Author: Ady

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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, the 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.

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Making Great Customer Onboarding Experience

provide great customer onboarding experience

Even though we’re past the pandemic, its impact on digital experiences can’t be underestimated. It has changed how people access financial services. The digital revolution has increased the number of people who use a range of financial services across the globe.

It has significantly impacted how people send and receive money, borrow, and save. 

With a sudden shift in the way customers use the services, customer expectations have changed significantly as well. Compared to 10 years ago, Gen Z is now leading the Buy Now Pay Later industry.

These are the same consumers who are more than likely to see digital engagement as the industry standard and want a seamless customer onboarding experience for financial services.

What Consumers Expect from Customer Onboarding

According to a BAI report, “75% of millennials surveyed would switch banks for a better mobile experience.

Gen X on the other hand is looking to open more banking, saving, and loan accounts online. 

Salesforce also conducted a survey of what customers expect from financial services and found that 80% of customers consider user experience a part of the service that an institution provides. 

Around 30% of all customers abandon the onboarding process because it’s too long and complicated.

All the data points towards one thing. Financial institutions need to find a balance between seamless customer onboarding and simultaneously preventing fraud.

The best approach to providing great customer experience is to place identity at the center of customer experience. This can help brands build stronger relationships with customers based on trust.

Best Practices for Customer Onboarding

1. KYC in Financial Services

Know Your Customer is a series of checks every business has to do to verify a customer or entity’s identity. These KYC checks are done during customer onboarding and several moments during the customer lifecycle. 

Types of financial institutions that have to comply with KYC checks include:

  • Banking
  • Credit
  • Payments
  • Money Transfer
  • Cryptocurrency (Some jurisdictions).

Complying with regulations also helps in preventing financial crimes. It also helps businesses avoid many risks that come along with a failure to comply, including financial penalties, brand reputational damage, and more.

2. Building Trust and Reputation

Considering KYC checks and Identity checks as a service of your business makes good sense in this digital-first environment. 

To establish quality relationships with customers, businesses need to find the right balance between:

  • Personal identifiers
  • Identity documents
  • Behaviors and signals.

If a brand can successfully find the balance, it can instill greater confidence about its brand in a consumer’s mind right from the onboarding. 

For customers, well-designed KYC checks and ideal customer onboarding practices remove barriers and provide access to financial services. It has one more benefit as it removes the risk of fraudsters abusing the system.

3. Risk Assessment and Multi-Layered KYC Solutions

Taking a risk-based approach to KYC is a crucial part of ensuring customer onboarding meets the industry standards and prevents fraudsters from being able to access the service. 

A risk-based approach, including geography, finances, and other key demographics needs to be put in place.

Great customer onboarding solutions should have a built-in automated risk assessment. They show how much risk factors a customer has. The best KYC solutions for financial institutions are multi-layered, they combine risk management engines that search customer risk parameters.

4. Speed and Convenience Matter

Speed and convenience are as important as security when it comes to customer onboarding. Consumers don’t want to go through a customer experience that’s slow, clunky, and poor. 

To avoid customers abandoning the customer onboarding process, KYC in customer onboarding needs to be done in minutes. 

Quick KYC checks and good experience during customer onboarding help in building trust in a customer-business relationship.

5. Analyze and Adapt for Great Customer Onboarding

The best customer onboarding for financial services will aim to balance sign-up with compliance and risk management. To make the best customer onboarding solutions, businesses must provide analytics to improve the customer experience. 

Businesses need to know which OS, browsers, screen resolutions, and devices customers are using to sign up. Which part of the customer onboarding process is experiencing the highest number of drop-off rates? 

Businesses also need to focus on their customer onboarding conversion rate. How many prospects are automatically being accepted, rejected, or referred for review?

Identifying this data can create an improvement cycle that learns from mistakes, and continually evolves to enhance customer onboarding experience and conversion rates.

FAQs
1. What are KYC, CDD, and EDD?

KYC is know your customer, it covers a number of activities such as identifying and verifying a customer’s identity. Customer Due Diligence (CDD) verifies the identity of a customer and also assigns a risk profile to the customer. 

If a customer has a high-risk level, they have to go through enhanced due diligence (EDD).

2. When should businesses do KYC checks?

At a minimum, KYC checks should be done when onboarding a new customer. Ideally, businesses should do KYC checks when there are any changes to a customer’s situation. 

The most robust KYC is an ongoing risk assessment, and it may be a requirement for EDD.

