Author: Ady

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AML

What is Risk Based Approach to AML?

Risk-Based Approach to AML

Money laundering is a severely growing problem, and it’s not limited to any one country. The United Nations Office on Drugs and Crime (UNODC) that money laundering figures worldwide will exceed the global 2% of global GDP ($1.7 trillion).

Eurojust Report on Money Laundering, states that cases registered regarding money laundering have doubled within the last 6 months. 

Anti-Money Laundering (AML) is a set of guidelines pertaining to financial institutions and other related industries. These guidelines are meant to prevent activities that support the financing of terrorism. Regulated businesses should not knowingly or unknowingly support these activities.

Risk-Based AML and Global Regulation

There are several anti-money laundering regulatory bodies that set up rules and regulations that local and international organizations have to follow. For companies to do business in a particular location, they have to comply with the rules and regulations set by the governing body. 

The Financial Action Task Force is the global money laundering and terrorist financing regulatory body. The FATF has the responsibility to set international standards that aim to prevent illegal activities and the harm they cause to society. 

FATF works with several governments and national regulatory bodies to achieve regulatory reforms. Regulations made by FATF cover more than 200 countries and jurisdictions. 

The UK was the first one to propose a risk-based assessment for anti-money laundering. It was further adopted and improved by the FATS in 2012. this led to the development of proactive risk management.

Common AML Risk Factors

A proactive risk-based approach to AML can only be done when there is an accurate risk assessment. And there are 3 distinct areas of risk that regulated industries need to focus on during risk assessment.

  1. Individual Risks

Governments need to collect and maintain lists of high-risk individuals. These lists include known fraudsters, money launderers, terrorists, and red-flagged Politically Exposed Persons (PEPs). 

These individuals are considered high-risk individuals because of their influence and access to a large number of funds. During customer onboarding, businesses need to identify high-risk individuals as it’s a KYC requirement. 

  1. Location Based Risks

Governing bodies also compile assessments of risk that comes with geographical jurisdictions,  flagging unsatisfactory money laundering and terrorist financing. 

The geographical location determines the laws, regulations, technology, security, data privacy, and data accuracy of a business environment. To take a risk-based approach to AML, businesses need to take location-specific risks into consideration. 

  1. Channel Risks

The way a product or service is taken to the market can also affect the risk level. Now that we’re living in an internet-based economy, sales of products and services that happen online always carry a hint of risk. Without robust KYC verification and ID verification process, there’s no way to eliminate the level of risks associated with online transactions.

How to Implement a Risk-Based Approach to AML?

Taking a risk-based approach to AML is similar to managing any other type of risk in your business. A risk-based approach to AML includes:

  1. Identifying Business Risks

To be able to take a proactive approach to AML, you first need to identify the risks. A business needs to review products, services, and portfolios, that contain common AML risk factors, such as:

  • Customers – How much do you know about the type of customers for your service?
  • Geography – What’s the exposure of the target markets to financial crime?
  • Delivery channel – By what means the product will be delivered to the customers?
  • Industry – How advanced are the regulations of your business’s industry?
  • Monetary Value – Does your product and service has a high monetary value?
  • Regulatory Controls – If the regulations in the country are advanced enough.
  • Process Controls – How well can you document and follow your processes as a business?
  1. Analyzing Business Risks

Analyzing and assessing risks that a business has to face is crucial for a risk-based approach to AML. Using a table of risk factors for each product or service, a business can assign risks. Then the level of risk can be categorized as “low, medium, or high”. 

The FATF has a guide that businesses can use to show how to rank risks using a simple matrix.

  1. Implement Policies that Eliminate Risks 

Once the risk assessment is complete, businesses need to make policies and implement policies that help mitigate risks. These policies should make sure that the right level of scrutiny is applied to the right type of risks. 

There should be an ideal balance between high scrutiny for high risks, and minimal friction for customers with low risks.

Technologies Involved in Anti-Money Laundering

To manage risk and maintain the risks of a business, there needs to be a solution that can cover every part of the business. There are a lot of AML technologies out there that can automate the risk-assessment process for new customers, and new transactions within seconds. 

Technologies involved in anti-money laundering can be broken down into two categories:

  1. Know Your Customer

Know Your Customer (KYC) is the combination of customer due diligence and enhanced due diligence that regulated organizations comply with to make sure their customers are real people and not someone posing as someone else. If there’s a customer that poses a level of risk needs, to be monitored throughout the relationship with the business. 

In an economy that’s moving towards digital solutions, new solutions that cater to online ID verification, and ID proofing are always coming up. These technologies can help businesses identify whether a customer is a genuine person or a criminal with stolen ID data.

  1. Transaction Monitoring

The process of monitoring a customer’s transactions, be they small or big is known as transaction monitoring. Transaction monitoring techs are designed to eliminate the risk of money laundering. These techs can monitor digital transactions across all business channels and look for suspicious behavior.

The cost of these solutions to the business is the only consideration businesses need to have before finalizing a technology.

Frequently Asked Questions

1. What is Anti-Money Laundering?

Anti-money laundering is a set of rules and regulations outlining steps a business needs to take to manage or prevent the risks of money laundering. These regulations help businesses fight terrorism financing and other illegal activities. Businesses that work in under-regulated industries need to comply with these rules and regulations.

2. What is a risk-based approach to AML?

AML regulations can be enhanced by taking a risk-based approach. The risk-based approach includes assessing the risk of a product and service’s exposure to the market, customers, channels, transactions, and other risk factors.

The assessed risk is categorized into low-risk, medium-risk, and high-risk categories. The potential impact on the business needs to be analyzed so businesses can come up with policies to prevent and manage these risks.

