Author: Ady

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Identity Verification In Crypto

Cryptocurrency exchanges serve as both magnets for fraudsters and subjects of regulatory scrutiny. To navigate this landscape effectively, it’s crucial to enhance crypto KYC (Know Your Customer) and identity verification tools, striking a balance between fraud prevention and regulatory compliance.

What Exactly is Crypto KYC?

Crypto KYC, or Know Your Customer, represents a legal obligation for centralized exchanges to authenticate user identities. The primary aim is to prevent illicit activities such as money laundering, tax evasion, and illegal funding through cryptocurrencies.

Given the involvement of monetary transactions and pseudonymous digital assets, crypto exchanges are prime targets for fraud and criminal activities. As a result, governments have enforced increasingly stringent KYC and identity verification rules.

However, these requirements are often met with reluctance by both exchanges and crypto enthusiasts. According to a 2019 Coinfirm report, 69% of crypto businesses lacked comprehensive and transparent KYC processes.

Crypto KYC Process in Action

The procedure for crypto KYC is analogous to that in traditional financial institutions, guided by regulations set by government authorities in alignment with the exchange’s geographical location.

Key elements of the cryptocurrency KYC process include:

While these checks can be carried out manually, automation through specialized KYC software is more common. Such software provides a risk-based approach and incorporates identity verification tools. 

In light of anti-money laundering (AML) requirements, combining KYC with AML checks, encompassing politically exposed person (PEP) screenings, sanction checks, and adverse media scans, further strengthens compliance efforts.

The Advantages of Employing Crypto 

KYC Integrating some form of KYC during user onboarding offers significant benefits to crypto exchanges and platforms. These advantages include:

  • Enhanced Compliance

Many jurisdictions mandate crypto KYC as a legal prerequisite within the FinTech sector. Neglecting proper KYC procedures can lead to fines or regulatory issues related to anti-money laundering and countering the financing of terrorism (AML/CFT) laws. 

  • Reduced Fraud

Robust KYC protocols act as a deterrent against various forms of fraud. Gaining comprehensive insights into customers enables monitoring and potential restriction of high-risk individuals. 

  • Fostered Trust

Implementing robust KYC measures instills confidence in customers, demonstrating the exchange’s commitment to adhering to legal standards and safeguarding their interests. 

  • Ecosystem Protection

Crypto KYC plays a pivotal role in safeguarding the financial ecosystem against money laundering, terrorist financing, and other fraudulent activities. 

  • Preserved Reputation

By showcasing diligent steps taken to secure customer assets and accounts, the exchange’s reputation is fortified and protected. 

  • Advancing The Crypto Vision

A robust KYC process can alleviate reservations that potential investors may have about engaging in cryptocurrency, thereby promoting broader participation and mutual benefits. 

Challenges Encountered in Crypto KYC Despite well-intentioned efforts, crypto exchanges face significant challenges in implementing effective KYC procedures.

Here are four key obstacles:

  1. Variety of Fake Id Types

Fraudsters exploit diverse tactics, including synthetic IDs and deepfake technology, to bypass KYC procedures and gain access to crypto exchanges. 

  1. Balancing Friction And Security

Users seek swift access to volatile markets, necessitating a delicate balance between seamless onboarding and stringent security measures to avoid customer churn. 

  1. Clash With Crypto Ideals

While crypto enthusiasts envision the technology as innovative and exempt from conventional financial regulations, regulatory bodies impose distinct standards. Exchanges may need to incentivize users to complete KYC by offering special deals. 

  1. Risk of Compliance Fines

Inadequate KYC checks expose exchanges to substantial fines. Failure to meet requirements can have serious financial implications. Regulatory scrutiny extends beyond crypto exchanges to encompass various crypto-related entities. 

In a notable example, a crypto tumbler faced a $60M fine in 2020 for non-compliance with AML standards.

