman Bhatia, faces the task of rebuilding the bank’s credibility, ensuring its systems meet regulatory expectations, and safeguarding the bank’s continued growth. With these corrective actions in place, Starling hopes to address the issues that led to the fine and avoid future regulatory penalties.

Bottom Line

The £29 million fine against Starling Bank highlights the need for fast-growing financial institutions to prioritise strong compliance. Challenger banks and fintechs are especially at risk if they fail to scale their financial crime controls with their growth.

At KYC Lookup, we understand the importance of compliance in safeguarding financial institutions. Our AML training programs which are all fully accredited equip professionals with the skills to implement effective AML, sanctions screening, and fraud prevention measures, helping institutions stay ahead of regulatory requirements and avoid costly penalties

Whether you’re a start-up or an established bank, we offer tailored courses to help businesses navigate complex regulations and protect against financial crime. Explore our solutions and enhance your compliance today.