3. What is Know Your Customer (KYC)?

Know Your Customer or KYC refers to the customer’s due diligence and enhanced due diligence process. Regulated companies have to make their customers go through the diligence process to verify if the customer is an actual individual or not.

The KYC process also includes continuous transaction monitoring, through which businesses can figure out suspicious activities.

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General

Common Challenges in Risk Management

Challenges in Risk Management

It is almost impossible for lenders to measure and manage credit risk, based on the disruptive patterns in consumer behavior in the last 2 months. How can large banks ensure that their digital transformation programs are working perfectly?

Managing risks is becoming tougher in today’s time, and businesses from all over the globe are implementing new methods.

Managing Risk Models in a Crisis

One of the biggest problems faced by risk leaders worldwide involves changes in consumer risk. Leaders also need to know how to measure these risks to be able to better decisions. 

Every major change in the economy brings up the issue of risk model performance.  The current models are based on risk models prior to Covid.

Robust risk management models will keep performing well even when the situation in the financial industry has changed. But the actual level of risk will change, making the model monitoring and governance more critical.

Biggest Challenges in Risk Management Today

There are 5 major challenges in risk management as of today, including:

1. Failure to Use Appropriate Risk Metrics

Value-at-risk or VaR is a common risk metric, but it only tells the largest loss a firm has incurred at any given time. VaR gives no idea about the distribution of losses that exceed VaR.

This would suggest the application of VaR doesn’t guarantee the success of risk management. The effectiveness of implementing VaR also depends on the liquidity of the financial market.

2. Measurement of Known Risks

Risk managers sometimes mistake accurately depicting the probability and the size of the losses. They could also use the wrong distribution channel. For a financial institution with endless positions, although they may properly estimate the distribution associated with every position.

Unable to measure, or wrongly measure a known risk is a big challenge in risk management.

3. Failure to Take Known Risks into Consideration

Sometimes, risk managers face challenges in considering all the risks in a risk management system. Sometimes it’s because of neglect, and sometimes it’s because of the additional expense. This happens because it’s impossible to forecast future events.

4. Unable to Communicate Risks to Top Management

Risk managers have to share information about the risk position of the organization with the top management. The management and the board have to take this information into account and come up with a risk management strategy.

If a risk manager is unable to provide this information to the top, they won’t be able to come up with a risk management strategy. The strategy they do come up with is based on ill information. This leaves the firm vulnerable and unable to manage risks properly.

5. Failure in Monitoring and Managing Risks

The last challenge for risk managers is to capture all the changes in the risk characteristics of securities to adjust strategies accordingly. As a result, risk managers often fail to monitor or get rid of risks simply because the risk characteristics of security may change too quickly to allow them to assess them, and put on risk-preventing methods accordingly.

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Fraud

First-Party Fraud, and How To Prevent It?

what is first-party fraud

The word fraud is used almost every day today. It’s not always hackers sitting behind multiple screens who conduct these frauds. Ordinary people with a little bit of knowledge also conduct fraud. In reality, a lot of customers end up sharing their personal information with fraudsters unknowingly. These fraudsters use this information to rack up huge credit card bills. In other cases, users end up committing fraud using their own information.  

Both of these types of fraud are called first-party fraud. 

Most of us assume that first-party fraud happens only in banks, but as telecom companies have entered the financial industry, so they’re also feeling the pinch. Debt collection agencies are leaking more profits and costs, trying to collect something that isn’t recoverable.

First-Party Fraud Affects Profitability

First-party fraud usually comprises 10% of the volume of credit card losses. These losses are also called bad debts. This huge risk often gets missed as it comes somewhere between the risk department, operations, and the fraud team. In other words, first-party fraud does not have an owner most of the time. 

Soiled fraud and collection departments can reduce the chances for fraudulent patterns to be discovered. While the relatively low volume of first-party fraud reduces its priority level, for some organizations, first-party fraud remains one of the biggest profit drains. 

In 2022, it is more vital than ever to take decisive actions and manage first-party fraud.

Why It’s Easy to Miss First-Party Fraud?

Traditional third-party fraud requires some kind of impersonation or stolen identity. Be it stolen credit card data, or someone taking over your identity. At some point, many victims of third-party fraud become aware of the crime when unknown transactions come up on their statements. 

Compared to third-party fraud, first-party fraud is often confused with credit risk problems. Accounts that don’t pay their debts are sent to collections for a progression of treatment. 

Unlike third-party fraud, the transactions happen with accurate information and they look like legit transactions. This makes first-party fraud much harder to spot. And in this way, first-party fraud can be eventually written off as it is uncollectible. This information is also sold to third-party external collection agencies.

Newer financial services providers are even more challenged in figuring out first-party fraud. Newcomers don’t have access to all the historical data that banks have to analyze which transactions are legit and which aren’t.

Be it an online bank, or a telecom service financing costly devices, all these organizations face similar challenges in fraud prevention.

Common Types of First-Party Fraud

There are different types of first-party frauds that organizations should know about:

  1. Sleeper Fraud: It occurs when a fraudster gets their hands on a type of credit, and over time builds up a reputation. As they build trust with the service provider over months, they can take maximum advantage of cash and any goods with these cards. Once they’ve racked up a huge debt, they leave this information and move on to the next one.
  2. Bust-Out Fraud: This type of fraud is also called hit-and-run fraud. It can happen in a type of financial service. It’s quick and sometimes easy, and credit cards and loans are the easiest targets. In some countries where cheques are in use or have slower clearing cycles, fraudsters can exploit these weaknesses to rack up a credit balance 10 times the normal limit. Then the fraudsters cash out before these transactions are even caught.

