Cifas, the UK’s fraud prevention community, found that in 2018 nearly 6,000 children under 18 were knowingly or unknowingly taking part in money laundering – an increase of 20 per cent from the previous year.
Children’s finances are almost wholly digital now; most children receive their pocket money via online prepaid cards such as Go Henry or Nimbl.
The digitalisation of children's financial products has brought many benefits. But the transition has created loopholes for criminals to exploit, as know-your-customer procedures revolve around the parent or guardian, and not the child.
Is it time to start implementing more KYC requirements and anti-money laundering checks on prepaid cards aimed at those under 18?
In line with the growing shift away from High Street banks to digital challengers, the market for digital financial services for children is expanding fast.
In 2020 research from Lloyds Banking Group showed that more than a third of children aged 12 to 15 have pocket money sent directly into a bank account, demonstrating the shift away from the notes and coins many previous generations would have received.
Giving young people the ability to spend and save through technology can be a great way to learn about financial management and budgeting. It also brings convenience of being able to pay for goods online, contactless shopping and cash withdrawal.
However, this growth in digital financial services is leading to an increased risk associated with children’s online banking and other financial products like prepaid cards.
While the financial services industry is constantly updating procedures to tackle fraud and money laundering, new products in the digital economy have enabled criminals to exploit children and have them complete transactions on their behalf, that is, becoming money mules.
At the moment there are almost no checks on the child’s transactions, but the spending limits are generous. Generous enough to encourage criminals to take notice.
The reality of children's financial services
Given the market for children’s digital financial services is still nascent, it is hard for providers to detect illicit transactions or suspicious activity taking place on these types of accounts. According to Europol, more than 90 per cent of identified money mule transactions are linked to cybercrime.
On top of this, UK finance figures have revealed that the number of 14 to 18-year-olds misusing their bank accounts has risen by 73 per cent in only two years. The financial services industry needs to take action to detect mules and disrupt their activity. However, the path to detection and control is not so simple.
The current model for detection mostly trusts parental diligence, assuming the account subscriber will notice any illicit activity and report it. This method is practical for younger children, with a regular flow of agreed pocket money entering and leaving an account – it’s likely any changes would be noticed.