Author: Ady

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Using AI for Fraud Detection in Banking

al for fraud detection

In 2022 and after, more than 50% of all financial institutions plan to use AI to detect and prevent fraud. The use of artificial intelligence (AI) to detect and prevent fraud is not new. But, the fight has just gotten tougher as fraudsters have derived new methods to combat AI methods.

Especially after the Covid-19 pandemic fraud has become more sophisticated. So it makes sense that financial institutions would want effective AI solutions to detect and prevent fraud.

According to some data, the demand for AI seems more simple than ever:

  • More than 50% of financial institutions’ respondents plan to roll out AI solutions to tackle new cases of fraud.
  • Almost a third of financial institutions plan to invest in newer AI technologies to prevent fraud.

Banking institutions are aware of the downsides of not investing in AI capabilities. Fraud numbers hit an all-time high in 2020, and manual verification methods aren’t enough to combat new types of fraud.

Trying to uncover new types of fraud without using some AI is a heavy burden for analysts. Not just that, but human errors and rule-specific approaches can lead to a higher number of false positives. This leads to a negative impact on the customer journey.

Machine Learning in Banking Fraud Detection

Artificial technologies run on machine learning technologies. Machine learning algorithms are incredibly effective against fraud.

When implemented successfully, machine learning helps in detecting fraud, and uncovering complex financial crimes. They protect businesses from fraud losses and let businesses provide a frictionless experience to legit customers.

If you’re wondering how machine learning algorithms detect fraud, you’re not alone. Machine learning is a teachable system that can automate both front and back-office processes.

Instead of OS, or unchanging protocols, AI can learn from its experiences and evolve according to the situation. Machine learning systems also consider past transactions and also apply these rules to future transactions. 

The more data these systems go through, the more efficient they become in uncovering fraud. AI systems become familiar with techniques used by fraudsters to crack FIs systems. 

Investing in AI software, and machine learning technologies can be a great option for fraud detection and prevention.

Predictive Analysis for Banking Fraud Detection

Before machine learning technologies, there were predictive analysis technologies. While machine learning solutions are more flexible, and have more freedom, predictive analysis still has a firm place in the industry.

Unlike machine learning technologies, in which algorithms are asked to process supplied data without rules and regulations, predictive analysis finds patterns and behaviors. 

This is helpful when it comes to going through large sets of data to predict behaviors. Any activity outside of the predictive behaviors is likely to be considered a red flag. The predictive analysis relies on analyzing behaviors in the past and then converting them into fraud prevention methods today.

Next Steps in Automating Fraud Detecting

Automating fraud detection and prevention is a major challenge. With the focus on including AI in the financial industry, fraud prevention can be increased. Instead of using historical data, predictive analysis prevents fraud from happening.

While AI is not a sure-shot method of fraud prevention, when combined with instant document verification, human elements, it can lead to complete fraud detection. Over time, the inclusion of AI in the financial industry has become a vital part of the strategy.

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Importance of ID Verification for Buy Now Pay Later Providers

Buy Now Pay Later companies

The Buy Now Pay Later (BNPL) sector has seen tremendous growth in the last couple of years. Especially because it gives customers an option to pay for things later that they buy right now. However, the service providers and the sector itself have faced some criticism from consumer interest groups and the Financial Conduct Authority (FCA).

There are huge concerns that consumers could build up large debts by spending more than they can afford to pay back. There’s also a worry that fraudsters could target companies that offer these services to do some fraud.

With the help of stolen identity data, fraudsters can open up accounts and make purchases with no intention of paying back. Moreover, if an organization doesn’t have enough security measures in place, fraudsters can easily rack up huge debts.

With ID theft cases on the rise, customers who have done no harm may be liable to pay amounts that they haven’t used. Having a dark spot on their resume also impacts a user’s ability to secure a loan or mortgage in the future. Even if their identities were stolen, they didn’t go into debt themselves. Because mortgage lenders verify bank statements before approving your loan applications.

FCA’s Review of the BNPL Industry

With this growing concern, FCA evaluated the unsecured credit market in 2022 and is now coming up with regulations that will protect customers and businesses from fraud. 

Unregulated providers will have to comply with regulations set by FCA to continue working. For Buy Now Pay Later startups, protecting themselves and their customers is now one of the biggest concerns. 

