Author: Ady

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Proactive Customer Communication

proactive customer communication

In the digital age, banks face the constant challenge of effectively communicating with their customers to prevent and manage fraud incidents. The results of a recent global consumer fraud survey highlight the need for proactive, personalized customer communication to detect and prevent fraud, as well as to efficiently resolve fraud cases.

However, meeting customer expectations in this area is not a simple task, as dissatisfaction with a bank’s response to fraud management can lead to customer churn.

Power of Proactive Communication

To demonstrate care for their customers’ financial well-being, banks must find ways to be proactive in their communication. One of the most effective ways to show this care is by actively working to detect, prevent, and notify customers about potential fraud incidents. 

While fraud detection measures strive to minimize false positives, there will always be cases that appear to be fraudulent but are not.

Consider a scenario where a customer makes an unusual purchase, such as expensive diamond earrings. Since this transaction deviates from the customer’s typical spending pattern and involves an unfamiliar merchant, it may trigger a fraud alert.

In such cases, proactive customer communication is essential. A quick, automated SMS message from the bank can allow the customer to verify the purchase and avoid any potential embarrassment at the checkout. 

When executed correctly, this communication reinforces a sense of protection for the customer. However, if the communication is incorrect or mishandled, it can result in a negative experience that requires significant resources to rectify and may damage the customer’s relationship with the bank.

Consumer Preferences for Communication Channels

Globally, customers prefer digital channels for communication, such as text messaging, emails, bank apps, and third-party messaging services, over traditional analog methods like phone calls. 

According to a survey, nearly 80% of customers worldwide prefer digital channels for payment verification. Text messaging is the most favored method, with 43% of customers preferring it, followed by 17% who prefer email.

However, it’s important to note that payment verification preferences vary across countries. In the United States, 64% of customers prefer text messages for verification, while only 2% prefer third-party messaging apps. 

In Brazil, the preferences are more diverse, with 28% preferring text messages, 30% favoring bank apps, and 12% opting for third-party messaging apps. 

Thailand stands out from the global group, as 41% of respondents in the country prefer phone calls for payment verification.

In regions like the European Union, customer verification methods are driven by regulatory requirements. Strong customer authentication dictates that many payments must be authenticated using two out of three methods:

  • Inherence (biometrics)
  • Possession (e.g., mobile phone)
  • Knowledge (e.g., password)

This approach is being adopted globally with the introduction of 3-D Secure 2 for card payments.

With such diversity in communication preferences, banks face the challenge of effectively reaching out to customers through their preferred channels.

Addressing Gaps in Contact Information

Accurate customer contact information is vital for proactive customer communication. However, many banks struggle with outdated or inaccurate contact details. 

According to the survey, 22% of credit card customers worldwide report that their card provider does not have their correct mobile number. Similarly, 18% of debit card customers report inaccurate mobile numbers, and 28% report inaccurate home addresses.

The impact of inaccurate contact information goes beyond basic communication issues. Mobile numbers are increasingly linked to user security and anti-fraud controls.

In the UK, almost 20% of customers report that their bank does not have their correct mobile phone number. This becomes problematic if the bank relies on sending one-time passcodes via SMS for payment authentication. 

In many cases, the requirements of PSD2 Strong Customer Authentication prevent issuers from bypassing these checks. As a result, banks must find alternative methods to authenticate payments for customers with mismatched contact details, or the payment will fail.

Considering that there are over 50 million adults with a bank account in the UK, and 70% of them also have a credit card, it is estimated that more than 10 million individuals may have discrepancies between their actual mobile numbers and the numbers their card providers have on record for communication, authentication, and identity verification purposes.

The Cost of Negative Experiences

When banks struggle to contact and engage customers effectively, they face significant repercussions. The survey reveals that 83% of customers worldwide will either complain to their bank (56%) or switch banks (27%) if they are unsatisfied with the bank’s response to a fraud event.

According to the Bank Administration Institute (BAI), banks can spend up to $10 per contact in their call centers. Any increase in contact center volume leads to escalating costs for banks, not to mention the risk of losing customers to competitors. 

Proactive and personalized communications are crucial for maintaining stability and fostering growth.

Meeting Customer Expectations

To summarize, consumers prefer digital channels for communication, and banks must bridge the gap in contact information to provide proactive customer communication. Failure to do so can result in increased contact center costs, a decline in brand equity, and customer attrition.

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What is Transaction Fraud and How to Prevent Transaction Fraud?

transaction fraud detection

Today, people can use business services globally. Digital transactions allow consumers to connect with brands all over the world and take advantage of eCommerce opportunities.

Building trust in digital commodities is ideal for your business to succeed. Businesses don’t know who exactly they’re transacting with. So, transacting online requires verifying identities and preventing online transaction fraud.

Apart from customer onboarding, businesses have to continue to protect themselves from transaction fraud. Businesses should be able to identify suspicious activities or anomalies intelligently and generate accurate and timely feedback on the transactions.

In this guide, we’ll cover what is transaction fraud and how to detect transaction fraud.

What is Transaction Fraud?