3. Who is responsible for doing KYC checks?

Any financial institution that is trying to onboard customers is responsible for doing KYC checks. This could be any activity, such as:

* Opening a bank account
* Getting a loan
* Real estate purchase, or more.

The customer has to go through KYC checks to be able to access services.

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Vendor Fraud Practices and Prevention

vendor fraud practices

Businesses often overlook fraud red flags. In the long run, this leads to monetary and reputational losses. Vendor fraud has become highly prevalent across several industries. When vendor fraud happens, the culprit could be someone from your own team or someone you trusted. It could also be a fake vendor that wasn’t verified properly. 

Every business needs to make robust and reliable partnerships with vendors to thrive. Fraudsters often take advantage of this reliance on vendors to trick businesses into making wrong payments. 

Here are some of the most common types of vendor fraud, and how you can prevent them:

Common Vendor Fraud Types

1. Phony Vendors

One of the most common methods of vendor fraud is fake vendors pretending to be legit. Fake vendors try to get businesses to make payments for fake services. It can take a long time before companies uncover the fraud.

In some cases, even employees pose as fake vendors to exploit known weaknesses in payment systems. Employees can set up fake vendors, and make fake invoices to get payments in their accounts.

Common red flags to uncovering fake vendor fraud include:

  • Photoshopped invoices
  • Photocopied invoices
  • Companies with no real-address
  • Sequentially numbered invoices
  • Companies with addresses of post offices

Companies should train their employees to check for red flags in invoices raised by vendors. If there’s a specific vendor that raises invoices just below the sum that needs approval from higher-ups.

2. Fake Invoices with Real Vendors

Sometimes an employee from your business and an employee from the vendor’s team can collaborate to come up with a scam. Both members of the team can collude to trick the business into making wrongful payments. 

A vendor may submit fake invoices, and an employee at the purchasing department will make payment for the amount. The payment is made to a personal account and split between the two. 

This type of fraud becomes common when the supplier and business teams are in close contact. To prevent this kind of fraud businesses must do due diligence before they hire their employees.

3. Kickbacks

If your business performs contract work, then kickbacks are another type of vendor fraud you need to be wary of. The person who approves the contracts could be receiving kickbacks from their vendors. Common red flags for this kind of fraud include:

  • Fewer bids than expected/needed.
  • Widely ranging bids on the same project.
  • Sudden and unexplained deadline changes. 

Kickbacks also happen when you’re paying higher prices for low-quality products. Making cash payments to your employees is the hardest to detect as there’s no record of these payments in company books. But they are reflected in higher pricing from vendors. Even fraudulent vendors need to cover their costs. 

To minimize losses, companies should always look for consistent shortages, communications that happen informally between vendors and staff, and poor record keeping.

How to Effectively Identify Vendor Fraud?

The key to fighting vendor fraud is knowing where to look. If you don’t know where to look for it, you won’t be able to detect it. Here are some basic measures any company can take to prevent vendor fraud:

  • Check for the vendor’s pricing structure. If the prices look too good to be true, they’re probably scams. 
  • Don’t be lenient on any single invoice. Scrutinize every invoice submitted by the vendor or submitted on behalf of the vendor. If there are two same invoices with the same invoice numbers, it’s probably a fraud. 
  • Most companies follow their own invoice format. If the invoice was made using Microsoft Excel, it’s a red flag.
  • A vendor that doesn’t have a verifiable taxpayer identification number is most likely to be a fake vendor.
  • Do vendor onboarding checks? Run Vendor KYB checks, and background checks to see if they’re legit or if they have a history of fraud.
  • Any vendor with a P.O. box address is likely a fraud.

Tips for Vendor Fraud Prevention

Knowing how to look for vendor fraud is one thing, but it’s not enough to identify vendor fraud. What’s important is to prevent vendor fraud from happening. 

  1. Manage Vendors Effectively

Fraudsters keep evolving their methods of conducting fraud. When you’re fighting vendors, you need to come up with an effective vendor fraud management system. 

With an ideal vendor fraud management system in place, it will become easier to manage vendor risk. Ideal strategies can significantly reduce the risk of fraud.

  1. Audit Vendors Regularly

Keeping a track of vendors is essential. Even a trusted vendor can suddenly start doing fraud. Frequent vendor auditing can help you protect your business against huge financial losses caused by fraudulent schemes. 

  1. Multi-Level Payment Approval Process

Vendor fraud happens the most at businesses where there are just one or two employees handling vendor invoices. 

To prevent making fraudulent payments, vendor invoices should go through multiple processes from different departments. 

