Author: John Paul

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Maintaining Security in Financial Institutions: How Essential is KYC?

common kyc procedure of financial institutions

The 9/11 attack on American soil shook the nation to its core, and the perpetrators used The Hudson United Bank of New Jersey to fund this attack. According to the 9/11 Commission, proper money-laundering safeguards within the financial industry at the time weren’t designed to detect or disrupt the type of deposits, withdrawals, and wire transfers that helped the attackers to commit the crime. After the attack of 9/11 KYC laws were introduced as a part of the Patriotic Act as a means of preventing financial activity and crime.

Why is KYC Implemented for Banking Institutions?

Know Your Customer (KYC) laws were introduced as part of the Patriot Act as a means of preventing terrorism financing and financial crime such as money laundering. As criminals use fake or stolen identities to commit financial fraud, banking institutions have to find a way to distinguish between fake and legit customers. That’s what KYC policies help achieve, the policies require financial institutions to conduct a series of tests to get to know their customers. This should help financial institutions to understand if the customers are who they say they are. 

This makes KYC and Customer Identification Procedure (CIP) vital for banking and with more and more banks supporting online customer onboarding, KYC is becoming even more crucial. Banks, financial institutions, and other businesses need to find technologies that can streamline customer onboarding and KYC procedure and eliminate the risk of fraudsters getting access to financial systems.

Why is KYC Compliance Mandatory?

For decades, the United States Department of Treasury has had legislation guiding financial institutions on the detection and prevention of money laundering. The BSA (Bank Secrecy Act) of 1970 requires financial institutions to maintain specific records like cash transactions exceeding $10,000 and also report suspicious transactions that they think could be linked to money laundering, tax evasion, or any other criminal activities. 

Recently in 2016, the regulatory body ‘FinCEN’ issued new rules that outlined how to strengthen customer due diligence and Anti-Money Laundering strategies. This also requires financial institutions to perform due diligence so they can better understand who their customers are and what kind of transactions they conduct. Any transactions from their ordinary transaction habits can be marked as a red flag. 

To successfully comply with KYC regulations, banks all over the globe spent over $100 billion in 2016 and the cost has since risen by 10% in 2021. Regardless of the growing cost of compliance and huge investments, over $26 billion were imposed as fines in the last decade to financial institutions for non-compliance with KYC and AML laws.

Common KYC Procedure of Financial Institutions

To make the CDD (Customer Due Diligence) process more robust and meet the KYC requirements, FinCEN outlined 4 basic elements for an effective KYC procedure. The 4 elements are:

  • Identifying and authenticating the identity of customers
  • Identifying and authenticating the identity of beneficial owners of legal entity customers (Ultimate beneficial owners).
  • Understanding customer nature and purpose of customer relationship for building a risk profile.
  • Transaction monitoring, monitoring, and updating customer information based on customer risk profile. 

What do Customers Have to Provide During Onboarding?

To keep up with the regulations, financial institutions have to collect and authenticate identity information while onboarding new customers. Different financial institutions have different requirements when it comes to identity information. 

Individual customers who visit the bank for account opening will bring some ID documents (driver’s license, passport, etc), proof of address document, and any other document that is required. The banker then authenticates the documents to verify that the customers are who they claim to be. For onboarding businesses, banks ask for additional information to verify the identity of beneficial owners. Most financial institutions also require a profit and loss statement from businesses.

Opening a new account online significantly toughens the process as banks have to verify digital documents like driver’s licenses, proof of address documents, and others. Building a trustworthy link between a digital ID and an actual person requires a strong customer ID verification process to eliminate fraudsters from the customer onboarding process. This verification process may include biometrics verification, facial recognition, online document verification, and machine learning technologies for verification.

Use of Technologies for KYC Verification

Companies all over the world are using biometrics verification, manual verification, and online document verification software to comply with KYC regulations, prevent online fraud, and provide a better customer experience for customers.

The technologies can be used to enhance trust among customers and also create a seamless onboarding experience.

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Preventing Debit Card Fraud: Strategies, Tactics and Best Practices

debit card fraud prevention

Reports of debit cards, electronic funds, and ACH frauds were up by 32% in 2020 in comparison to 2019, according to reports created by the Federal Trade Commission (FTC). Most customers end up finding unauthorized charges on their account and it can be a hassle for banks to resolve debit card fraud. Fortunately for banks, financial institutions, and customers is that continuous monitoring of accounts can help in protecting your money.