Transaction fraud is a major risk for any business that does business online. The most common types of transactional fraud include identity fraud, fake payment methods, or the use of fake information by a fraudster. 

Transaction fraud committed by organized criminals leads to legit customers being victimized. Individuals that commit transaction fraud seek to abuse the business policies and chargeback policies. 

According to reports, criminals stole more than £609.8 million through authorized and unauthorized transaction fraud.

The biggest problem is that the situation is continuing to get worse.

Types of Transaction Fraud

1. Authorized Fraud

This type of transaction fraud tricks a customer into making a payment. The methods to conduct this type of fraud include:

  • Purchase scams
  • Investment scams
  • Romance and advance fee scams
  • Invoice fraud
  • CEO fraud and impersonation

These frauds rely on social engineering, fake phone calls, text messages, emails, etc. to trick customers into making a payment.

2. Authorized Push Payment (APP) Fraud

Authorized push payment (APP) fraud type of fraud is similar to authorized payment fraud. Fraudsters trick customers into sending payments into an account controlled by a criminal. Fraudsters could act as a government department, debt collection agency, or someone else to get payments.

3. Unauthorized Fraud

Another type of money transfer fraud involves payments that happen without the victim’s knowledge. This type of fraud is also known as account takeover fraud or ATO.

Fraudsters use several techniques to make this type of fraud happen:

  • Phishing emails
  • Fake call centers
  • Device compromise 
  • SIM swap
  • Malware and ID spoofing

4. Account Takeover Fraud

Account takeover fraud is a type of ID theft and a very common type of transaction fraud. Fraudsters can’t take over an account without stealing users’ personal information such as account credentials, security question answers, and other account data.

5. Card Not Present Fraud

CNP is also referred to as ‘remote purchase fraud’, this type of card payment fraud makes unauthorized use of stolen or leaked card details. Most of the information is obtained through data breaches, phishing emails, or purchases on the dark web.

6. Lost or Stolen Card

As the name suggests, this type of fraud happens whenever a user loses their card or it gets stolen. Fraudsters use a card without the user’s permission and usually without the user’s knowledge. 

7. Chargeback Fraud

Chargeback fraud or credit card dispute fraud is an intentional attempt by a cardholder to make an illegitimate chargeback to the card after an online purchase. 

Customers who do chargeback fraud intentionally tend to use these reasons most commonly:

  • The charge on the card is not recognized by the user.
  • The product or service hasn’t been received.
  • The product was damaged, defective, or didn’t match the description.
  • The card was stolen or used without consent.

Strategies to Prevent Transaction Fraud

  1. Verify Customers at Onboarding

The best way to beat fraud is to verify customers during onboarding. The best practice in transaction fraud prevention is to recognize risk during the earliest stages of building a relationship with a customer.

Use online document solutions to onboard customers from all over the globe. Keep track of every small activity that a customer does and flag anything that looks suspicious or out of character.

  1. Take a Risk-Based Approach

Risk assessment is more crucial for businesses than what people think. A risk-based approach to transactions helps in effective and efficient transaction monitoring.

A risk-based approach doesn’t need to cover all scenarios and it should be sufficient to understand each product or service and sales channel. When you segment customers, products, and services in this way, a business can carry out custom-made transaction monitoring.

  1. Refine the Process

You can expect to detect and prevent fraud with any run-of-the-mill process. The entire fraud detection process should be a combination of customizable workflows, adaptive rules, strict rules, CDD and EDD methods, and so much more.

Without combining multiple techniques into a single workflow, it’s almost impossible to detect new-age fraud. There’s no single “perfect fraud detection” solution out there. So as a business, you have to combine multiple solutions to ensure your business and customers are safe from fraud.

Every single component should provide some kind of value. Successful fraud detection and prevention should happen at every step, not just one step.

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5 Ways to Fight First Party & Synthetic Identity Fraud

first party fraud prevention

Synthetic fraud and first-party fraud is becoming a major challenge. Both first-party fraud and synthetic fraud are hard to detect. In this guide, we’ll dive deeper into how banks and telecom organizations can identify these types of fraud without adding friction to the process of real customers.

The biggest problem with first-party fraud is figuring out real customers from fake ones. Making the onboarding process too difficult can discourage genuine customers from signing up. Banks and telecom have to make the process easier to encourage business. At the same time, they need to prevent fake customers from signing up.

Without properly analyzing these fabricated customers, businesses are at a higher risk of onboarding fraudsters. Here are the top 5 ways for businesses to fight first-party fraud and synthetic identity fraud.

Tips to Fight First Party & Synthetic Identity Fraud

Here are some ways businesses can employ to fight first-party fraud and synthetic fraud. 

1. Learn the Difference Between Bad Debt and Intentional Bad Debt

Businesses need to be aware of the differences between intentional and unintentional bad debt or fraud. With the right type of analytics, basic patterns of intentionality can become easy to spot. These include linked accounts that people used to pay fake bills for each other or to mimic payroll deposits.

2. Learn to Characterize Fraud

This is where a lot of businesses fail. To prevent fraud, first businesses must learn to correctly characterize fraud. Fraudsters try to showcase fraudulent activities as bad debts. 