Effective Tools and Features for Crypto KYC

Automated processes are standard in crypto exchanges’ KYC checks, necessitating the incorporation of the following tools and features within their KYC software:

1. ID Selfie and Video Verification

Modern identity verification vendors offer seamless integration of document verification into crypto KYC procedures. However, it’s important to note that these tools introduce a degree of friction to the user experience.

Additionally, concerns about falsification arise, as fraudsters can manipulate IDs or use stolen credentials. These checks also carry a significant cost, with automated document verification estimated at an average expense of $2 per check.

2. Digital Footprint Analysis 

Digital footprint analysis serves as a preliminary KYC check or an extra layer of security for crypto KYC. It involves uncovering hidden digital and social signals to gain deeper insights into users. Data points include email addresses, IP addresses, phone numbers, browser types, and device specifications. Notable aspects of this analysis include:

3. IP Lookup

Identifies high-risk IPs, potentially associated with harmful activity, suspicious data centers, or VPNs. 

4. Email and Phone Lookup

Flags free email providers and virtual SIM cards, aiding in risk assessment.

5. BIN Lookup

Helps establish card-issuing banks or detect invalid details, contributing to user profiling. By integrating this information and subjecting it to risk assessment rules, a clearer understanding of user risk is achieved during the crypto KYC process.

6. Device Fingerprinting

Device fingerprinting capitalizes on the unique amalgamation of hardware and software attributes within users’ devices. This distinct fingerprint can serve as a key identifier, aiding in identifying connections between accounts. 

The technology also helps identify and exclude bad actors relying on emulators and virtual machines, which are considered high-risk.

7. Blockchain ID Validation

Blockchain technology presents a novel approach to ID verification, offering potential advantages in terms of anonymity, affordability, and efficiency.

For example, HSBC’s successful experiment with blockchain-based KYC in the UAE demonstrates its potential. However, challenges remain, including limited adoption of blockchain KYC and the need for explicit regulatory approval.

8. Leveraging Digital Footprint

Analysis in Crypto KYC SEON’s track record with crypto exchanges highlights the effectiveness of digital footprint analysis in facilitating KYC checks and reducing chargebacks resulting from fraudulent credit card transactions.

Key advantages include:

  • Seamless experience: Real-time data collection via API minimizes friction for users.
  • Cost savings: Digital footprint analysis acts as a pre-filter, blocking low-quality users before engaging in more resource-intensive KYC checks.
  • Enhanced intelligence: The analysis complements manual reviews, allowing for a more comprehensive risk assessment. Users with incomplete digital footprints or obscured online presence can be subject to closer monitoring.

You can explore this approach by entering an email address or phone number below, discovering the depth of insight a digital footprint can provide about a potential legitimate customer.

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Understanding Fraud Analytics – New Way to Combat Fraud

Fraud analytics relies on the use of big data analysis to detect and prevent online financial fraud. It can help financial organizations learn about ongoing fraud trends and build safeguards to protect themselves.

More and more people rely on online banking for the convenience it offers. The 2020 lockdown acted as a catalyst for online banking. With the ever-increasing number of users, online financial fraud numbers have also gone up. Out of all types of financial fraud, Account takeover fraud is the most prominent.

With fraud analytics, financial institutions can gain deeper insights into financial fraud, fraudulent behaviors, and how to protect against fraud.

Financial institutions today have to apply robust fraud management measures to ensure their and their customer’s security.

Challenge of Financial Fraud

Financial institutions are obligated to protect their customer’s sensitive information from fraudsters. Over time, keeping information secure has become more complex as customers can access their accounts from multiple channels. Customers can use mobile banking apps, online banking, or call the bank’s customer service to perform financial activities.

This opens up the bank to several risk points. A fraudster could log in using the mobile app with stolen credentials and the bank would have no way to distinguish between a legit user and a fraudster.

It is also becoming increasingly easy for fraudsters to steal credentials. To give you an idea, the dark web has over 15 billion credentials that you can buy for next to nothing.

The average price for banking credentials is as low as $15.43 for a single consumer. If a fraudster wants to buy credentials for an organization’s key system, the average price is $3,139.