How Does First Party Fraud happen?

First-party fraud is highly opportunistic and it can be done on a small scale by a single fraudster or by a group of fraudsters. Both sleeper fraud and bust-out fraud can be conducted in an opportunistic fashion. 

Some of the first-party fraud schemes are executed in both ways. For example, in the UK, Europe, and the Middle East, the highly fluid mobility of university students creates conditions that are perfect for fraud. 

In this type of fraud, fraudsters gangs have focused on out-of-country students to buy their ID data and bank account information as these students go back to their home countries. There are many potential victims, as only 10% of foreign students stay in their country. Almost 90% of students go back to their home countries, thus their information is ripe for exploitation. 

Fraud with student credential fraud often starts with criminal gangs advertising in student unions and social media. Sometimes they even infiltrate family WhatsApp groups just to get their hands on some quick cash.

While these offers may be tempting to cash-strapped students, the fraudsters have different intentions. With 1.3 million students in the EU, you can see why this group is one of the biggest targets for fraudsters.

Strategies for Fighting First-Party Fraud

The biggest challenge with first-party fraud is distinguishing between fake and real customers. So, what can businesses do? Here are some strategies to try fighting first-party fraud:

  1. Learn to recognize the distinction between unintentional bad debt and intentional bad debt, or fraud. With the right type of analytics, patterns can start to become clear, and very evident. 
  2. You need to accurately categorize fraud as fraud, instead of calling it a bad debt. These instances should be called first-party fraud or synthetic identity fraud. This will help you to begin identifying patterns and common traits in the schemes fraudsters use. 
  3. Define clear rules and models and perform link analysis to analyze data for known fraud patterns. These common signs include phone numbers, names, email addresses, and other identifiers that fraudsters will use again and again to apply for loans, credit cards, accounts, and mobile subscriptions. 
  4. Improve sign-up and onboarding processes by using these analytics. By doing this, you can monitor for links between declined applications for credit risk and new applications where the same data is used for application. 
  5. If you don’t have enough evidence to mark a transaction as fraudulent, tag these accounts as suspicious accounts. Once an account is opened, and credit is extended, the account can be monitored more carefully for suspicious activity. Any sudden changes in account data can be a sign of fraudulent transactions about to happen.

Be Proactive With First Party Fraud

The rate of fraud is only increasing, so businesses need to be proactive in fraud prevention. For those fraudsters with established synthetic identities hidden in account portfolios, the high time for using these identities is now. 

At the same time, organizations that are keen to increase their customer base have had to increasingly look to digital channels, as face-to-face interactions have almost vanished. Increased criminal activity coupled with increased reliance on remote onboarding processes has made it harder to prevent fraud.

Businesses need to make sure that they act before fraudsters do.

Categories
Compliance

Compliance vs Risk Management Process – Everything You Need To Know About it

different between compliance and risk management

According to surveys, 60% of top-level executives in the financial industry consider compliance and risk management as the two most complicated categories. Some surveys have showcased that a huge number of banks globally don’t have ideal techniques in place to maintain compliance.

There are tons of misconceptions about compliance and risk management. While both of them help businesses protect their legal structure and physical assets from fraud, both of them are unique. Most people end up interchanging the terms with each other. For businesses operating in the financial industry, the need to understand the difference between the two is crucial.

Without having an idea what compliance and risk management have to offer, it’s practically impossible to stay secure.

Business leaders can come up with strategies that take advantage of all the tools at hand. The end goal should be to comply with all laws and manage risk as much as possible.

What is Compliance?

Compliance is the process of following a set of standards, regulations, and legal guidelines. Compliance management is the process of making sure the entire organization is doing activities that help them conform to the rules. Managing compliance in businesses involves two important steps:

  • Regulatory compliance: These are the steps and changes made by an organization to comply with the set of rules, guidelines, and laws set by an external authority.
  • Corporate Compliance: These are the actions and security practices an organization implements to ensure compliance with the organization’s internal rules.

For an organization to operate smoothly, they need to comply with both regulatory and corporate guidelines. Maintaining regulatory compliance can protect businesses from external threats, and prevent fines, legal actions, and even shutdowns in some instances.

What is Risk Management?

Risk management is something an organization has to do on its own. It’s the process of analyzing, assessing, identifying, and then managing potential threats that can hurt an organization’s reputation and financial health.

These risks come from various sources, including legal liabilities, data-related issues, financial uncertainty, poor KYC and customer onboarding processes, poor vendor onboarding processes, etc.

Risk management involves building and implementing plans that can increase awareness of these threats and teach how to avoid them. 

Risk management allows businesses to predict future threats and prepare for them.

Difference Between Compliance and Risk Management

Compliance and risk management are closely intertwined. Compliance in association with industry regulations makes sure that businesses stay protected from emerging threats. Risk management, on the other hand, helps businesses prevent risks that can arise from non-compliance. Let’s break down the differences between both them:

  1. Prescribed vs Predicted

Compliance is a set of rules and regulations that are set forth by regulatory bodies (governments, industry leaders, etc). Risk management is mainly internal. Organizations have to predict for themselves the risks that can arise in the future. Based on these assessments, businesses have to come up with solutions that help manage these risks.

  1. Tactical Approach vs Strategic Approach

Not complying with industry standards and rules can lead to huge fines, penalties, and reputational damage. Businesses spend hundreds of hours worth of manpower to take a “check-box” approach to make sure the organization is complying with the rules.