  1. Use Invoice Matching Technique

Invoice matching is pretty basic but it can reduce vendor fraud significantly. 

As the name suggests you have to match invoices submitted by vendors against internal records such as purchase orders, payment receipts, inspection slips, etc.

To ensure you achieve the best possible results, you have to match the invoice against multiple documents. 

  1. Don’t Make a Single Employee Manager

Sometimes, several employees work with each other to commit fraud. This is why businesses go such a long time without detecting fraud. Usually, its employees in the procurement and payments department conduct these kinds of fraud. 

The best way to manage risks and prevent fraudulent vendor payments is to keep rotating employees and moving them across different departments. This can ensure that no one employee has too much power.

  1. Thoroughly Verify Vendors

Vendor verification is a crucial part of the process. During vendor onboarding, you should verify the vendor’s business information. This includes vendor proof of address verification, vendor KYB checks, and vendor bank account verification.

Running through these checks simply means that you’re using vendors you can trust.

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3 Different Types of Fraud

types of fraud

Digital banking has opened up more means for fraudsters to trick financial institutions, lenders, or end customers. To keep up, businesses have transformed their operations to provide valuable digital banking experience to customers, and combat fraud.

Banks all over the world are now focusing on seamless onboarding experiences. However, this rapid growth in digital banking has also allowed fraudsters to become more creative. The numbers around digital banking fraud, ID theft, and data breaches are increasing rapidly.

In this blog, we’ll outline the common types of fraud, and how and why they’re changing. We’ll also be sharing ways lenders can protect themselves against evolving fraud. 

First off, let’s take a look at the common types of fraud:

What is First-Party Fraud?

First-Party fraud is when a person knowingly falsifies their identity or gives false information for financial or material gain. Common examples include exaggerating their income, fabricating their employment, or providing fake information to take advantage of some services.

Business often categorizes first-party fraud as credit loss and is written off as bad debt. This leads to issues in the long run for businesses trying to figure out how much they’ve lost. The data makes them able to make future lending decisions, and build fraud prevention practices:

Common types of first-party fraud include:

  • Fronting

Fronting is when businesses set up services in someone else’s name to save money. Kids applying for car insurance under their parent’s name to get cheaper insurance.

  • Address Fronting

Address fronting is when someone uses a different application to get a cheaper service. Someone could sign up for a service in a cheaper area, using a fake address instead of using the real address which costs more money.

  • Chargeback Fraud

Chargeback fraud is often called “friendly fraud”. This fraud happens when a user denies making a purchase on a credit or debit card to get a refund from the credit card provider.

  • De-Shopping

 It’s a type of fraud that users do when they buy clothes or other items with the intention of returning them after using them and getting a full refund.

  • Goods Lost in Transit Fraud

This is a type of fraud that’s increasing at an alarming pace. In this, customers order goods online and claim that they haven’t been delivered. Some buyers claim that the products have been damaged, or even return empty boxes to get a refund.

How is First-Party Fraud Changing?

The type of people that cause first-party fraud has changed significantly during the pandemic. During the pandemic, customers with excellent credit scores and a good repayment history found themselves struggling financially.

According to a report by CIFAS, 1 out of 13 Brits admitted to committing one instance of first-party fraud last year.

What is Second-Party Fraud?

Second-party fraud is when an individual shares their identity or personal information with someone else to commit fraud. The biggest example of second-party fraud includes money mulling.

In money mulling, an individual provides access to someone else to move money in or out of their accounts for a small fee. While a lot of people consider this a victimless crime, it can have some victims. If the money being moved is used to fund violent crimes, terrorism, or drugs, it can be victim-related.

How is Second Party Fraud Changing?

More than often, young people have been the target of second-party fraud. Fraudsters love to use social media to target young people. The trend has changed as more and more older people are involved. As with first-party fraud, the pandemic has pushed more people into financial problems. This makes them more vulnerable to fraudsters.

What is Third-Party Fraud?

Third-party fraud in general is known as identity theft. Fraudsters steal the user’s identity or personal details and use them without the user’s consent. It also includes manufactured identities called synthetic identities. 

There’s a clear victim when it comes to third-party fraud. To a trained eye, it can be easy to spot instances of fraud. It also includes manufactured identities, with the fraudster creating a new identity using stolen and false information.

Third-party fraud is the most common type of fraud that happens throughout the globe. 

How is Third-Party Fraud Changing?

