Neobanks are at risk of becoming a common tool in future criminal activity, according to a new report by Swedish authorities.

One reason identified in the report, National risk assessment 2023/2024 – Neobanks, is the fact that neobanks – completely digital banks – only use digital and rapid customer recognition and verification processes, which often means a “lower degree of control.” This in turn could enable another lever of anonymity, including the risk of ‘account keepers’.

Annie Frohm, chair of Samordningsfunktionen (a coordinated group of authorities responsible for the report), said that “the simplicity, speed and anonymity that some neobanks offer with their services make it easier for criminals to move, hide and launder the proceeds of crime.”

Another factor is the possibility of quick cross-border transactions with different parties and countries, which could also make it harder to trace transactions.

“This leads to the risk of neobanks becoming an increasingly common tool in criminal activity,” said Frohm

Organized crime and money laundering

The Ecocrime Authority noted that a lot of neobanks, of various sizes, are showing up in its money-laundering investigations. The neobanks are being used as criminal tools within organized crime to commit financial crimes and to launder money. The authority also found that those neobanks that are directly aimed at companies crop up pretty often in preliminary investigations.

The majority of the neobanks found in investigations were located abroad, yet some were based in Sweden.

The Financial Police also said that the approaches to laundering change when new solutions and players appear on the market.

Tax evasion

The Swedish Tax Agency has also seen that neobanks are being used in connection with tax evasion, especially within the construction and trade sectors. In some cases, neobanks have been used to pay workers from other EU or third-party countries who are employed by foreign subcontractors, but who have not reported that they are operating in Sweden. This makes the companies unknown to Swedish authorities and so they do not pay the required taxes.

Individuals have also been found of using foreign neobanks in order to evade paying income tax on their earnings.

“The simplicity, speed and anonymity that some neobanks offer with their services make it easier for criminals to move, hide and launder the proceeds of crime.”

Annie Frohm, chair, Samordningsfunktionen

The Security Police has also noticed that the usage of neobanks increases among individuals who appear in the force’s intelligence operations. Criminals can more easily move money between countries which would normally have been flagged as suspicious in a regular bank.

Brå, the Crime Prevention Council, also emphasized in the report that digital banking and payment market makes fraud possible – and that it’s increasing. In 2022, about 180,000 scams were reported to the police – a big increase from 50,000 reports in 2000. The estimated value of the criminal profits in 2022 was believed to hit SKr 5.8 billion ($566m).

30 neobanks in Sweden

According to the Swedish Financial Supervisory Authority Finansinspektionen, approximately 30 neobanks were active at the end of 2023 in Sweden. All are authorized by the authority and are under its supervision.

Erik Blommé, head of the Financial Supervisory Authority’s Money Laundering Supervision department, also highlighted the importance of the report, and said that it’s “an important basis for everyone who participates in the work of countering money laundering and the financing of terrorism.”

The report also came with proposals for risk-reducing measures, including:

• improving information exchange about Swedish customers between Swedish authorities and foreign neobanks;
• improving reporting to the Financial Police and the Swedish Tax Agency;
• introducing e-identifications within the EU when verifying transactions;
• working and collaborating internationally between countries to fight money laundering; and
• reviewing Swedish legislation regarding offering products and services that fall outside one’s own license, and looking at the problem of drawing boundaries regarding customer relations and division of responsibilities that such cooperation agreements often give rise to.

The report was put together by ‘the Coordination Function’ which includes the Swedish Companies Registration Office, the Crime Prevention Council, Ecocrime Authority, the Real Estate Agency Inspectorate, the Financial Supervisory Authority, the Swedish Enforcement Agency, the County Administrative Board in Skåne County, the County Administrative Board in Stockholm County, the County Administrative Board in Västra Götaland County, the Police Authority, the Auditors’ Inspection, the Tax Agency, the Gambling Inspectorate, the Swedish Bar Association, the Security Police, the Swedish Customs Service, and the Public Prosecutor’s Office.