Characterizing fraud will help you identify patterns and common methods that fraudsters use. Knowledge of common methods can then be passed on to the employees.

3. Define Rules

If your organization doesn’t have a set of pre-defined rules for fraud prevention, you’ll always face challenges against fraud.

A business should always have some pre-defined rules. Moreover, there should be a model to perform link analysis, this helps in examining data for known patterns. 

Some of the most common signs of fraud include phone numbers, names, email addresses, and other identifiers that fraudsters use to apply for loans, and other forms of debt over and over again.

Fraudsters use the same information repeatedly to convert a fake ID into a legit-looking one with some financial history.

4. Enhance Sign-Up Process

Knowing that you know common signs and tricks used by fraudsters, you can implement methods to improve your onboarding process. You can monitor the links between applications. 

As fraudsters use the same information over and over again, you can look for declined applications due to credit risk, or new applications where very little information is provided. 

Make it hard for fraudsters to use an identity they’ve created to sign-up. At the same time, ensure that the onboarding process isn’t too complicated for the ordinary user.

5. Tag Suspicious Activities

There will be times when you won’t be able to figure out if the account is fraudulent or not due to a lack of evidence. Instead of outright rejecting/accepting the application, you should tag the account as suspicious.

This is a part of enhanced due diligence (EDD). Once the account is opened and credit is provided, make sure to closely monitor the account for any suspicious or “out of behavior” activities.

You can look for sudden changes in the account information (Name, address, banking information, etc). This is one of the most common ways to detect fraudulent activities.

Conclusion – Be Proactive While Fighting Fraud

Fraudsters are always on the move, looking for new ways to exploit financial institutions, so it makes sense to be proactive. Organizations have to be extra vigilant and need to provide the level of customer experience that has become standard.

It’s high time to combine fraud prevention methods and user-friendly customer onboarding techniques to come up with a seamless experience.

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Knowledge-Based Authentication (KBA) Guide

Knowledge-Based Authentication

Knowledge-based authentication or KBA is an authentication method that relies on a series of questions to verify a person’s identity. KBA is one of the oldest authentication methods to prevent fraud. Without answering a series of questions, a user can not access the account.

KBA at its core indicates that it’s a type of authentication based on the knowledge that only a user has. The authentication method is based on the idea that only the true owner of an account would have the ideal information and will be able to access the account.

Knowledge-based authentication has two different categories:

  • Static
  • Dynamic

The distinction is based on the type of questions. The questions can range from basic personal information to complex questions. 

While KBA sounds like the most secure authentication method, it is slowly becoming a thing of the past. Today, chances are you’ll see KBA on 1 out of every 1,000 websites.

The password reset and account recovery process has completely got rid of KBA as an authentication method. Moreover, KBA has become more and more susceptible to vulnerabilities in today’s time. 

In terms of multi-factor authentication, KBA is part of the “knowledge” type of authentication. Which is “something a user knows”, alongside passwords.

Let’s break down the different types of KBAs below and the challenges associated with them:

Static KBA

Static knowledge-based authentication is one of the most used security methods and is also called “shared secrets”, or “shared secret questions”.

Most common examples include:

  • What is your parent’s name?
  • What is the name of your pet?
  • Your favorite color?
  • What is the name of the street of your childhood home?

The user chooses the static KBA questions whenever they sign up for an account. So, whenever a user wants to sign up, they have to answer the questions that they chose.

The biggest problem with KBA is that it is open to vulnerabilities. With the rise of social media, fraudsters can find answers to a lot of questions.

The biggest example of this is an incident in 2008 when the Alaska governor’s email account was hacked. The password to her Yahoo! Account was changed by fraudsters. They accessed her account with security questions such as her date of birth, zip code, and other information that is readily available on the web.

Dynamic KBA

Unlike Static KBA, dynamic KBA doesn’t require the users to define a security question when making a new account. 

This means that all the questions about the user are generated in real-time. The questions are based on the ID number and aren’t usually available in the individual’s wallet. 

This is the reason Dynamic KBA is sometimes also called “Out-of-wallet questions”.

The dynamic KBA questions are usually more specific and offer alternatives, such as:

  • Which of these addresses matches one of the houses where you lived in 2005?
  • Choose the last digits of your social security number.
  • Which one of these purchases matches the last purchase you made on your account?

The answers to these questions are based on the user’s activities. But, there’s a small chance that the information could also be available publicly. Especially with the growing number of data leakage. 

There is also a third classification which is known as advanced dynamic KBA. The primary difference is that the security questions are generated from proprietary data that are stored behind a firewall.

Alternative to Knowledge-Based Authentication

KBA identity verification has become less effective since the rise of social media. As we stated above, answers to a lot of questions can be answered by visiting a potential victim’s social media profiles.

Not just social media, data leaks, and advanced phishing attacks also make KBA more vulnerable. That is one of the reasons multi-factor authentication is so important in today’s time. Additional authentication methods have to be used to secure accounts.

Other account authentication methods have grown in a way that is making KBA obsolete.