Compared to that, risk management is all about building strategies as it requires carrying out decisions that minimize risks.

  1. Preventing Risks vs Creating Value

Businesses need to take a far-sighted approach to risk management. Without preparing for the future, businesses are not usually able to generate value propositions for themselves.

The compliance process ends when an organization is sure that a particular rule is followed. Out of the two, compliance is easier. But, it gets a bad reputation in the industry as it requires time, effort, and resources from employees. Instead, employees could be spending their time on other projects.

A good risk management program is a never-ending process. It requires constant changes, amendments, and thought. Risk management requires changes to strategies all the time so the organization can stay compliant with external rules. Constantly staying up to date with compliance leads to generating a great brand reputation in the market.

Can Compliance Happen Without Risk Management?

Your organization can’t have risk management without compliance. Not being able to or not wanting to comply with rules leads to fines, exposure to threats, and reputational damages. So, make sure to include the compliance process in your business.

The average non-compliance cost for a business is $9.4 million. A  good risk management plan will be able to allocate resources and time to ensure an organization is up to date with all the latest compliance laws.

Organizations can prevent hefty fines, losses due to theft, and reputational damages by simply investing in a risk management process.

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Compliance

Importance of Compliance Management

what is compliance management

No business can survive without a list of rules and regulations. To maintain this compliance, businesses have to follow the rules and regulations that are related to their industry. Businesses consider “maintaining compliance” a challenge as the rules are always changing. If you fail to stay up to date on these compliance rules, it can damage your company’s reputation.

What is Compliance Management?

Compliance management is the process of monitoring and assessing an organization’s internal systems to make sure that they comply with industry regulations.

Maintaining compliance isn’t just the role of top management, it comes down to everyone within the organization. The knowledge and understanding should correlate with the organization’s goals. All employees should be aware of how they can follow compliance standards. This helps in smooth working operations.

Importance of Compliance Management

As technology is becoming a major part of all sectors of our lives, legal regulations are becoming fiercer. Compliance management is crucial for every business as non-compliance can lead to legal and financial penalties, data theft, and damage to a business’s reputation.

Compliance management software or verification software can help financial institutions to keep up with compliance requirements.

Here are all the reasons why businesses need to comply with industry rules and regulations:

  1. Avoid Violations

Noncompliance with industry rules and regulations can hurt your business’s financial health. According to a recent study, it came to light that businesses without a compliance management system were imposed fines 2.71 times more than organizations with a system in place. 

These fines amounted to $14.83 million annually. The same report also stated that the annual cost for compliance management is $5.47 million. Businesses operating in financial industries especially need to comply with industry standards and regulations.

  1. Helps in Evaluate Security Risks

Complying with rules and regulations allows businesses to evaluate and manage security risks. Not just written guidelines and documents, but organizations need proper systems that can help to maintain compliance.

Risk assessments help in evaluating the level of risk an organization is facing at any given time. It also helps in uncovering potential risks. In addition to continuous monitoring, compliance management tools like KYC verification software can help you fix vulnerable parts of the operations.

  1. Protect Against Data Breaches

In case you fail to follow compliance requirements, it can lead to data breaches, and legal penalties, and it can hurt your business’s reputation. Every year, the number of data breaches is increasing, leading to the loss of millions of dollars worth of data. That’s not all. These data breaches ultimately increase the number of ID theft cases, leading to a whole new domino chain of fraud.

Challenges of Compliance Management

The reason why businesses shy away from compliance management is the challenges they face. Complying with laws and maintaining them throughout the organization is a major task. 

  1. Regular Changes in Laws

Regulatory bodies often keep changing the rules and regulations based on current fraud trends. As new cyber threats move quickly across industries, regulatory bodies have to make immediate changes to rules to help organizations protect customers.

  1. Large Enterprises with A Lot of Employees

Managing and maintaining compliance is most challenging for larger enterprises. With a large workforce, it can be tough to make sure everyone is following the compliance initiatives. This leads to complex organization systems and can increase the risk of data breaches. 

  1. Scattered Working Environments

As organizations now have both on-site and remote workforces, it becomes even more challenging to get an accurate view of compliance status. As a result, it has been challenging for most organizations to manage and monitor for risks and weak points.

Compliance Management Best Practices

Compliance management is a major process that requires a multi-faceted approach. You need to build a system that allows you to monitor all environments at the same time. Here are some best practices that you can follow for compliance management.

  1. Conduct Policy Audits

If your organization’s policy was written years ago, then most likely it needs to be added. Go through your organization’s compliance management policy, and take note of all the things that look dated. An audit will reveal gaps and weak points in your policy. Try to fix all the issues and you’ll be able to come up with a newer and stricter compliance management policy.

  1. Train Your Staff

Your staff needs to have a complete understanding of how they can maintain compliance throughout the organization. If your staff are your weakest link, then just making policies won’t solve anything. 

Training helps reinforce policies and procedures and helps you handle employee questions and concerns. You should also schedule training sessions throughout the year to make sure all the employees are up to date on compliance standards. 

  1. Continuous Monitoring and Due Diligence are the Keys

Data security and privacy legislation are some industry standards that want organizations to manage their cybersecurity standings. While privacy and security are two completely different things, they do go hand-in-hand.

The new privacy laws require businesses to consider “privacy by design” or “security by design,” and the use of continuous monitoring solutions. Businesses need to note that they should perform due diligence on third-party vendors. They can do this by using vendor bank account verification solutions.