That’s not the only thing that BNPL providers have to protect, they also have to protect their reputation. In a new and growing sector, winning the trust of customers is crucial for growth.

To minimize the risk of ID fraud, many companies have to review their operations and make changes to comply with the strict requirements of AML and KYC. This will also mean making greater use of ID verification services. Businesses also need to carry out sophisticated checks every time a user chooses to use the services.

ID verification checks also help Buy Now Pay Later companies to successfully verify customers who may be spending more than they should or customers who may have trouble paying back.

BNPL companies should also look forward to protecting customers and verifying affordability and other factors.

What do BNPL companies need to know about ID verification?

BNPL companies can use ID verification services to check if their customers are who they claim to be. Know your customer checks have to validate a customer’s personal information.

While onboarding a new customer, BNPL companies should conduct KYC checks. The same level of due diligence must be applied when a customer is making a high-value purchase or making changes in their delivery address. 

In these cases, a customer may be asked to provide valid ID proof or to enter a unique code sent to the customer’s email ID.

Why is Identity Verification for BNPL Services Important?

ID fraud makes up around 61% of all fraud cases reported to the UK’s National Fraud Database. ID fraud cases have grown by 32% in the last 5 years. Online banks and sellers are common targets for fraudsters. BNPL companies are also increasingly being targeted by fraudsters.

Common attacks include phishing attacks to obtain users’ log-in details, creating new accounts with stolen payment cards, and account takeover fraud.

This in turn destroys trust in Buy Now Pay Later companies and hurts the growth of the industry. To be able to establish trust in the industry, businesses need to verify ID verification services.

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NeoBanks vs Traditional Banks – What’s the Difference?

Neobanks vs traditional banks

Have you noticed new companies popping out of nowhere, offering great credit cards, bank accounts, and other financial services? Companies with a massive digital footprint, but almost zero physical footprints.

Welcome to the world of digital banking. Digital banking or Neo-Banking is the next natural step that the financial industry will take, at least according to some industry experts.

Every now and then there’s someone who asks what are digital banks, how they operate, and how are Neobanks different from Traditional banks.

The word Neo comes from a Greek word that basically translates to “new.” So, Neobanks is a clever way of saying that this is the new age of banking. Similar to traditional banks, they offer savings accounts, current accounts, loans, money transfers, credit cards, and more.

So what’s the actual difference between the two? That’s what we’ll help you figure out.

Difference Between Neobanks and Traditional Banks

There’s a huge list of similarities between Neobanks and traditional banks, but they’re still fundamentally different. Let’s go over the list of differences between Neobanks and traditional banks.

1. Neobanks have no physical presence

Unlike traditional banks that have branches all over a location, neobanks have no physical locations you can visit. The entire infrastructure is online, and you can handle every setting of your account with an app.

This online-only model helps in saving thousands of dollars on operations costs, and costs that come along with running physical locations.

Traditional banks historically have had a physical presence, and in recent years they’ve started to get into digital banking more deeply. Compared to digital banking services offered by traditional banks, Neobanks’ services are more user-friendly and easy to use.

2. Neobanks are not regulated

While they’re called banks, neobanks are actually financial institutions. The difference between neobanks and traditional banks is that traditional banks need to have banking licenses. Neobanks are not recognized as an official entities by regulatory bodies, and thus they don’t have to follow regulations.

They utilize this saved money to provide better services at a lower cost to customers.

Some neobanks may have partial, full range, or a special banking license. A banking license allows neobanks to offer all kinds of banking services. 

3. Neobanks are more affordable

As neobanks have no physical operations to run, they can save more money, which allows them to be more affordable. They have no opening fees, low maintenance costs, no minimum requirements, no hidden fees, and they offer higher saving interest rates.

Neobanks also tend to be more transparent with their fees upfront. Traditional banks tend to have a lot of hidden charges that consumers may not understand at first.

4. Neobanks offer more flexibility

Compared to traditional banks, every single activity in neobanks is easier to do. Opening up a new account and signing up is far easier than traditional banks. It is also easier to borrow money from a neobank compared to a traditional bank.

Signing up for a credit card, or applying for a loan at a traditional bank means you’ll have to pass a range of checks. 

5. Traditional banks have more services

The biggest difference between a neobank and a traditional bank is the number of services offered. While Neobanks are faster more, user-friendly, and flexible, they often have one or 2 main services. 