Other Methods of Account Authentication

Today, businesses use a lot of other authentication methods apart from knowledge-based authentication.

Some of the most common authentication methods include:

  1. Physical Security Keys

One of the primary reasons to use security keys is that only the user has access to it. A physical key makes sure that the account isn’t vulnerable to data breaches/phishing attacks. 

If the user ends up losing or damaging their physical key, users can rely on secondary authentication methods to regain access to the physical key.

  1. Phone-as-a-Token

Information stored in a mobile phone can also be used to identify a user’s identity. There are a lot of Phone-as-a-Token security solutions that businesses can use. 

This method has grown exponentially over time with the rise of mobile devices. One of the reasons behind the popularity is that users don’t have to carry any additional security key or data.

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What is Regulatory Compliance?

Regulatory Compliance

Regulatory compliance by its definition is an organization’s compliance with local and global rules and regulations. If an organization fails to comply with regulations, it can face legal troubles and huge fines. 

Some of the biggest examples of compliance laws and regulations include:

  • Payment Card Industry Data Security Standard (PCI DSS)
  • Health Insurance Portability and Accountability Act (HIPAA)
  • Federal Information Security Management Act (FISMA)
  • Sarbanes-Oxley Act (SOX)
  • EU’s General Data Protection Regulation (GDPR)
  • California Consumer Privacy Act (CCPA)

Based on the nature of the business, every organization has to follow different rules and regulations.

Importance of Regulatory Compliance

Within the last 2 decades, regulations have become more elaborate and complicated. Almost every industry has some set of rules and regulations that businesses have to follow.

These growing regulations have led to the birth of new positions, such as:

  • Creation of corporate regulation
  • Chief and regulatory compliance officer
  • Compliance manager

The primary objective of these positions is to ensure businesses comply with all evolving regulations.

Regulatory compliance processes and strategies help organizations achieve their business goals while preventing the risk of fraud. Companies that are transparent about their compliance process tend to build more trust in the industry. 

Some of the compliance rules are specifically designed to ensure customer data protection. Poor protection of customer data can impact an organization negatively. With more and more data breaches happening every day, businesses across industries need to comply with regulatory compliance. 

Data privacy-specific regulatory compliance such as GDPR and CCPA have become more common. Proper handling of consumer data has become a huge concern across the globe and businesses are under higher scrutiny.

Challenges with Regulatory Compliance

Companies that don’t follow regulatory compliance practices are held liable legally and financially. Moreover, they have to participate in remediation programs that include on-site compliance, audit, and compliance inspections. 

Non-compliance with regulations can lead to reputational damages as well. Complying with regulations can be expensive as businesses have to spend capital to comply with laws and regulations. 

Businesses have to appease stakeholders by showing profit, this is why a lot of organizations skip out on complying with regulations. 

There can be a lot of challenges surrounding regulations, especially in highly regulated industries such as finance, and healthcare. 

Common challenges that come along with maintaining regulatory compliance include:

  • Figuring out how new regulations will influence the direction of business and existing business models.
  • Incorporating and developing a compliance culture and promoting the culture throughout the organization.
  • Deciding on and hiring compliance roles and accountability and functions required by legal, compliance, and audit departments.
  • Foreshadowing compliance trends and integrating regulatory processes to increase efficiency.

Constantly evolving consumer technologies also make it complicated for companies to comply with regulations.

The inclusion of the internet, websites, and apps in businesses creates multiple endpoints that businesses have to keep in mind. For digitized companies to remain compliant, they have to stay on top of required updates and patch weak points in the existing software.

Compliance Regulation Across Industries

Every industry has some regulations, but some industries are far more regulations than others. The financial industry, for example, is constantly under scrutiny and has several mandates designed to protect the public and investors from nefarious business practices. 

Healthcare companies are also subject to strict rules and regulations as they handle a lot of sensitive and personal patient data. Hospitals and other healthcare providers have to show regulatory agencies that they’re complying with patient privacy rules. 

HIPAA is the regulation that the healthcare industry has to follow. The regulatory compliance outlines all the data privacy and security mandates designed to secure patients’ medical information. 

In addition to healthcare providers, cloud service providers (CSPs) and other vendors of healthcare organizations also have to comply with HIPAA privacy laws. 

Each country also has its set of regulations. SOX, for example, is a U.S. legislation, but similar regulations include Germany’s Deutscher Corporate Governance Kodex (DCGK). Australia also has a similar regulation that includes Corporate Law Economic Reform Program Act 2004 (CLERP 9).

Multinational organizations have to be wary of the regulatory compliance rules of the country they operate in. For example, GDPR doesn’t just apply to companies and citizens living in the EU, but also to companies and users whose data is stored in the EU.

GDPR expanded on the initial rules of consumers by including a transparency mandate that includes businesses informing customers on how their data is used. 

Companies that comply with GDPR compliance rules are required to notify all affected parties and supervising authorities about a data breach within 72 hours. 

When it comes to CCPA, California residents are provided the right to which kind of data is being collected about them. Consumers also have the right to refuse the sale of their data.

How Companies Ensure Regulatory Compliance?

