Author: John Paul

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Digital Banking and AML Regulatory Compliance

aml regulation in digital banking

As banks and financial institutions try to embrace advancements in financial technology, the digital banking sector has grown exponentially. The pace of digitization of banking systems has been reinforced by the covid-19 pandemic. Out of all bank customer onboarding in 2020, almost 65% of them were done with online methods. Unfortunately, as digital banking services become more meticulous, so do the criminals trying to find a way into banking systems.

In a changing and growing financial sector, firms need to prioritize compliance for their digital banking sectors and they need to make sure that they can detect and prevent money laundering and terrorist funding, and other financial activities. Banks and financial institutions need to continue to deliver regulatory compliance.

Digital Banking AML Regulation

Digital banking service providers are now facing both traditional money laundering risks and other risks that have become possible due to technological advancements in the banking sector. Those risks may be the reason for new methodologies such as phishing scams, malicious software, and virtual currencies to launder money with new digital banking systems. Digital banking services are popular with money launderers because of the anonymity offered by digital banking systems.

Global financing authorities are quickly trying to handle these threats and fill in the gap in regulations, by focusing on improving digital banking services. In the United States, the Financial Crimes Enforcement Network (FinCEN) has issued a set of rules and guidelines for organizations dealing with virtual currencies. Europe’s 5th Anti-Money Laundering regulations are a set of regulations for digital financial sectors and cryptocurrency service providers. Similarly to that, the Financial Action Task Force (FATF) has also released its guidance on digital identification and compliance with KYC and AML regulations.

How to Comply with AML Regulation in Digital Banking?

Banks and financial institutions need to make sure that they offer digital services in compliance with AML to reduce the risks of money laundering. Under FATF policies, most financial organizations need to follow a risk-based approach to fight AML. They need to implement an internal compliance program:

  • Customer Due Diligence (CDD): Financial institutions need to set up CDD measures to verify the identities of their digital banking customers. Under the risk-based approach, customers that come under a higher risk of money laundering should be verified with proper due diligence measures.
  • Monitoring Measures: Banks and Financial institutions will need to set up measures to monitor suspicious customer activities during digital transactions. Suspicious activities can include unusual transactions, transactions over the usual limit, or regular transactions with high-risk countries. 
  • PEP List Screening: Screening and monitoring potential customers on PEP (politically exposed persons), international sanction lists, and customer involvement in adverse media stories. Any of these can be enough to deem the customer as a potential risk.

Some rules and regulations require financial institutions to get licenses for certain digital services such as cryptocurrency exchange or features like digital wallets. FATF policies also require organizations to train their employees and appoint a compliance officer to go over all the AML programs.

Digital Banking AML Measures

To manage the new money laundering and digital banking risks, banks and financial institutions need to take new approaches to keep up with regulatory compliance. Firms need to change the way they collect and verify customer data. The most effective factors of a digital AML solution include:

  • Digital Identification: Digital ID systems include biometric verification such as fingerprints and retinal scans. Combine with fully equipped smartphones, both the customers and banks may use those systems for customer onboarding. Digital identities can support more accurate and efficient CDD during onboarding and throughout the business relationship. Technologies such as DIRO online document verification technology can verify customers online by verifying documents such as bank statements, address proof, and utility bills. DIRO’s document verification tech can verify documents instantly thus improving the overall digital onboarding process.
  • Artificial Intelligence: AI technology offers a wide range of opportunities for firms to improve their AML and KYC compliance. AI can help in prioritizing data collection and transaction monitoring. AI-based technologies can also improve the detection of red flags during online transactions and reduce the time and effort banks spend on detecting suspicious activities manually.
  • Blockchain: As cryptocurrency is slowly growing, blockchain technology is also becoming more common among banking institutions. Blockchain is a public distributed ledger and blockchain allows firms to record and verify transactions. The technology could be used to store and encrypt customer information as a secure block of information. The use of blockchain technology within AML regulations would help fight the challenges associated with digital banking.

Integrating Technologies for Smoother AML Compliance

Managing customer data and following compliance in the era of digital banking means leaving the traditional AML rules behind. Embracing smart technologies for verification and automation for a better customer experience. 