Comparatively, traditional banks have a wider reach all thanks to their physical locations. People who don’t yet trust online banking, or haven’t had exposure to online banking services still prefer traditional banking over newer methods. 

6. Traditional banks are more accessible

The popularity of Neobanks has grown tremendously over the years. This is because of those who want the convenience of online banking. At the same time, traditional banks use their old-age methods of maintaining quality relations with their customers.

Neobanks are going through a great phase throughout the world. Millions of customers rely on their services, and industry experts are waiting for the future. Currently, the situation is that more users prefer traditional banks over neobanks as they’re more easily available and more reliable. 

Customers can actually go to a physical office or talk to a representative when they have a grievance. The same can’t be said for a neobank.

Frequently Asked Questions

1. Which bank is better? Neobank or traditional bank?

The better bank depends on your needs. Based on your service requirements, the better bank for you can differ greatly. Neobanks have lower fees, they’re easier to sign up with, and they’re great for tech-savvy people. 

Traditional banks are more reliable, have physical accessibility, and they’re regulated. But they’re more expensive, offer lower interest rates, and more.

2. What are the services of a traditional bank?

The most common traditional banking services include:

  • Providing a savings account
  • Providing a checking account
  • Issuing debit cards
  • Issuing credit cards
  • Wealth management
  • Giving out loans
  • Insurance

3. Which bank is safer, Neobank or a Traditional bank?

It comes down to the level of due diligence an institution has employed. Being more tech-friendly, neobanks generally offer better security. They have simpler onboarding, yet they do ID verification, and KYC checks. 

However, traditional banks have huge infrastructure and years of experience under their belts. Moreover, they have to follow regulations set by regulatory bodies. 

In the end, it comes down to the level of customer due diligence an institution employs.

4. Do Neobanks have banking licenses?

No, most neobanks don’t have a banking license. Although, there are chances that some neobanks may have a partial, full, or special banking license. With these licenses, neobanks can offer services that a traditional bank can, with more focus on user experience, and affordability.

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Identity Identification vs Identity Verification

Identity Identification vs Identity Verification

Fraudsters love to come up with new methods to commit fraud, launder money, or steal money. A growing number of fraudsters also impersonate real customers for getting access to their accounts.

As more and more transactions happen online today, businesses are facing a number of threats such as card fraud, phishing attacks, and electronic transfer fraud. This constant wave of fraud impacts business growth, and impacts the level of trust customers have in businesses.

To fight against fraud, Identity verification and identity identification services need to be implemented. Moreover, these services help businesses comply with regulatory guidelines. But, there are some key differences between identity verification and identity identification.

In this blog, we’ll cover identity verification vs identity identification. Let’s go over them and what they mean for businesses.

What is Identity Identification?

Identity identification is the process of checking if the person actually is who they claim to be. It’s the act of identifying individuals by checking their photographs, and personal information in ID documents.

This can be as simple and quick as showing an ID badge when visiting a government office, or showing identity documents when buying something age-restricted.

In online environments, the identity identification process is a bit different. Customers are asked to prove their identity by entering personal information alongside their payment details. All this information helps organizations verify if the information presented is correct or not.

For low-value transactions or organizations that are comfortable with a higher level of risk, this is enough due diligence. But, with the level of ID theft fraud growing every year, normal identification methods aren’t enough. More sophisticated methods of verifying identity should be in place to deter fraudsters. 

To ensure a higher level of security and to comply with ID regulations, it’s not enough to make decisions using user-submitted information. In simple words, it means that the information provided by customers needs to be verified against another source. This will help organizations understand if a real person is submitting the information, or if a fraudster trying to trick the organization.

What is Identity Verification?

Digital identity verification services help organizations to verify identity information available in the ID documents that are submitted by customers. This data is compared from an issuing source, like the DMV. Comparing information available from a third party, or verified data sets can reduce the risk of identity theft taking place.

In this increasingly digital environment, organizations may need to verify a customer’s identity almost every day. Especially when it comes to onboarding new customers. Verifying a customer’s identity is crucial when they want to open a new account, make a high-value transaction, or access age restricted-services. Identity verification is often used by organizations that have stricter security standards. Banking and financial industries have higher security standards. 

With more than 1.2 billion personally identifiable information records available on the dark web, it’s a major risk to allow customers to onboard without verifying their information. Onboarding people without verifying their identities can lead to huge losses for banks, can put other customers at risk of exposure, and break the existing trust value of an organization.