Types of Online Financial Crime

  • Account Takeover Fraud

ATO is one of the most prominent types of financial fraud. A fraudster uses stolen credentials to take over an existing online account. The fraudster then uses the account to commit financial fraud.

  • Sim Swap

Sim Swapping is another type of account takeover fraud. In this type of fraud, the fraudster uses a victim’s personal information, to try and convince the mobile company to port the victim’s phone to another number.

When the mobile company ports the number, the fraudster conducts financial fraud and the victim is unaware until it’s too late.

  • Phishing Attacks

Phishing attacks are aimed to target less technically proficient users. This type of fraud happens when a fraudster impersonates a legitimate company/service provider. Then the fraudster sends a text/email to the user asking them for their personal information.

Once a less suspecting victim shares their personal information, the fraud begins.

  • Malware

Fraudsters use several methods to gain a victim’s personal information. This includes trying to trick a victim into installing malicious programs on their device. This malware is designed to log keystrokes, corrupt data, or make the device unusable until the victim pays a ransom.

  • Card Not Present

CNP is becoming more prevalent because of a growing trend of eCommerce shopping. Fraudsters use stolen credit card accounts to make online transactions.

How do Fraud Analytics Help in Financial Fraud Management?

Online fraud is ever evolving and financial institutions need to keep finding new ways to combat fraud. Traditional methods of fighting fraud are not up to the standards. Fortunately, there is a huge pile of data that financial institutions can use to predict and detect fraud. 

Just having a username and password isn’t enough to protect customers and institutions against fraud. When someone accesses, or attempts to access a victim’s information, there is behavioral data that banks can use to verify if this is a legitimate transaction or not. 

Vital data that financial institutions can use to detect fraud include:

  • What device a user is using?
  • If the device has been previously registered with the bank.
  • Can the user verify their identity with a fingerprint?
  • Does the transaction data fit the previous patterns?

These types of data can be broken down into four categories:

  • Knowledge: Something that a user knows, such as passwords, identity information, username, etc.
  • Possession: This type of data signifies something that a user has, such as a mobile phone.
  • Inherence: This is something that a user is, such as a fingerprint, retinal data, palm print, etc.
  • Behavioral: Something that a user does. Any activities that form a pattern, such as their requested transaction, or a series of transactions.

By analyzing these data and combining them with big data, fraud analysts can discover hidden patterns. 

Banks, since forever have been operating on a fixed set of rules that examine requests and provide a yes/no decision. These rules are based on increasing fraud techniques which expands the rules sets and these rules end up becoming too complex. 

Even the most complex traditional rules don’t adapt to hidden or unknown threats. Having systems that haven’t adapted to the latest developments leads to a huge number of false positives.

Machine learning solutions can collect massive amounts of data. These solutions can also analyze heaps of data and assign a real-time risk score for a customer. 

This is how fraud analytics help in detecting and preventing online financial fraud.

ML Models for Fraud Detection and Prevention

Fraud analytics is applying machine learning techniques to financial data. Fraud analysts use machine learning to examine all the valuable data to determine whether the transaction is high-risk or low-risk.

Based on the outcome, machine learning solutions offer recommendations to either allow or block the transaction. There are also cases where multi-factor authentication is needed before approving a transaction.

There are two different types of machine learning solutions. Unsupervised, or supervised. Unsupervised machine learning models analyze unstable data sets to find anomalies in the data. The model can also detect otherwise hidden relationships in the data to suggest a function or instruction set to describe the underlying dimensions of the data. 

Supervised machine learning models on the other hand are trained using labelled data. These models predict the likelihood of fraud. The way to train supervised models is by presenting them with legitimate and fraudulent data and commanding them to analyze the data to develop an instruction set or an algorithm. 

This algorithm is then used on other examples to verify the capabilities of the model. A perfectly trained supervised machine learning model can identify known and unknown patterns. These models are most likely to provide an accurate risk score for a requested transaction.