Each company has different regulations to follow. Regulatory compliance requires businesses to analyze their unique requirements and mandates specific to the industry. 

Here are some steps businesses can take to achieve regulatory compliance:

  • Identify applicable regulations: Businesses need to figure out which laws and compliance regulations apply to a company’s industry and operations.
  • Determine requirements: Identify requirements in each regulation that are relevant to your business. Come up with plans to implement these regulations.
  • Document the compliance process: Businesses should specify the compliance process with specific instructions for each individual.

Monitor changes and apply when needed: Compliance requirements are applied regularly, and businesses should monitor changes to determine if they are relevant to the company.

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Know Everything about Data Risk Assessment

data risk Assessment

In today’s digital world, safeguarding sensitive data is crucial for businesses. One key aspect of data protection is conducting a thorough Data Risk Assessment (DRA). This comprehensive guide will walk you through the importance of DRA, its benefits, and a step-by-step process to conduct one efficiently.

Understanding Data Risk Assessment

Data Risk Assessment is a systematic process that entails reviewing, analyzing, and evaluating the locations where sensitive data is stored and managed. This data can include intellectual property, personally identifiable information (PII), and other critical business information.

The main objective of a DRA is to identify potential risks to sensitive data and implement appropriate measures to mitigate these risks.

Importance of Data Risk Assessment

Conducting a Data Risk Assessment is vital for several reasons:

  • Visibility: A DRA provides insight into all potential threat vectors that could lead to security or privacy violations, ensuring you know exactly what data you have and where it is stored.
  • Risk Management: Identifying and assessing the risks associated with managing PII and other sensitive data enables you to make informed decisions about data security investments and risk tolerance.
  • Compliance: A DRA helps you maintain and demonstrate compliance with legal, regulatory, and industry-standard requirements.
  • Vulnerability Analysis: By conducting a DRA, you can identify potential vulnerabilities that may increase the likelihood of data leakage or breaches.
  • Security Metrics: With a DRA, you can establish key performance indicators (KPIs) for your data security efforts, allowing you to track progress and make improvements.

Primary Steps in Data Risk Assessment

A comprehensive Data Risk Assessment typically follows a three-step process:

1. Map Data to Applications

The initial step in a DRA involves gaining full visibility into all data stored, collected, and transmitted by your organization. This process is known as creating a data footprint. Key elements to define during this step include:

Data Owners/Data Stewards

Identify individuals responsible for the collection, protection, and quality of data within a specific department or domain.

Data Types and Attributes

Identify and tag sensitive files with classifications to enhance controls.

  • Data Classification

Determine the risk level and potential impact on the organization if data is compromised.

For effective data classification, consider assigning risk levels such as high, medium, or low, and classification categories like:

  • Restricted

Data whose unauthorized disclosure, alteration, or destruction poses a high level of impact on the organization.

  • Private

Data that is only to be seen by a selected few eyes. Unauthorized disclosure of this data could lead to fraud, and significant damage to the organization and consumers. 

  • Public

Data whose unauthorized disclosure, alteration, or destruction poses a low level of impact on the organization.

Once you have covered all the responsible parties and the level of risk associated, you need to map the data to the apps that use it. This mapping should include:

  • Applications: A list of applications that query or use the data.
  • Data Environment: Geographic locations or regions where data is stored.
  • Data Flows: The path data takes between applications, databases, and processes.
  • Controls: Security measures used to protect the data in question.

2. Assess Risk

This stage involves reviewing, analyzing, and evaluating threats and vulnerabilities that could put data at risk. Risks to consider include:

  • Excess Access: Users who have more access than necessary to complete their job functions.
  • Outdated User Permissions: Users who retain access from previous roles within the organization and no longer require that level of access.
  • File Sharing: Permissions allowing access to data by anyone with a link.
  • Collaboration Tools: Sharing data through chat tools like Slack or Microsoft Teams.

Automated solutions can help streamline the risk assessment process by scanning data repositories and analyzing data storage, handling, and security processes, practices, and controls.

3. Remediate Vulnerabilities

After assessing potential risks, it is essential to mitigate these risks by addressing the identified vulnerabilities. Some remediation activities include:

  • Principle of Least Privilege: Ensure users have the least amount of access needed to complete their job functions using role-based access controls (RBAC) and attribute-based access controls (ABAC).
  • Multi-factor Authentication (MFA): Implement additional authentication controls around sensitive data, including step-up authentication when users move between applications and modules.
  • Data-centric Security Policy: Focus on securing sensitive data types with policies and controls that consider business context and data transmission across applications and storage locations.

Transitioning from a traditional security approach to a data-centric security approach can be challenging. 

However, with distributed workforces connecting to your data from the public internet, securing the transmission itself is crucial. This can be achieved using a virtual public network (VPN) or Secure Access Service Edge (SASE) to protect data in transit.

Conclusion

Performing a comprehensive Data Risk Assessment is crucial for any organization to safeguard sensitive data and maintain regulatory compliance.

The three-step process outlined in this guide will assist you in identifying potential risks, mapping data to applications, assessing vulnerabilities, and implementing effective remediation strategies.