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Payment

Managing Online Payment Fraud Efficiently

manage online payments fraud

Banking has become digital. The payments sector has been especially impacted by digitization. But with the growing use of digital payments, fraudsters have found a new avenue for success. According to a 2022 payment fraud study, merchants spend an average of 10% of eCommerce revenue on fraud management.

Every merchant and business needs to manage payment fraud to mitigate losses. Constant payment fraud even acts as a red flag for the organization. Preventing payment fraud can even help organizations scale at the right pace.

One of the biggest challenges of fighting online payment fraud is that interconnected networks are complicated.

Every single transaction could be a potential attack point for the organization. Regardless of the threat, an organization has to provide a seamless payment experience.

There are a lot of moving parts that customers have to care about, such as interfaces, websites, apps, and back-end services. On top of all of this, additional services such as ID verification, authentication, transaction monitoring, and more.

Banks need to be highly careful about the ever-changing nature of the payments industry, and the new techniques being used by fraudsters. Maintaining a safe and seamless payment environment for customers is becoming increasingly challenging.

Fortunately for banks and financial service providers, preventing payment fraud doesn’t need to be super complicated, expensive, or time-consuming. The best way to move forward is to take a risk-based approach that covers your specific needs and aligns with your organizational goals.

Knowing Your Customers is Crucial

Regulated industries have been struggling with fraudulent transactions. Since they have to fight fraud all the time, they have better fraudulent transaction handling. Businesses in these industries have well-established procedures to identify customers and understand the risks that come along.

KYC procedures are made to design and prevent money laundering and offer intelligence into the nature of the customer. You need to know who the customers are, and if they are real.

KYC happens during the customer onboarding process. You need to ensure that fraudsters can’t even create an account. While these processes tend to weed out fraudsters, they can also hurt genuine customers. Your fraud prevention process should not create unnecessary friction in the customer onboarding process.

You absolutely need to implement seamless, effective ID verification solutions. It is the first-ever step in managing payment fraud.

Understanding Payment Flows

While it is possible that every single transaction is fraudulent. Businesses still need to monitor, flag, and analyze transactions to provide ongoing intelligence and add another level of risk management.

As payments are becoming faster, the increasing speed of payments requires faster payment information processing. Latest innovations such as real-time payments will require solutions that are incredibly sophisticated.

Financial institutions need solutions that can help them understand who their customers are, and whether the information provided to them is accurate or not.

In the EU, legal obligations require strong customer authentication for multiple transactions. Two-factor authentication such as confirming a text, email, or in-app notification, is an authentication technique that businesses can deploy.

A new verification method has come out called 3D Secure 2.0, and it is backed by all the major credit card providers.

Some other dynamic fraud detection tools same as transaction monitoring can also help in risk mitigation. Some online fraud mitigation processes can help in:

  • Spikes in activities
  • Exceeding thresholds
  • Out-of-area or unusual cross-border activities
  • Changing purchase patterns
  • Consumer alerts
  • Credit reports
  • IP address discrepancies
  • Fraudulent patterns

Integrate Security into the Process

Managing payment fraud should be a natural part of the process. It should not feel like an additional task that you have to manage. Security is a crucial part of running a successful digital company and it contains a lot of factors. If there are a lot of weak points in your security, that’s the place where fraudsters will target.

There are some methods and solutions that every business needs to have to prevent fraud:

1. Tokenization

The best way to protect customers from a data breach is to tokenize the information. In the case information is stolen, it won’t mean anything to anyone other than the transaction and the retailer. If the retailer is hacked, the hackers won’t be able to gain anything from all the data.

What’s even better is that the Payment Card Industry promotes this practice and it works with almost all existing POS systems. It replaces the actual 16-digit credit card number with a 16-digit token. It doesn’t add anything to the payment process, and it cuts down on compliance costs.

2. Encrypt the Information

For all major retailers, end-to-end encryption is a great option to prevent fraud. PCI standards don’t allow storing credit card information after a transaction, and converting that data via an algorithm protects the data while still allowing authorized use. But you need to keep one thing in mind: encryption is an expensive process that doesn’t work well for small and mid-sized companies.

4. Address Verification

Currently, all the eCommerce address verification checks are done using the Address Verification System (AVS). AVS can check the address on the credit card file to the data provided by the customer.

AVS checks the zip code and the street number of a billing address and it compares those numbers to the zip code and street number of the credit card owner. Visa, MasterCard, and American Express support AVS in the U.S., Canada, and the UK.

But, the AVS isn’t perfect. Customers could have moved to a new location, or they may be ordering things online for someone else. In these situations, the AVS just falls apart. What works better is the address verification solution offered by DIRO. DIRO address verification can verify customer addresses straight from government sources, thus eliminating the risk of payment fraud.

Categories
Bank

What is Good Standing Verification and Why Does Your Business Need It?

verify good standing

Almost every business is asked to provide a good standing verification certificate. Only the state can issue the good standing certificate verification. It’s one document that every business should be able to provide when asked for it. 

Every business, LLC, or any other entity needs to have a good standing status in its records. This helps banks, financial institutions, and other businesses understand that the business is in good standing. A good standing verification certification can help in:

  • Maintain the limited liability that an entity provides.
  • Take their business into other states.
  • Acquire a loan on the basis of good standing.
  • Get rid of state-imposed fines and penalties.

Most of the time, a lender requires a good standing verification certification to offer a loan. Businesses can avoid delays in the loan approval process by maintaining good standing.

What is a Good Standing Certificate?

A certificate of good standing lets others know that the company is legally registered with the state and it complies with all the state laws, such as:

  • State registration fees
  • Required document filings
  • Legally permitted to conduct business in the state

A certificate of good standing usually contains an expiration date. This date suggests when the organizational registration is due. This renewal date could be at the end of a calendar year, or during some other time when the state’s laws require renewal or periodic filings.