Data Analytics Techniques to Fight Financial Fraud

Data science is also a part of the solution to fight fraud. Financial institutions collect behavioral, device, and transactional data of every customer. Analyzing this data through a fraud detection system can help in the detection and prevention of financial fraud. 

But the analysis can only be as great as the data available in the data set. If a financial institution has great data available, there are several data analysis techniques that a machine learning-based fraud system can use to fight fraud. 

Predictive analysis is looking at available data and making predictions about the future. Using past events to figure out a pattern and then showcase the potential prosperity for fraud.

Pattern recognition is another data analytics technique that businesses can use to combat fraud. Machine learning models analyze data sets to detect anomalies and identify patterns that are different.

Machine learning algorithms can learn from the data and make predictions for future events.

Forensic analytics is examining the causes and consequences of a financial fraud event. By analyzing the data and relationships between the cause and the consequences, it is possible to identify potentially fraudulent behavior and expose cooperation between fraudsters.

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Marketplace Fraud Trends

Marketplace fraud is as the name suggests. A buyer or seller makes false claims through a company. The fraud could be as simple as making false claims about the quality of products and services, or selling different items as advertised.

An online marketplace provides a platform that buyers and sellers to find one another. eBay is the father of online marketplaces. Launched in 1995, it opened the floodgates for other online marketplaces.

Since then, online marketplaces have grown to offer so much more. Any service or product you could think of, you’d be able to find a marketplace for it.

Marketplace Fraud Trends

At its core, the fraud marketplace can be broken into two categories. Buyer scams and seller scams. You’ll be able to find scammers on both sides of the transaction. 

Here’s a breakdown of the common buyer and seller marketplace fraud trends:

Types of Buyer Fraud

Scams that target buyers are more than common on online marketplaces. Here are the most common types of fraud that scammers use to trick buyers.

1. Counterfeit Goods

Millions want the luxury of expensive goods but don’t have the money to experience the luxury. To match this demand, fake luxury goods are produced in countries like China, Turkey, and others. Online marketplaces face a lot of issues with counterfeit goods.

Customers who can’t differentiate between original goods and counterfeit tend to fall for these scams.

Sellers are extremely good at tricking people into believing that they’re selling a legit item. Customers often fall prey to paying absurd amounts of money for a fake item.

The best way to prevent this fraud is to research about possible counterfeits. There are online forums such as Reddit that have communities that can help you decide whether a good is legit or fake.

2. Non-Delivery Scams

This is another common marketplace fraud trend. The best way to scam a buyer is by selling an item that the scammer never intends to deliver.

There are situations where the seller makes up a fake advertisement and doesn’t have anything to sell. You can probably find photos that look suspicious and the seller may not be able to answer specific questions. 

The best way to tackle this fraud is to always ask for secondary images and images from different angles. You can ask the seller to also send a photo of the product and a piece of paper with your name written on it. 

This is in no way a complete solution as a lot of scammers do have the item in their possession. By making fake listings, sellers can sell a single item multiple times to multiple victims without delivering anything. 

Some ways to spot this type of fraud include:

  • Check reviews and comments. Especially look if anyone has mentioned being scammed by this seller. 
  • Ask whether you can pick up the item in person and pay via cash. If the sellers tell you they can only send it via post, it’s probably a scam.
  • Always be wary of people who want you to pay using cryptocurrencies or use any non-secure payment methods. Apart from cryptocurrencies, look out for international fund transfers, money orders, and pre-loaded gift cards.
  • If the seller pushes you to make the money transfer as soon as possible. And if they try to give some enticing offer to sell you the product as soon as possible, they’re trying to manipulate you into buying.
  • If the seller requests that you communicate or pay outside of the Facebook marketplace, then it is most likely a scammer.

3. Phishing Scams

Phishing scams are one of the most common types of scams you’ll find online. These types of scams can be just as common on online marketplaces as they are elsewhere. 

A phishing scam is designed to steal your personal information to defraud you. To make this type of fraud happen, fraudsters make up a fake listing. These listings can contain links to malicious websites that are designed to steal your data.