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Third-Party Due Diligence Proces – Everything You Need to Know

third-party due diligence best practices

Due diligence is the primary part of building a business relationship. Be it an individual or entity, conducting due diligence helps a business analyze the amount of risk associated with someone. In compliance, the term is often related to third-party due diligence. 

Conducting due diligence allows compliance teams to make informed decisions on whether or not they should conduct business with an entity or individual. The third-party due diligence process is an essential function for organizations. It helps businesses to minimize the onboarding to risk elements. 

In this blog, we’ll go over what is third-party due diligence, the third-party due diligence checklist, and how to make a third-party due diligence process.

What is Third-Party Due Diligence?

Third-party due diligence definition is an investigation that a business conducts of an individual or a business before entering into a partnership with them. Usually, businesses have internal teams that conduct due diligence. Whenever a business looks to enter into a partnership with a new supplier/vendor/individual/business, they conduct third-party due diligence. It is undertaken to understand the level of risk associated with the entity.

The process of third-party risk assessment involves first making a list of all prospective third parties and assessing the risk level for each of them. Compliance teams collect crucial data about the vendor, their reputation, ownership data, and operations information. Businesses then do deeper research into the relevant areas to meet regulatory compliance. 

Every organization has its own third-party due diligence process. These rules change based on the region of operations, UBO information, industry, and much more. The due diligence process may be conducted by the organizations or with the help of third-party service providers.

Importance of Third-Party Due Diligence

As businesses grow, they have to become more careful of regulations, data privacy rules, and financial risks such as money laundering and terrorism financing.

With a lot of regulatory practices set in place, companies today have to uphold a higher standard. This means businesses have to invest more in third-party due diligence processes.

Unvetted third-party relationships can lead to several risks for the business. Large enterprises with multiple third-party relationships should make third-party due diligence processes their first and foremost priority.

It is essential because it helps businesses keep risk factors at bay. Every organization should have some kind of third-party due diligence checklist to verify vendors and individuals.

Third-Party Due Diligence Best Practices

As mentioned above, every business has its own third-party due diligence checklist, but there are some best practices every business should follow.

Here’s a list of third-party due diligence best practices to include in your due diligence process.

  • Make a list of all risk factors specific to your organization. 
  • Test your risk factors and the amount of risk they pose over and over again. 
  • Focus on building dynamic workflows. 
  • Database screening just won’t be enough, to combine human effort with automation. 
  • Make your third-party due diligence process based on your current risk framework. 
  • Use third-party due diligence software to enhance your current process. 
  • Find an ideal balance between centralized processes and decentralized teams. 
  • Use outsourcing to find gaps in your current due diligence process and to fix gaps n your internal knowledge. 
  • Take advantage of workflow automation tools.

How to Build a Third-Party Due Diligence Process?

Implementing a third-party due diligence process can be challenging if you don’t know where to start. Businesses spend months to come up with a due diligence process and overlook some crucial points.

Here’s how to break down the process and build a third-party due diligence checklist from scratch.

1. Make a List of All Current Third Parties

To start, make a list of all the third parties associated with your business. As a business, you have to be aware of all the current risk factors for your business.

You could ask the leaders of business operations to come up with a list of vendors, resellers, local agents, and more. Identifying all current third-party providers will help you understand the current scope of risk.

2. Know your Organizational Risk

Ensuring that your organization is risk-proof, including money laundering, trade sanctions, antitrust, or cybersecurity risks should be the priority. The goal should be to understand your own organization’s regulatory and compliance obligations.

Once you have that understanding, focus on learning how your relationships with current third parties magnify those risks.

3. Identify High-Risk Regions

Every country has a certain level of corruption risk. Countries that have high-corruption risks tend to have local agents and vendors that also contain a level of high risk.

If you’re operating in a high-risk area, you need to be wary of onboarding third-party vendors with a lot of risks. You should focus on conducting due diligence on who you onboard.

4. Have an Understanding of Current Regulations

Every organization does some level of due diligence, even if someone asks third-party vendors for their addresses. You need to have complete information about the current regulatory landscape.

5. Learn About Current Reporting Processes

Every organization is required to report shady activities to their respective regulatory bodies. To ensure your organization can take swift action, you need to be sure about current reporting processes.

6. Rely on Automation

Third-party due diligence software is the perfect solution for businesses that are just starting to build their compliance process.

Third-party due diligence software like DIRO can help businesses onboard vendors and suppliers quicker and with complete surety. DIRO allows businesses to verify third-party vendors’ proof of address, bank statements, UBO information, and more in minutes.

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ID Verification for Wealth Management Companies

ID verification for Wealth Management Companies

In today’s fast-paced digital world, where financial transactions occur across borders and online platforms, the need for robust identity verification has become paramount. Wealth management companies, tasked with safeguarding the assets and interests of their clients, face increasing challenges in combating fraud, money laundering, and identity theft.

In this blog, we will explore the importance of identity verification for wealth management companies and how it contributes to maintaining trust, complying with regulations, and mitigating risks.