This rule is similar for businesses formed somewhere else and registered as foreign entities in the state.

Most users confuse good standing as a business or occupational license, but it’s not. A company can also do business in the state it was formed, it does not need a good standing certificate to do so.

Which Businesses can Get a Good Standing Certificate?

As not all businesses need to register themselves with the state, they won’t be able to obtain a good standing certificate. Lenders, government agencies, and even other businesses can ask for a good standing certificate of a business.

If you want to get a good standing certificate, then there are two ways you can follow. The easiest ways are to register or qualify their company to transact business in another state and to open a business banking account. A good standing certificate acts as part of the compliance.

How to Obtain a Good Standing Certificate?

As mentioned above, the best way to get a good standing certificate is to register your business with a state. When you register your business, the state will offer a certificate of good standing.

The issuing entity is often the secretary of state or any one of their subdivisions. The agency has different names based on the state they are in:

  • Arizona: Arizona Corporation Commission
  • Massachusetts: Corporations Division, Secretary of the Commonwealth of Massachusetts
  • Michigan: Corporations Division, Department of Licensing and Regulatory Affairs
  • New Jersey: Division of Revenue and Enterprise Services, Department of the Treasury
  • Utah: Division of Corporations and Commercial Code, Utah Department of Commerce
  • Virginia: State Corporation Commission
  • Wisconsin: Department of Financial Institutions
  • Delaware: Division of Corporations
  • Hawaii: Business Registration Division, Department of Commerce and Consumer Affairs
  • Maryland: Department of Assessments and Taxation
  • Alaska: Department of Commerce, Community, and Economic Development

If you want particular information on how to obtain good standing certification from the state department, you’ll have to contact them for all details.

What do Businesses Need to get a Certificate of Good Standing?

Most businesses require a good standing certificate while going through a KYB verification process. Most financial institutions do incorporation verification before onboarding them. A good standing certificate is just one of the many documents that lenders ask for.

This happens when you try to open a business bank account, or set up a new credit card, or debit card. Some lenders also ask for a Good Standing certificate. If your business isn’t required to register with the state, it’s not possible for you to get a good-standing certificate. There is one absolute requirement for getting the certificate. Your business needs to be registered in the state for the good standing certificate.

When You May Need a Good Standing Certificate?

There are a number of situations when you may be asked to provide a good standing certificate. A good standing certificate even protects your business from a lot of things. Banks will want to see the certificate before onboarding you.

Here are the situations where you will need a good standing certificate:

  1. Opening a business bank account
  2. Establish business credit
  3. Applying for payment processing
  4. For improving your business credit score
  5. Securing an investor for funding your business
  6. Securing a lease for your office space
  7. To protect your business’s LLC status
  8. For renewal of business licenses and permits
  9. Applying for a loan
  10. For selling your business
  11. For getting business insurance

If you lose your good standing status, it impacts your business’s reputation and ability to do business.

Verification of Good Standing Certificates

Banks ask for good standing certificates to verify a business, and its ability to do business. But fraudsters globally have figured out a way to trick banks by forging good standing certificates. Verification of good standing certificates is really tough. For years, banks have been verifying documents manually.

Fortunately, DIRO’s document verification technology has changed that for good. DIRO helps banks, lenders, financial institutions, and other entities to quickly verify good standing certificates during incorporation verification. This leads to fewer false positives and an enhanced level of security for financial institutions.

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Business

Proof of Address Verification in Vendor Onboarding Guide

address verification during vendor onboarding

Onboarding a vendor without having proper guidelines in place can severely impact your business. Vendor onboarding fraud and the consequences that come along can be fatal for a business. So, how can you know the vendor you’re onboarding is the right is not a fraud?

Every business regardless of its nature of business needs to have a vendor onboarding checklist. To avoid instances of fraud that can harm your business, you need to follow the required due diligence.

One of the biggest parts of vendor onboarding is to make sure that you’re keeping up with all the changing laws, rules, and regulations.

What is Vendor Onboarding?

Vendor onboarding is the process of collecting all the crucial information that you need to approve a vendor for your organization. A vendor allows businesses to buy supplies without having to go through a long process. Vendors in turn issue invoices for businesses. Let’s say you onboarded a fraudulent vendor, they’ll end up issuing invoices for things you haven’t purchased. This is how most fraudulent vendors operate and earn money.

The vendor onboarding process needs to have an ideal checklist. By following the checklist, every business can make sure they’re onboarding the right vendor.

Importance of Vendor Onboarding Process

Vendor onboarding is the first step of the vendor management process. If a business doesn’t have a vendor onboarding process, it can become a part of fraud. When you follow a vendor onboarding checklist, you can reduce the risk of fraud, eliminate additional costs, and achieve a higher ROI. 

When you build a vendor onboarding process for your business, it becomes easy to avoid pitfalls that come along with bad vendor management. 

Not just customers, you also need to nurture relationships with your vendors. A well-thought-out vendor onboarding process can help you make your relationships with vendors strong. It also offers other benefits:

  • Reduce or eliminate risks
  • Streamlined process and increased level of efficiency
  • Ensure compliance with regulatory guidelines
  • Build a positive business reputation  in the industry
  • Boost ROI
  • Reduce redundancies and mistakes
  • Track business data and workflows
  • Automate basic tasks

How to Build Your Vendor Onboarding Process?

