Monzo is facing a criminal investigation by the Financial Conduct Authority as the watchdog cracks down on suspected money laundering breaches.
The digital bank is being investigated for potentially breaking anti-money laundering rules and financial crime controls between October 2018 and April 2021, and could face unlimited fines if found to have acted illegally.
Monzo – which has signed up 5m customers for its mobile app as it seeks to challenge the big established banks – was told about the investigation on May 7 and disclosed it in an annual report published on Friday. It is now investing in beefed-up financial crime controls.
It came as the lender warned that heavy losses mean it will need to raise more money, despite already tapping investors for £200m over the last 12 months.
Monzo said that failure to secure new funds could “cast doubt” on its ability to continue as a going concern, although bosses expect to secure the money sought. The bank is not in financial difficulty and customers’ deposits are protected by the Financial Services Compensation Scheme.
The FCA is looking into both criminal and civil liability at Monzo, which is cooperating with their investigation. It was ordered to appoint a third party to review its financial crime controls in August last year.
A Monzo spokesman said: “The prevention of financial crime is an issue that affects the entire banking industry and one which Monzo is taking extremely seriously.
"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.”
TS Anil, Monzo’s chief executive, declined to comment further.
The digital-only bank’s losses widened to nearly £130m in the year to February, and were 14pc bigger than its loss of £114m in the previous 12 months. This was a a smaller increase than in 2020, when losses more than doubled from the year before.
Total revenues increased by £12m to £79m, a significantly smaller rise than the 237pc increase which the bank posted the year before. Bosses said that they hope to turn profitable in 2022, and revenues could double.
Monzo is backed by venture firms Accel, Passion Capital and General Catalyst as well as tens of thousands of retail investors who bought shares during multiple crowdfunding drives.
The results cap off a turbulent year for the bank following the departure of its founder and former chief executive Tom Blomfield. Mr Blomfield cited stress and burnout for his decision to leave the company in January this year.
Tom Blomfield has now left Monzo
Monzo also cut 120 staff from its UK offices and a further 165 from a contact centre in Las Vegas last year after it was hit by the pandemic. Despite raising £200m in new capital, it was also forced to slash its valuation by 40pc.
Despite its popularity the bank has struggled to persuade customers to use its free service as their primary current account for salaries and other regular payments, holding back its efforts to become profitable. It is now betting on paid-for products, such as a £15-a-month premium subscription with a metal card.
Mr Anil said: “We are targeting profitability on an ongoing basis in the 2022 calendar year. We are not racing towards profitability, but we are building towards a sustainable business.”
Monzo said: “The support we’ve had from our investors this year and from recent talks with potential investors… gives us confidence that we’ll be able to raise the capital we need.”
Mr Anil said the previous funding round was oversubscribed and that investors are already interested in stumping up more cash.
The Bank of England tightened up Monzo’s capital requirements last year, which has forced it to consider raising even more funds.
In its annual report, the bank said: "The directors recognise that material uncertainties cast doubt on our ability to continue as a going concern.
"As in previous years, we expect to raise additional capital in the next 12 months on our path to growing and becoming profitable, but there’s always a risk we can’t raise the amount needed. The Directors are confident that we can deliver our business plan and raise the capital needed."
While Monzo has consistently been rated highly by customers, it has also been hit by complaints on Facebook and Twitter after users were locked out of their accounts.
Monzo’s rival, Starling Bank, claims it has been profitable since October last year. Meanwhile Revolut, which does not yet have a banking licence, is expanding rapidly and raised $800m (£575m) in July.