Fraud varies significantly across the lender’s portfolios and the type of products they offer. According to reports, third-party fraud is at risk of growing for current accounts, loans, cards, and savings. Mortgages and asset finance are at an increased risk of first-party fraud.

Combating fraud is challenging, but with technologies like online document verification, online bank verification, or online proof of address verification services can help.

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Fraud Risk Management Practices

best fraud risk management practices

According to a report by ACFE, organizations lose about 5% of their annual revenue to fraud annually. This is because businesses don’t focus much on common fraud risk management practices. This leads to companies not being able to protect themselves against fraud, and meet bottom-line compliance requirements.

As more and more financial institutions are required to bear the burden of compliance, they need to know the appropriate methods of risk management.

These risk management frameworks help businesses to identify and respond to fraud. Being able to assess risk early on helps them protect organizations against common fraud types. Businesses can implement fraud risk management practices and gain an advantage over their competition.

Benefits of Fraud Risk Management Practices

Financial institutions that implement basic and advanced fraud risk management practices tend to reap additional benefits.

The most common benefits include the following:

  • Reduced financial losses due to fraud. 
  • Reduced costs of responding to fraud.
  • Better compliance with local and global regulatory requirements.
  • Enhanced employee awareness of employees against fraud throughout the organization.
  • Increased reporting of potential fraud and other ethical issues. 
  • Enhanced level of corporate governance.

Best Practices for Fraud Risk Management

Organizations don’t need over-the-top processes that add friction instead of reducing it. To reduce fraud, businesses need to reinforce their current models. This can be done using best practices for fraud risk management:

1. Invest in Ideal Technology

The right type of technology can make or break everything. Integrating technologies that help prevent fraud such as online document verification, proof of address verification software, bank verification software, etc.

Technologies like these can help organizations streamline the compliance process. Financial institutions can also verify which customers are real, and which are not.

Being able to clearly see through fraudulent practices is what businesses can do to reduce financial losses through fraud.

2. Build a Risk Insight Culture

Businesses can get instant benefits from risk insights. Risk insights can also improve the management decision-making process. Although, in order to maximize the long-term benefits, businesses need to take a systematic approach. Employees should know about risk awareness and should ensure continuous compliance in the financial process.

3. Understand Your Compliance Capabilities

Strong compliance provides benefits that are hard to measure. Business leaders need to identify their company alongside the level of their compliance capabilities. Knowing the journey helps organizations understand which approach they should take to improve compliance capabilities. 

4. Find Flexible Solutions

The fraud number keeps on increasing on existing channels and new channels. Finance leaders need to strengthen their ability to detect fraud and analytical capabilities.

Financial institutions need to leverage existing data to be able to improve fraud risk management capabilities. Fraud is getting complicated, thus making it vital for businesses to come up with flexible fraud risk management solutions. 

5. Consolidate All Data Sources into a Single Platform

There are thousands of fraud risk detection solutions available in the market. Businesses need to make sure that data captured from all these technologies are kept on a single platform. Consolidated data makes analysis and decision-making easier. 

This also avoids the creation of unnecessary data silos, which leads to instances of fraud.

6. Have an Omnichannel View of Fraud Detection

Organizations need to consider all digital channels if they want to manage risk effectively. An omnichannel approach to fraud risk management can minimizes the risk of a fraudster migrating to another channel after losing access to the first one. 

To be able to do this, businesses need to develop a single central platform to ensure data points and behavioral patterns can be accessed through all channels. 

7. Evaluate Risk Throughout the Customer Journey

The level of risk associated with a transaction should be assessed and handled before the customer reaches the final step of the payment. Risk management leaders must build fraud risk management systems that can assess risk from the beginning of a customer journey. 

This includes analyzing customer behavior, analyzing the use of bots, and scripts, monitoring account login/creation, and defining the risk of the action. They also need to implement ideal obstacles along the journey.

8. Build a Seamless Customer Experience

The risk management approach is different for each organization. No two organizations can follow the same steps and get the same results. A new approach is needed that can integrate fraud detection and customer verification technologies.

The goal of the process should be to eliminate fraud while trying to keep the customer onboarding experience as seamless as possible.

Risk management leaders should focus on streamlining the customer experience, and implementing frictionless customer verification processes.

9. Reduce the Cost of Fraud

When businesses focus on reducing the total cost of fraud instead of the rate of fraud, they are able to come up with better strategies. With this goal in mind, organizations can make informed decisions about how much they need to invest in fraud detection and prevention.