To start building your vendor onboarding process, you need to keep a couple of things in mind:

  1. Evaluation and Approval Process: Every business should have an evaluation and approval process while onboarding vendors.
  2. Setting Up Requirements and Expectations: Set up clear policies and expectations to make sure there’s no confusion between all the moving parts.
  3. Developing Process for Strategic Supplier Partnerships: Strategic partnerships hold a lot of value for businesses. You need to create a separate onboarding process for all your strategic partners.
  4. Establish a Communication System: Having a clear line of communication matters a lot. Knowing you can reach out to your vendors at any given time is helpful in eliminating redundancies, mistakes, and errors. Plus, it helps in building stronger relationships with customers.

Vendor Onboarding Checklist

To make the process easier, you need to make sure that you’re not missing out on any crucial factors.

Here’s a vendor onboarding checklist you can use.

1. Evaluate Risk Level

Hiring a vendor that has a poor track record can be risky. You need to evaluate the level of risk a vendor brings along with them. Here’s how you can do so:

  • Check business product and service records.
  • Check creditworthiness.
  • Assess vendor compliance level with current regulations.
  • Ask the vendor to sign an ethical code of conduct. 
  • Make backup plans.

2. Collect Information About Products & Services Offered

  • Expected nature, volume, and how frequently you need the supplies. 
  • Ask for product and service specifications.
  • Ask for requirements for placing an order, and the format of order placement. 
  • Have a clear conversation about pricing and discounts. 
  • Clear out payment terms beforehand. 
  • Figure out the delivery process and logistics. 
  • Supplier training requirements or orientation sessions.

3. Collect Information About Vendors

  • Ask for the registered name, address, and contact details.
  • Ask for licenses, insurance, and other important documents. 
  • Vendor bank account verification for creditworthiness check.
  • Contact information of vendor representatives.

4. Make all Information Available for Internal Use

All the vendor information should be available for access by some teams, including:

  • Accounting teams
  • Purchasing teams
  • Warehousing and inventory control

5. Share Necessary Information for Vendors

Your vendors should have all the necessary information when they enter into a relationship with a business.

Here’s a list of what you should share with vendors:

  • Provide correct invoicing details.
  • A record of all the agreed terms and send them for confirmation.
  • Provide contact details for purchasing managers and logistics teams.
  • Provide training if needed.

Importance of Proof of Address Verification In Vendor Onboarding

Proof of address verification in vendor onboarding is a step that a lot of businesses ignore. Verifying where a business comes from plays an important role in figuring out if they’re genuine or not.

Let’s say there’s a location that’s famous for having risky vendors, or there’s a location that your business doesn’t serve. How would you know the vendor is not from the location?

That’s where online proof of address verification comes in. When you verify a vendor’s proof of address, you can make sure you’re not getting into a relationship with a fake vendor.

DIRO online proof of address verification can help you verify the address of your vendors by verifying the documents provided. DIRO provides 100% accurate results instantly, using proprietary technology.

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Finance

5 Things You Need to Keep in Mind While Integrating Digital Payments

integration digital payments methods

Digital payments have become the norm when it comes to consumer finance. According to some new reports, emerging payment methods such as account-to-account payments, digital wallets, and Buy Now, Pay Later. More than 80% of all consumers have used digital payment methods in the last 1 year. This number is expected to grow to 93% by the end of the next year.

A lot of these digital payment methods rely on the open banking framework and are a natural progression of shifting landscapes. In our guide, we will be telling you all the ways things you need to consider while integrating digital payments systems into your FinTech solution.

Things to Consider While Building a Digital Payment Method

1. Consumers Want Convenience Over Anything

Consumers all across the globe are using digital payment methods and it’s easy paying bills using this method. Paying bills and managing finances online is easier than any other method.

Subscription bills, utilities, loan repayments, and retail payments are more convenient with open banking-powered apps and services. Around 80% of all customers already know of account-to-account payment, but they may not be aware of the benefits of open banking. Open banking payment methods add speed and efficiency to the process.

2. Consumers Want Flexibility While Making Payments

Almost all global customers want flexibility and control to optimize their digital payments. Similar to the motivations around bill payments, consumers are connecting their accounts to automate the repayment process for BNPL and installment loans. 50% of consumers are currently open to the idea of connecting their bank accounts with other financial services to enable auto payments, and over 52% of customers claim that they want automated repayment solutions to prevent missed payments.

3. Security is the Top Priority for Customers

Consumers understand the value digital payment systems bring to the table. The customers who aren’t on board with digital payment methods are mainly because they think it’s not a secure method of sending money.

If you’re looking to integrate a digital payment system with your FinTech, then you need to build trust about digital payments in your customers. Building comfort with emerging digital payment methods is a key step in supporting future adoption as the two are tied together. Faster transactions, the convenience of payment, transparency, and security are the top reasons for customers to overcome security issues.

4. Consumers Use FinTechs to Keep Track of Their Finances

Consumers are relying on FinTechs and also open baking to get through everyday financial activities. The reason is simple, FinTechs make it easy to handle these tasks than doing them manually. 83% of all consumers have used digital tools at least one time to handle financial activities. Over 50% of customers use technology to complete 4-5 tasks. The majority of users see making payments as the only beneficial use case of FinTech companies and open banking technologies.

5. Latest Technologies are Most Famous Among Gen Z And Millennials

Newer generations are more likely to adopt newer technology compared to older users. When it comes to digital payments younger generations are the ones who pushed forward the use. It’s anticipated that their use case will keep on growing. There are generations who are less likely to make payments compared to younger generations. The percentage is 50 for Gen Z and 78 for Boomers. Younger generations are less likely to use cash for making payments. But security remains a major concern for all generations while using digital payments.