The best way to identify phishing scams is when the scammer asks for your personal information. Sensitive information that makes no sense to ask for while purchasing something.

Any sensitive information you provide to the scammer can be used to engage in fraud.

4. Rental Scams

Rental scams are growing at an alarming pace. Scammers make up fake listings for properties, rooms, boats, sports arenas, etc.

Once someone shows an interest, the scammer asks for an upfront payment or deposit to secure the rental. After the buyer makes the payment, they lose their money as there is no rental place/equipment to use.

To prevent yourself from getting scammed, don’t rent on marketplaces that aren’t built for specifically renting services. Moreover, you can ask to see the place/equipment first and pay money in person.

5. Ticket Scams

If you’re on the hunt for tickets to a sold-out Foo Fighters concert, seeking a Lollapalooza ticket, or coming across unbelievably cheap entry to a famous art gallery on Facebook Marketplace, beware of ticket scams.

Scammers are adept at selling counterfeit tickets that look genuine but will leave you disappointed on the night of the event. To safeguard yourself, exercise extreme caution and only purchase tickets from authorized sellers and resellers.

While legitimate ticket touts do exist, selling tickets at a premium, there are just as many scammers peddling expensive forgeries, with Facebook Marketplace being a preferred platform for their schemes. Stay vigilant and follow these guidelines to avoid falling victim to ticket scams:

Purchase tickets only from authorized sellers and resellers.

  • Be wary of deals that seem too good to be true or significantly cheaper than the regular ticket price.
  • Verify the seller’s legitimacy by checking their reputation, reviews, or feedback from previous buyers.
  • Avoid using insecure or non-refundable payment methods like bank transfers or cryptocurrency.
  • Exercise caution with electronic or print-at-home tickets, as they can be easily forged and sent by scammers via email.
  • Cross-check ticket details, including the date, time, venue, and seating information, against the official event information to spot potential discrepancies in the scammer’s advertisement.
  • Compare the ticket’s appearance with an official one to detect signs of counterfeiting.
  • Be cautious of sellers who rush you into making a payment.
  • If possible, meet the seller in person to verify the authenticity of the tickets before purchasing. Trust your instincts and thoroughly assess the legitimacy of the ticket purchase from the seller.
  • Maintain all communication and documentation related to your ticket purchase as evidence for potential complaints.

6. Pet Scams

The pandemic and the rise of remote work have sparked increased interest in pet ownership. Unfortunately, scammers have exploited this trend by creating fake listings for pedigree puppies, kittens, and other popular pets on Facebook Marketplace.

To avoid being defrauded by pet scams, follow this simple checklist:

  • Visit the seller in person to verify the existence of the pet, its health, and the conditions it is kept in.
  • Do not make upfront payments for vaccines or unnecessary charges.
  • Only provide a deposit if you are certain about the seller’s legitimacy.
  • Use secure payment services for transactions.
  • Preferably, pay for the pet when you pick it up to ensure its authenticity.

Seller Scams

Sellers are not exempt from fraud, and awareness of potential pitfalls is crucial to safeguard themselves. Here are some common seller scams:

  1. Payment and Overpayment Scams

Always verify that you have received a payment from the buyer and that it has completely cleared before offering any refund. Use payment methods that cannot be reversed at the last minute.

  1. Returns Scams

Wait until you have received the returned item and checked its condition before issuing a refund.

  1. Electronic Payment Delay Scams

Never allow a buyer to leave with the item until their payment has fully cleared.

  1. 2FA Scams

Avoid sharing your phone number and 2FA codes with anyone you meet online, as they may exploit them for fraudulent purposes.

  1. Phishing Scams

Be cautious of suspicious inquiries and limit sharing of personal information with potential buyers. Use secure communication channels and verified payment methods.

Always trust your instincts and proceed with caution when dealing with buyers or sellers on online platforms like Facebook Marketplace or others. Following these guidelines can help you avoid falling victim to scams.

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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 ensures 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, balance and audit confirmation, 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.