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How to Prevent Account Takeover Fraud?

what is account takeover fraud

Account takeover fraud (ATO) happens when an unauthorized person takes over a normal user bank account. Fraudsters take every measure to try and control an account. Once they have an account under control, fraudsters apply for a new card or change basic account information. In this guide, we’ll be talking about account takeover fraud, and how big of a threat it is for financial service providers.

Most of the time, individuals are the victims of account takeover fraud. Sometimes, fraudsters take over the business and small business accounts as well. Compared to 2019, 2021 saw a 21% increase in account takeover fraud. Out of all types of fraud, three-quarters of cases are account takeover fraud.

Old and New Ways of Account Takeover Fraud

Account takeover fraud is one of the oldest types of fraud. In the past, criminals relied more on manual ways to collect enough knowledge about a victim to access the account and eventually take control. 

They could access this information by going through people’s trash, stealing mail, and bribing or blackmailing. In today’s time, the way of accessing information has changed completely. Cybercrime has become the primary method of acquiring information for account takeover fraud.

Moreover, fraudsters can buy information for dirt cheap from the dark web to allow them to take over financial accounts. 

The dark web has multiple marketplaces that specialize in selling personally identifiable information (names, account numbers, addresses, social security numbers, national IDs, and more). 

As most people reuse their passwords for multiple accounts, it makes it easier for fraudsters to take over multiple accounts at once. 

When fraudsters have access to this much data with ease, they test it out. There are both old-school, and new-age methods to try these techniques. They can use automated tools to mount mass attempts to access these accounts with credentials stuffing. 

There are other ways. According to reports, around 44% of account takeover fraud instances happen using telephone channels. This suggests that call centers are the weak link in the process.

What Do Fraudsters Do With Taken-Over Accounts?

There are multiple parties involved when it comes to fraud. The criminals that commit data breaches to access accounts, are not the same criminals to use the data to determine if it’s usable. When accounts are found that are vulnerable, they’re sold to other fraudsters that actually take over the account. 

When an account is taken over, some fraudsters just want to make quick money. They simply transfer the available amount to some other account. Some fraudsters use these accounts to use them for money laundering.

Other fraudsters play the longer game, they use the account to get as much monetary gain as possible. This is done in several steps:

  • Fraudsters gain long-term control of the account. They change core account information such as an address, mobile number, and date of birth. 
  • Fraudsters issue a new card for the account with the new details (new address, new mobile number, etc).
  • They keep using the account to maximize the funds available.  They increase credit card limits or use the account as a gateway to getting more funds, such as a loan. Once a fraudster has maximized the amount they can obtain before the risk to them becomes too high, they cash out of the account under their control. 

When this happens, it’s extremely difficult for the financial institutions to find the legitimate account holder from the fraudster, or which activity was done by whom.

How do Financial Institutions Handle Account Takeover Fraud?

To stop account takeover fraud from happening, financial institutions need to both prevent it and also detect suspicious activity so they can intervene. This can be done by employing multiple techniques:

1. Strong Customer Authentication

ID authentication is a major part of the account protection process. Several banks and financial institutions pay huge attention to the ID verification process. In the EU, PSD2 regulation is used more for checking a customer’s identity when they make a payment. That’s now all, PSD2 also includes authentication of account holders when they access or use payment accounts.

Any activity on a payment account that increases fraud risk requires strong customer authentication. Financial institutions have multiple methods to verify if the account holder is a legitimate user or not.

To meet the requirement of PSD2, financial institutions have to cover 2-3 categories:

  • Knowledge authentication – Something only the user knows (password, PIN, etc).
  • Possession – Something only the user possesses, such as a token, mobile, card, etc.
  • Inherence – Something that the user himself is (fingerprint, facial recognition, etc).

2. Customer Communications for Confirmation

Once a fraudster has access to an account, it’s not all over. The more details the fraudster may change on the account, the more control they have, but before they make changes the bank has the contact information for the real account holder. 

As well as authenticating customers wanting to make changes. To prevent account takeover fraud, banks can use real-time automated, and two-way communications with their customers to confirm, such actions are needed.

For example, if a change of address is needed, then a text message can be sent to the mobile phone number on record to confirm if this action is legitimate. 

3. Understanding Criminal Networks

Organized crime usually happens on a larger scale. Fraudsters try to take over as many accounts as they can. While this is a threat to financial institutions that have bad defenses, it can also be an opportunity to identify accounts that have been taken over. 

With application fraud, criminals have limited contact information that they can use to manage accounts. They recycle mobile numbers, emails, and addresses using the same contact information for multiple accounts.