Why Wealth Management Companies Should Do Identity Verification

1. Safeguarding Against Fraud and Identity Theft

Wealth management companies handle vast amounts of sensitive client information, including personal identification details, financial records, and investment portfolios. By implementing effective identity verification processes, these firms can ensure that the individuals they engage with are who they claim to be, minimizing the risk of fraud and identity theft.

By verifying the identity of clients, wealth management companies can significantly reduce the chances of unauthorized access to accounts and protect their clients’ assets from falling into the wrong hands.

2. Upholding Trust and Reputation

Trust is the cornerstone of any successful wealth management firm. Clients entrust their financial well-being to these companies, relying on their expertise to manage their wealth effectively. By prioritizing identity verification, wealth management companies demonstrate their commitment to due diligence and protecting the interests of their clients.

This instills confidence and peace of mind in clients, fostering long-term relationships built on trust. Maintaining a strong reputation in the industry is crucial for attracting new clients and retaining existing ones, and identity verification plays a pivotal role in this endeavor.

3. Compliance with Regulatory Requirements

Wealth management companies operate in a highly regulated environment, with stringent anti-money laundering (AML) and know-your-customer (KYC) regulations in place. These regulations aim to prevent illicit financial activities, such as money laundering, terrorist financing, and tax evasion. Identity verification serves as a fundamental component of compliance with these regulations, ensuring that wealth management firms have a clear understanding of their clients’ identities, backgrounds, and financial activities. 

Failure to comply with AML and KYC requirements can result in severe legal consequences, financial penalties, and damage to a firm’s reputation.

4. Mitigating Risks and Enhancing Due Diligence

Wealth management companies deal with a range of risks, including market volatility, investment fraud, and reputational risks associated with clients’ activities. By implementing robust identity verification measures, these firms can mitigate the risk of onboarding clients with dubious backgrounds or questionable intentions.

Thorough due diligence conducted during the identity verification process allows wealth management companies to assess the legitimacy of clients’ funds, understand their risk appetite, and identify any potential conflicts of interest. This proactive approach helps to protect the company, its clients, and the broader financial ecosystem from undue risks.

5. Leveraging Technological Solutions

Advancements in technology have revolutionized identity verification processes. Wealth management companies can now leverage various tools and technologies, such as biometrics, artificial intelligence, and data analytics, to enhance the efficiency and effectiveness of their identity verification procedures.

Biometric authentication, for example, offers a high level of accuracy and security by verifying individuals based on unique physical attributes like fingerprints, facial recognition, or iris scans. These technological solutions not only streamline the verification process but also provide real-time monitoring capabilities to identify and address suspicious activities promptly.

Conclusion

Identity verification is crucial for wealth management companies to protect their clients, maintain trust, comply with regulations, and mitigate risks. By implementing robust verification processes and leveraging technological advancements, these firms can safeguard against fraud and identity theft, uphold their reputation, and enhance due diligence.

In an increasingly digital and interconnected world, identity verification remains a vital tool for wealth management companies to navigate the complexities of the financial landscape while ensuring the safety and security of their client’s assets.

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Understanding Ultimate Beneficial Owner (UBO) Verification

Ultimate Beneficial Owner verification

The Ultimate Beneficial Owner (UBO) is someone who owns or controls a business or owns a legal entity. Financial institutions are legally obligated to gather information on UBOs and the amount of risk that is associated with them. Financial businesses need to achieve regulatory compliance and enhance business security to handle risks that come along with UBOs.

Every jurisdiction is allowed to make up its own rules and regulations regarding UBO verification. Before onboarding a business, financial institutions need to verify business details, understand corporate structures, and verify UBO information.

Financial institutions need to verify UBO information to comply with Know Your Customer and Anti-Money Laundering Laws.

In this guide, we’ll be helping you learn UBO requirements and risks across the globe.

UBO Requirements EU

Financial institutions in the EU doing business with commercial entities have to verify UBOs. The AMLD4 regulation was the first-ever regulation that required businesses to verify UBO information. Member states in the EU are now passing new laws to push businesses on UBO verification.

Let’s take the example of Sweden. Swedish legislation requires businesses to report to the Swedish Companies Registration Office about UBOs.

Highlights of Swedish Legislation:

  • Swedish companies, companies that operate in Sweden, and people who administer trusts and other similar legal entities.
  • Defines a beneficial owner as anyone who controls the company directly or through agreements, or someone who has more than 25% ownership stake in the company.
  • Requires beneficial ownership change to be reported as soon as the entity is aware of the change.

While EU member states are allowed to come up with their legislation, they have to comply with 4AMLD. According to the 5th AML Directive, member states have to set up public registers for companies, trusts, and other legal entities. 

In the EU’s 6th AML Directive, there’s a build-up on the rule in AMLD 5. According to the rule, organizations working for these entities can be held criminally liable for not following the rules.

UBO Requirements U.S.A

USA’s FinCEN Customer Due Diligence final rule has a similar beneficial ownership disclosure.

Here’s what FinCEN’s rule guidance has to say “The CDD Rule outlines explicit customer due diligence requirements and imposes a new requirement for these financial institutions to identify and verify the identity of beneficial owners of legal entity customers, subject to certain exclusions and exemptions”.

