AML and Risk in P2P Lending: Why Regulation Matters

Peer-to-peer (P2P) lending offers a compelling alternative to traditional investment routes, often delivering higher potential returns and enabling investors to directly support small and medium-sized enterprises (SMEs). But along with opportunity comes risk - particularly when platforms operate without regulation.

The reality is clear: unlicensed platforms often lack essential safeguards. Without effective oversight, there may be no policies for how investor funds are handled, no verification of borrowers, and no requirements for transparency or accountability. If a platform misuses funds or collapses, investors often have little recourse.

In 2023, Latvian authorities reported over €5.6 million in losses due to investment fraud - a staggering 84% increase from the year before. And in just the first half of 2024, more than 1,600 suspected cases were identified, amounting to nearly €2.7 million in losses. A significant portion of these incidents involved unregulated entities operating without oversight.

These numbers underscore a crucial point: regulation is not a formality; it's essential. Platforms that are licensed and supervised are held to strict standards for financial conduct, risk management, and transparency. In today’s global financial environment, this is particularly important when it comes to anti-money laundering and combating the financing of terrorism (AML/CFT).

Effective AML frameworks are built on clear processes, such as customer due diligence (CDD), transaction monitoring, and regular cooperation with authorities. For investors, this means platforms are required to verify identities, assess financial history, and identify any potential links to criminal activity or sanctioned individuals.Know-your-customer (KYC) procedures are a cornerstone of these efforts. Regulated platforms must verify the identity of every investor and update records over time. The same applies to their business partners, including loan originators and note issuers. It's not enough to know who is involved; platforms must also understand the source of funds and ensure they are not facilitating money laundering or terrorist financing.

Sanctions compliance is another key pillar. In today's global environment, the risk of in-ad vertently doing business with a sanctioned entity is real. That’s why responsible platforms screen all counter-parties against international sanctions lists and investigate any matches thoroughly. If a risk is identified, appropriate action is taken swiftly and in full compliance with legal requirements.

Regulation also means that client funds are protected. On licensed platforms,investor money is kept separate from company funds, and transactions are traceable from end to end. Internal controls are regularly reviewed and audited, ensuring they remain effective and up to date with evolving regulatory expectations.

Industry collaboration also plays a role in raising standards. In Latvia, for example,licensed P2P platforms - including Debitum Investments, Twino, Viainvest, Nectaro, Indemo, and Lande have formed an informal alliance of regulated investment platforms, which are the main leaders of implementing AML/CFT regulations within theP2P platforms and promote shared commitments to AML compliance, transparency,and investor protection. This cooperative approach helps reinforce trust in the sector and supports more consistent practices across platforms.

From an investor's perspective, choosing a licensed platform should be a starting point,not an afterthought. It’s not just about minimizing risk - it's about ensuring that your capital isn’t inadvertently supporting illegal activity or becoming entangled in a fusion of legal issues. Proper regulation adds structure, accountability, and peace of mind.

“Our goal is simple: investors’ money should never be exposed to risky or prohibited entities. This isn’t about ticking boxes - it’s about giving you peace of mind that your investment is secure” says Justine Birkova, Head of AML at Debitum Investments.

The growth of alternative finance is a positive trend. It increases access to funding forSMEs and provides investors with diversified opportunities. But it must be underpinned by rigorous compliance. When AML and sanctions frameworks are strong, and regulation is taken seriously, P2P lending can function as a relatively safe, transparent,and trustworthy investment channel.

In summary, rigorous due diligence is essential - not only from platforms but from investors themselves. Always ask: Is the platform licensed? Are AML and sanctions policies clearly defined and implemented? Are internal controls reviewed and audited?The answers to these questions can make your investments work for you in a safe environment, not to take risk lose it in unregulated place.