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Business

Detecting and Preventing Fraud During Vendor Onboarding

vendor fraud

As businesses globally are understanding the importance of employing additional fraud prevention methods, it has led to a dramatic fall in fraud rates. Handling the aftermath of fraud is becoming super expensive for businesses. This is why the adoption rate of new technologies and compliance rate is improving.

Unfortunately, even after several significant changes in the industry, vendor fraud is a major issue. Fraudsters who aren’t able to break into financial institutions and banks move on to vendor fraud. The reason why vendor fraud is one of the most growing categories is that businesses are highly vulnerable to attacks.

For businesses to identify and prevent vendor fraud, proper knowledge is needed. The more knowledge a business has, the better it can protect itself.

What is Vendor Fraud?

Vendor fraud is basically fraudsters manipulating a business’s payment system. This is done to steal goods and money. In almost all cases, vendor fraud is done with the intent of stealing money.

Any business can be a victim of vendor fraud, but it differs from business to business. Vendor fraud can happen through collisions with third parties. It can also happen because of untrained employees within the organization.

The most common examples of Vendor fraud include:

  • A hacker manipulates a business’s payment systems to generate fraudulent vendor payouts.
  • A vendor that fails to falsify receipts or documents slowly steals money from a business through its ongoing transactions.
  • A group of employees wants to steal money from the organization.
  • An employee steals company checks and deposits them into a personal account.

Which Businesses are at a Risk of Vendor Fraud?

Businesses that don’t have the right level of security and scrutiny are at the most risk of vendor fraud. Businesses that are small and mid-sized often fall prey to vendor onboarding fraud.

It makes a lot of sense for fraudsters to target small-scale businesses. More than often,  small businesses rely on small teams to handle a variety of tasks. This can easily lead to mistakes. A lack of robust checks and no adoption of technology can lead to vendor fraud.

As businesses scale up and comply according to laws and regulation, it helps in preventing fraud. Companies that follow all the compliance guidelines tend to be less open to fraudulent activities due to mistakes. To combat the sophisticated methods used by businesses, fraudsters are also developing new methods.

Types of Vendor Fraud

Vendor fraud is different for every organization. There are multiple categories, that include:

  • Billing Fraud: Billing fraud refers to payment-related fraud, it can be done in 2 ways by employees. Sometimes, fraudsters make up a fake vendor, or sometimes the employees make up duplicate payments by using actual vendor details.
  • Fictitious Vendor: An employee with adequate information about a vendor can make up a fake vendor. Or, they can register as a new vendor and get regular payments on this account.
  • Duplicate Payments: An employee can use actual vendor information to make fake information and generate fake payouts. The same payments and extra payments can be transferred to employees’ accounts.
  • Check Fraud: This vendor fraud involves an employee engaging in forging or modifying information available on the check of a vendor. They do this to get payments into their own accounts.
  • Accepting Bribes: There’s another type of vendor fraud that’s quite common. A vendor pays some kind of commission to employees for helping them get additional sales or benefits.
  • Excess Bills: Whenever vendors issue an invoice for bill payment, and if it’s more than the desired amount, it’s called over-billing. This is also considered a type of vendor fraud.
  • Price Fixing: This fraud happens when 2 or more vendors make a deal together and fix the price of a product at a higher value. The buyer has no option other than to pay higher prices to the vendors.
  • Cyber Fraud: This is the most complex type of fraud to detect. Hackers can act as a vendor even when they don’t have any relation to the company. They operate completely from the shadows and they are able to create a fake vendor profile. They try to trick businesses into making payouts for goods and services. Needless to say, all the records and bills are fake and fabricated. This is what makes it one of the most challenging types of fraud to detect.

Detecting and Preventing Vendor Fraud

There are some basic rules and regulations every business needs to put in place to prevent vendor fraud.

1. Vendor Controls

Businesses need to set up a checklist outlining all the guidelines for vendor onboarding. Here are some common things you can keep in mind:

  • Businesses need to follow all the due diligence procedures. There should be extra attention to verifying information provided by the vendors. Online document and online vendor bank account verification technologies can help in streamlining this process.
  • There should be a centralized vendor database with your preferences. There should also be a list of high-risk vendors.
  • Businesses need to conduct thorough checks of all the vendors. Using technologies to do so can save both time and cost.
  • Checking bills issued by vendors is a good practice to make sure you’re paying for things that you don’t have to.

2. Employee Measures

A lot of times employees help vendors orchestrate the fraud. To prevent this, businesses should have some guidelines for their employees:

  • Doing thorough background checks during employee onboarding can uncover hidden red flags.
  • Keeping financial information limited only to high-level employees. 
  • Larger businesses should separate the duties of employees for better accountability and control.
  • A person that’s in charge of handling vendor information should be different than those who approve these vendors into the organization. 
  • Smaller businesses should rotate the duties of employees in vendor/AP/purchase departments. Or to make processes easier, businesses can hire managers for different tasks.

3. Set up Due Diligence Processes

Before you onboard vendors, you need to have a proper due diligence checklist. Having a proper guideline can help newer employees onboard vendors that are legit. As a business, you need to conduct thorough vendor verification. You need to make sure that the mailing addresses are correct. Check if the bank account is legit. Verify if the information and document submitted by them are original and not tampered with.

Conclusion: Vendor Fraud Prevention Guidelines

Vendor fraud can impact your business in a lot of ways. Prevention of vendor fraud requires proper planning and sticking to the plan. Preventive measures should be a priority for most businesses, and they should also focus on technologies that can help make the process easier.