To minimize the risk of ID fraud and money laundering, most identity verification solutions require users to verify their ID documents in additional ways.

In doing so, the level of security increases in line with the number of checks performed. Every security check needs to be done with a particular target in mind. This is one of the best ways to reduce the risks of fraud and build a certain level of trust in the industry.

Customer ID identification and ID verification methods should have the perfect balance between stringent, and easy-to-follow. Ensuring perfect fraud prevention and customer experience.

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Mobile Fraud – How Does it Work, How to Prevent it?

mobile fraud

Chances are that you’re reading this blog on your smartphone. That’s because over 60% of all online traffic comes from smartphones. We use our mobile phones for a lot of things, online accounting, social media, emails, and so much more. We carry it with us all the time and use it for every small thing. Smartphones have become an integral part of our personal and professional lives. So, it makes sense that fraudsters would want to gain access to your smartphone.

Mobile fraud has become a major concern in recent years. Just by accessing a single device, fraudsters can take over every single thing they need to. The threat to personal finance and security is very real.

In this guide, we’ll cover the five biggest mobile fraud threats and the best fraud prevention best practices.

Techniques Fraudsters Use for Mobile Fraud

Fraudsters keep coming up with new and interesting ways to conduct fraudulent activities. Although, there are some tried and tested techniques that work in their favor. So here are the top 5 mobile fraud threats that fraudsters love to try:

1. SIM Cloning & SIM Swapping

A common mobile fraud technique that fraudsters use is to take over an individual’s online accounts. This helps them ‘socially engineer’ access to their bank account and other personal and financial data.

This is done by collecting personal data from multiple sources, including messaging and social media sources. Then they use this data to try and persuade the mobile operator to issue a new SIM that a fraudster uses to get all the one-time passwords (OTPs) to access your accounts.

If this method isn’t successful, fraudsters use smart card copying software or use remote hacking to clone a SIM Card.

Cloning a SIM card provides access to all the data, and account details. Through this, they can conduct all kinds of fraudulent activities.

2. Device Cloning

Device cloning is another commonly used mobile fraud technique fraudsters use. Our smartphones contain all the apps and personal data that you need to access services like online banking, online stores, etc.

Fraudsters can transfer data and services from one mobile device to another one, making a clone of the original device. Fraudsters can make calls and conduct transactions from cloned devices without specific checks.

3. Caller ID Spoofing

Your Caller ID is the number visible to the people you’re calling. This helps others to identify who the call is from. Fraudsters can create false caller IDs from a local service provider/company that the victim knows. When the victim picks up the call, the caller tries to obtain personal information under false pretenses.

Calls and messages are sent from this fake ID to trick the victims into divulging personal/confidential information. Once the call or message is answered, the fraudsters will use social engineering methods to persuade victims to provide confidential information.

4. Recycling Phone Numbers

When a mobile user’s account is closed, the mobile operator will release the phone number again after a short period of closing the account. Now the number can be reassigned to someone else and can be used by some other user.

Today, it has become a common practice that mobile numbers are associated with personal accounts. Allowing for the transfer of funds using mobile numbers. A lot of fraudsters activate old mobile numbers with the aim of finding a number that has been recently recycled.

This number can then be used to access accounts linked with the number.

5. Call Forwarding

Call Forwarding is another mobile fraud technique used by fraudsters. In some online transactions, customers are asked to prove whether they have the mobile in their possession or not. This is done by sending a one-time password to the customer.

Sometimes, fraudsters call or text an intended victim, asking them to forward their call on to someone else. This can be done for any fake reason. Once the victim forwards inbound calls and texts to a fraudster’s device, the fraudster will be able to access all the one-time passwords needed to access personal accounts.

Fraudsters can now access accounts, make payments, and conduct other frauds without the victim ever knowing.

Use of Real-Time Data for Preventing Mobile Fraud

Mobile phones have become an undeniable part of our lives. Without smartphones, there are hundreds of things we won’t be able to accomplish on regular basis.

Mobile phones provide unique data in that it is the only source of ‘dynamic’ data on what’s happening in ‘real-time’. This dynamic data can be used to immediately figure out if a device has been lost or stolen, or if a SIM card has been recently swapped. It can even help in figuring out if the inbound calls or texts have been forwarded.