The utilization of DIRO’s document verification technology can offer real-time document verification with 100% of proof of authentication. DIRO’s online document verification technology can verify:

  • Bank statements
  • Bank account holder information
  • Proof of address
  • Insurance information
  • Utility bills
  • Student records & many more.

By employing instant online document verification technology, banks, financial institutions, and FinTechs can improve their digital banking methods. 

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Detection and Prevention of Sophisticated Document Fraud in 2021

document fraud

In 2020, the world saw the biggest use of fake and stolen documents for illegal activities. One of the biggest reasons for that is the pandemic that caused millions to face unemployment. We live in a digitally connected world and most of our lives are spent using online services. Digital banking, government tax portals, and digital payments have taken up a huge portion of our lives.

That’s why most fraudsters rely on forged documents and try to avoid document fraud detection. To signify the impact of document fraud, it costs more than $3 trillion annually. It is one of the biggest threats the world can face and it continues to grow. That’s why the best document fraud prevention techniques are required.

Different document fraud types are rising in banks and financial institutions since these organizations have to comply with KYC and onboarding information. Fraudsters use fake documents for various reasons and have a huge impact on the economy. They use the documents to apply for loans, purchase new property, make fake insurance claims, and travel to countries illegally.

All industries support the use of official documents for verification and customer onboarding. That’s why businesses must prevent these cases before fraudsters grandly hurt businesses. Investing in document fraud detection and prevention technologies is the first step toward safety.

Document Fraud Cases for Various Industries

The federal trade commission received over 2.1 million fraud reports in 2020. Imposter scams were the most common type of document fraud and the stealing of online credentials is the second most common type. Businesses lost over $3.3 billion in fraudulent cases by consumers and the FTC received over 4.7 million reports in 2020 about ID theft. 406,365 people reported that their information was misused for numerous illicit activities.

Document fraud types differ from industry to industry. Scammers love going for real estate as there are many types of these frauds. Victims face the consequences of false sale deed filings and fight to prevent getting evicted from their homes. Fraudsters claim ownership of the property using fake documents. They then sue the owners which cost them a huge fee to resolve the issue. Application fraud and identity theft make use of fake documents that are either stolen or purchased off the dark web.

Document Fraud Types

To successfully build document fraud prevention, banks, and financial institutions must be aware of document fraud types. This fraud industry is valued at more than $3 trillion and it’s one of the favorite industries of the fraudsters. The most common document fraud types are:

  1. Forged Documents

As the name suggests, forged documents are files that have tampered information in them. It is up to the fraudsters to change the information completely or partially. Some examples of forgeries in documents include adding timestamps, watermarks, adding or removing pages, and digitally changing signatures. These forged documents are usually used alongside fake identities to commit fraud.

  1. Invoice Fraud

This is a common type of document fraud, this is where an employee impersonates a vendor and makes up a fake invoice. Fraudsters then send these invoices to the company that disburses funds directly to user accounts.

  1. Blank Documents

Blank document is another common type of fraud, it can be used to insert falsified information and these type of documents are leaked from the manufacturing supply chain. In blank documents, blank fields can tamper however they want since they are empty and are needed to be verified.

  1. Camouflage Documents

Camouflage documents are fake identities that fraudsters create to trick banks and other institutions into believing they are someone else. This is a rare type of document fraud but it can be hard to detect if an institution is not directly looking for it.

  1. Counterfeit Documents

Counterfeit documents are something that fraudsters build by copying official documents. Bad actors can use these documents to open new accounts, and gain access to additional credentials. One of the most common uses of a counterfeit document is to use someone’s driver’s license to learn about the social security number.

Document Fraud Detection

Manual verification of documents is the oldest method that banks, financial institutions, and other businesses rely on. But as fraud is evolving, manual document verification can’t keep up. Obvious signs can be detected with document verification, but sophisticated documents can’t be detected with manual methods. 

Technologies like DIRO’s online document verification can help businesses to build document fraud prevention programs and detect forged and stolen documents instantly. DIRO verifies over 7000 document types from all over the globe. DIRO can verify documents instantly by verifying the data from the source. The technology also provides 100% proof of verification backed by verifiable credentials to prevent the use of stolen and fake documents. Businesses need to invest in the right technologies to ensure that the documents aren’t stolen or forged.