According to FinCEN, financial institutions include:

  • Banks
  • Broker-dealers
  • Mutual funds
  • Futures commission merchants
  • Commodity brokers.

According to FinCEN, Ultimate Beneficial Owner is someone who owns more than 25% or more of any business/legal entity. Or they can be someone who controls, or manage the entity in any way.

Corporate Transparency Act dictates that “US companies have to report UBO’s full name, DOB, current residence or business address, and identifying number from a passport, or driver’s license to the FinCEN”.

There’s no “in-effect from” date released by FinCEN.

International UBO Standards

Other countries also have agreements that require businesses to collect and share UBO information. In 2003, the FATF set beneficial ownership standards, and in 2012, 198 jurisdictions agreed to stronger FATF standards.

In 2014, the G20 Brisbane Summit emphasized the importance of Ultimate Beneficial Owner transparency and why financial institutions should focus on UBO verification.

The declaration states “Countries should ensure that competent authorities (including law enforcement and prosecutorial authorities, supervisory authorities, tax authorities, and financial intelligence units) have timely access to adequate, accurate, and current information regarding the beneficial ownership of legal persons”.

A 2016 FATF report stated that out of 20 G20 members, only 2 had made substantial efforts to set up UBO requirements. FATF promotes the use of technologies and procedures that speed the process and help businesses meet the requirements. 

Governments want to put tons of effort so they don’t seem lax when it comes to the war on corruption. Whether it is to collect more tax revenue, prevent terrorist financing, or prevent money laundering. More and more countries are setting up procedures to help businesses manage ownership due diligence.

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Link Analysis for Fraud Detection

link analysis for fraud detection

Link analysis is a powerful analytical technique that allows us to examine the relationships between entities or objects. In the context of fraud detection, link analysis can help us identify connections between individuals, transactions, and other data points that might indicate fraudulent behavior.

In this guide, we’ll explore what link analysis is, how it works, and how it can be used to spot fraud.

What is Link Analysis?

Link analysis is a type of data analysis. At its core, it focuses on the relationships between objects or entities. It is commonly used in law enforcement, intelligence analysis, and fraud detection.

In link analysis, data are represented as nodes (also known as vertices). The relationships between objects and entities are represented as edges. Nodes can represent anything from individuals to transactions to organizations, and edges represent the connections between them.

For example, in a network of financial transactions, nodes might represent bank accounts or credit card numbers, and edges might represent the transfers of money between them.

How Does Link Analysis Work?

Link analysis works by analyzing the patterns of connections between nodes in a network. Businesses and entities can rely on several methods to do link analysis, but the most preferred option is a graph database. 

In a graph database, data is represented as nodes and edges, just like in link analysis. However, graph databases have some additional features that make them particularly useful for link analysis.

One of these features is the ability to perform queries that traverse the edges of the graph. For example, we might want to find all the bank accounts that are connected to a particular credit card number, or all the transactions that involve a particular individual.

Another feature of graph databases is the ability to perform graph algorithms. These algorithms can be used to identify patterns in the data that might indicate fraud. For example, we might use an algorithm to identify clusters of nodes that are tightly connected, which might indicate a network of fraudulent activity.

How Can Link Analysis Help Spot Fraud?

Link analysis can be a powerful tool for fraud detection because it allows us to examine the relationships between data points. By identifying connections between individuals, transactions, and other data points, we can uncover patterns of behavior that might indicate fraud.

For example, suppose we are investigating a case of credit card fraud. Using link analysis, we might discover that several different credit card numbers are used to make purchases at the same set of stores. This might indicate that the fraudsters are using a “shopping list” of stores to target.

We might also discover that the credit card numbers are all being used from the same IP address, or that they are all linked to a particular bank account. These connections might further indicate that the fraudsters are working together and using a common set of resources.

Link analysis can also help us identify unusual or unexpected patterns of behavior. For example, suppose we are analyzing a set of financial transactions. By using link analysis, we might discover that a particular individual is involved in a large number of significantly larger transactions than their typical transactions. This might indicate that the individual is engaged in money laundering or other fraudulent activity.

Conclusion

Link analysis is a powerful tool for fraud detection because it allows us to examine the relationships between data points. By identifying connections between individuals, transactions, and other data points, we can uncover patterns of behavior that might indicate fraud. Link analysis can help us identify unusual or unexpected patterns of behavior, identify patterns of behavior over time, and identify networks of fraudulent activity. This can be especially useful in cases where the fraudsters are working together, as link analysis can help us uncover these networks and identify key players.

However, it’s important to note that link analysis is not a magic bullet for fraud detection. It requires skilled analysts who can interpret the data and identify meaningful patterns. In addition, link analysis is just one tool in the fraud detection toolkit – it should be used in combination with other techniques, such as data mining, machine learning, and traditional investigative methods.

Another potential limitation of link analysis is that it relies on the availability and quality of data. If the data is incomplete or inaccurate, link analysis may not be able to uncover meaningful patterns. It’s important to ensure that the data is accurate and up-to-date before performing link analysis.