By using mobile data, you can keep fraudsters out, and it’s also helpful in identifying good guys. Companies can do mobile data checks behind the scenes to access online services securely, quickly, and easily, and ensure that customers won’t fall prey to mobile fraud.

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Know Your Customer’s Customer

KYCC - know your customer's customer

KYCC is a great way to protect your business’s reputation and protect itself against financial crimes.

KYC (Know Your Customer) protocols are too common and are known by almost every regulated business. But, have you thought about the level of risks your customers’ customer present to your business? The type of products and services your customers provide will decide the type of customers they have. Based on the number of customers, you may face unique risks.

When you comply with the Know Your Customer’s Customer (KYCC) process, you can protect your business from potential threats that come up.

What is Know Your Customer’s Customer (KYCC)?

KYCC is an additional compliance method that businesses can employ. KYCC goes a step beyond ordinary KYC or KYB methods. It is the most similar to the Know Your Business (KYB), process. It involves you doing a close analysis of our business’s customers.

With KYCC, you have to evaluate your business clients. You have to go past your business’s clients and see who they work with. Based on your customer’s customer base, your business could be exposed to new and unique threats.

The primary goal of KYCC is to:

  • Confirm that businesses that are your customers are actually who they claim to be. By verifying their accounts, you can be a bit more confident that you’re dealing with an actual business, not some fraudster.
  • KYCC allows you to identify if any of your customers are offering their services to shell companies, or high-risk companies.

Importance of KYCC

KYCC measures can protect your business, customers, and the economy against tax evasion, terrorist financing, money laundering, etc. Without proper regulations, these crimes can grow at an alarming pace. 

KYCC procedures are not widely regulated across the globe currently. But, these regulations are becoming a standard. The 5th and 6th Directives in the EU and FinCEN have indicated a deepening interest in KYC, risk, and compliance. 

As new regulatory bodies continue to understand the importance of KYCC, it’s expected new regulations will soon be announced. If customers discover your businesses have facilitated illegal activity, it’s going to hurt your reputation. When you implement KYCC protocols, you’ll be able to identify these issues and reduce the level of risk associated. 

KYCC is more crucial for high-risk industries, such as finance. That said, any business can benefit from the reputational benefits of KYCC.

What Does KYCC Look Like?

KYCC looks a lot like KYC. The only big difference is that you have to verify your customers’ customers. Similar to KYC, there are some basic steps in KYCC:

  • Identification – In this step, businesses have to identify and verify the identity of each of your customers’ customers.
  • Due Diligence – This step involves checking sanctions lists, account history, and other information to make sure your customer’s customers aren’t involved in illegal activities.
  • Ongoing Monitoring – It is where you implement measures to find illegal activities. Businesses have to take action to handle the task accordingly.

How to Start Implementing KYCC?

To begin KYCC, you’ll first need to ask your customers to provide a list of their customers. If they’re not comfortable sharing this information or are hesitant to share it, you may have to teach your customers about the benefits of KYCC.

When you have the information, you’ll have to collect all the necessary information to do KYC checks on these individuals. To be able to perform KYC checks, you’ll need to collect information and data from multiple sources.

As your customers conduct business, they’ll add new clients to their list. It’s essential that KYCC becomes an ongoing process. This way, companies will be able to detect any suspicious activity as soon as possible.

Despite the efforts, a thorough KYCC process improves both your and your customer’s businesses. It helps businesses raise their reputational standards, establish improved compliance methods, and increase trust and safety. 

How to Protect Your Business with Proactive Implementation?

You can protect your business by implementing KYCC measures. But, you should only do this if other compliance methods are already fulfilled. While the measure is not too important currently, in the near future regulatory bodies may come up with new regulations.

By implementing KYCC in place today, you can proactively protect yourself from financial crimes such as money laundering. You’ll also be able to protect your business against reputational risks and avoid legal troubles that come along.

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How Identity Proofing Prevents Fraud?

digital identity proofing

Building trust online requires proof in today’s time. After the pandemic, it has become harder for businesses operating in the growing digital world needs to ensure that a customer is a real person. This is also known as “identity verification or Know your Customer” for businesses in regulated industries.

There are several technologies that involve verifying name, date of birth and address information to reputable data sources such as credit references. But, all of these steps are worthless if identity proofing is not done beforehand.

What is Identity Proofing?