Pros and Cons of Using a Debit Card

No doubt that Debit Cards allow for easy cashless and contactless transactions. Using debit cards has its own advantages and disadvantages.

Pros of Using Debit Card:

  • No monthly bill. That’s probably the best advantage of using a debit card. Every time you make a transaction, the purchase amount is deducted from your current account balance. So you don’t have to worry about paying the bills every month like a credit card.
  • Good for keeping track of your budget. The amount present in your bank is the amount you’re able to spend. Using a debit card with a limited balance can ensure that you don’t blow over your budget. 

Cons of Using a Debit Card

  • Credits are safer than debit cards. Any fraudster who can access your debit card can spend all the money in your account in an instant. If you don’t notice, there’s nothing you can do after the transaction is completed. Until the problem is solved, you’ll have to stay with the loss of your money. Credit cards are different, if someone gets access to your credit card and they make fraudulent transactions, the charges will be reversed instantly.
  • An overdraft fee is often expensive. If you go over your account balance while using a credit card, then you may end up paying so much more than your initial spend. 

What is Debit Card Fraud?

As the name suggests, debit card fraud is when fraud happens when a fraudster somehow gains access to a person’s debit card. Here are some common types of debit card fraud:

  • A fraudster installs a card skimming device on a petrol pump’s card reader or a superstore’s card reader. Then they use the stolen card data to make unauthorized purchases. 
  • Someone finds old statements in your home, steals your account number, and makes unauthorized purchases of thousands of dollars. 
  • Someone can steal a person’s debit card and use the information to steal thousands of dollars. 
  • Customers often get a phishing email and entering your data can lead to fraudsters accessing your data. 
  • A data breach at a bank or financial institution can allow fraudsters to steal personal information.

Difference between Debit Card & Credit Card Fraud

The financial problems created by debit cards can be far harsher compared to credit card fraud. That’s why credit cards are considered a safer option while making a purchase. There are two primary federal laws “Fair Credit Billing Act (FCBA) and Electronic Fund Transfer Act (EFTA) which are built for consumer liability in the event of a debit or credit card fraud. 

In the FCBA, credit card users are only responsible for up to $50 in terms of unauthorized transactions. At the same time, the liability of debit card fraud depends on the time taken to report it.

In ETFA regulation, if a person reports their debit card as stolen before any transaction happens. Then the customer isn’t responsible for any unauthorized transaction that happens. If you don’t report your stolen debit card, then the losses you’ll have to bear will depend on when you make the report:

  • Reported Within 2 Days: Up to $50
  • Reported 2-60 Days: Up to $500
  • After 60 Days: It is possible that you may be responsible for all the money stolen

It is vital for customers to keep a tab on the activities that happen in their accounts. Constant monitoring allows both customers and businesses to keep an eye out for red flags.

Preventing Debit Card Fraud: Best Practices

When it comes to protecting yourself from debit card fraud, it is vital to stay on the defense. Constant transaction monitoring will help customers and businesses to keep track of all the out-of-place transactions. Here are the best practices for debit card fraud prevention:

1. Review Bank Statements/Authenticate Bank Statements

Online bank accounts often provide customers with a transaction log where customers can keep track of their purchases. Banks and financial institutions also need to authenticate the bank statements that customers present to the bank to ensure that they aren’t just trying to take advantage of the bank’s policies. DIRO bank account verification software assists in authenticating bank statements instantly.

2. Keep Track of Your Statement

All the physical statements that you decide to keep safe should be kept in a safe place so that no one can access the documents. 

3. Keep Track of Your Debit Cards

As millions of transactions happen daily around the world virtually, not all customers use their cards regularly. It is easy to lose your debit card on the rare occasions that you actually use them. Keep track of your cards so they don’t fall into the wrong hands. 

4. Be Wary About Where You Store Your Data

Avoid storing your debit card number or your PIN on your smartphone. Phishing emails, data hacks, and plain old theft can lead to criminals getting your information.

5. Protect Your Debit Card During Online Shopping

Make sure you don’t shop from online stores that seem fishy. There are some common precautions to take before shopping online:

  • Before entering debit card information on any website, ensure there is an “https” on the website URL. 
  • Phishing scams can cause you to provide sensitive data to fraudsters. Fraudulent emails or texts are the origins of phishing scams. 
  • Consider using a third-party service like PayPal when playing online as these services prevent the websites from accessing your information.
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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.