Identity proofing is the process of making sure that the person who’s signing up is actually real. This is one of the most important parts of an identity verification journey. If a business is unable to verify the identity of a customer, any verification step afterward is in vain.

Not having a proper due diligence process for vetting your customers can lead to financial and reputational losses.

Document Verification in Identity Proofing

During physical customer onboarding, businesses can rely on physical identity data to verify if a customer is real or not. In physical settings, companies can check for ID documents.

After Covid, we’ve moved to a digital onboarding process. Businesses have to go through a digital identity verification process. So, what is the approach businesses can take to verify the identities of customers?

Knowledge-Based Authentication

A lot of new technologies have come to the market to accommodate this. Knowledge-based authentication questions are one method of identity proofing. KBA is a set of questions that only a real person would know. Common questions include:

  • Amount of money spent on mortgage
  • Color of the first car
  • Name of the first pet
  • Your favorite teacher

There are legitimate questions, but a spouse can also answer them. Bad actors try to guess answers to these questions. In case there has been a major data breach, fraudsters tend to use this data to answer questions. But knowledge-based questions aren’t really a secure method of identity proofing.

Businesses need to use solutions that replicate face-to-face interactions. There need to be solutions that can be legitimate, and secure.

Step-by-Step Process to Digital Identity Proofing

1. Document Verification

To verify identity, a customer is asked to provide copies of their government-issued ID documents. Robust document verification solutions such as DIRO can verify the legitimacy of the document by cross-referencing information from the issuing sources.

2. Face Match

In the next step, businesses need to verify that the person presenting the documents is legit. The right way to do this is to match the face on the document with the person who presented the document.

Some companies ask the customer to verify themselves by submitting a selfie. Face-matching is an important part of identity proofing.

3. Liveness Check

The problem with face match is that a fraudster can submit the selfie of the original person that they can download online. So Liveness check is crucial to make sure it’s a legit person submitting the application, not a fake person. 

Liveness check is the process where a person has to record a video and say a code in the video. This prevents the use of any impersonation tools or the use of fake photos.

4. Digital Identity Data Layering

All the Identity verification experts that no one size fits all digital ID proofing works for all businesses. With any system, there are outliers and exceptions. Having a multi-layered approach to digital identity verification is wise.

Relying on trusted third-party data is a crucial part of the identity-proofing process. Taking a data-centric approach to ID verification makes it easier for businesses.

5. Secure and Smooth Customer Experience

A great customer onboarding experience is crucial for both businesses and customers. Customers who have a poor onboarding experience tend to never use the services.

For businesses to scale up, you need to provide a secure yet smooth customer onboarding experience. Fraudsters, tend to find the path of least resistance, and by avoiding detection and prevention steps between bad actors.

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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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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. However, 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.

6. Lack of Clear Objectives

Another reason why risk management fails for businesses is the lack of clear objectives. Without a clear understanding of what businesses want to achieve and what risks they’re managing, they won’t be able to manage the risks properly.

7. Relying Only on Technology

While technology offers tons of benefits, businesses shouldn’t rely only on technology for risk management. A perfect blend of human judgment and expertise is crucial for analyzing the data and making well-informed decisions. Over 50% of businesses investing in risk technology are also training their workforce and processes to maximize effectiveness in managing risks.

How to Avoid or Overcome Risk Management Failures?

There are a couple of ways businesses can avoid or overcome risk management failures, such as:

1. Define Objectives

Defining risk management objectives clearly will ensure businesses will be able to avoid risks associated with their business. Clear objectives can also help align risk prevention strategies with the overall business mission and strategy.

2. Conduct Risk Assessment

Businesses need to assess potential risks, consider their likelihood and potential impact, and seek input from various sources.

3. Stay Vigilant

Another way to prevent risk management failures is by staying up-to-date with markets and risk trends. Businesses can do this by consistently monitoring their environment for emerging threats.

4. Allocate Resources

Ensure the business has enough financial, human, and technological resources to meet its risk management goals.

5. Engage Stakeholders

Businesses should make sure that they engage all relevant stakeholders in the risk management process. There has to be open communication to gather insights from everyone involved and affected.

6. Enhance Communication

There should be clear communication channels and protocols for sharing risk-related information and fostering a culture of open communication. The aim of this communication channel is to foster an environment in the organization where everyone is comfortable reporting risks and concerns.

7. Stay Compliant with Regulations

Another way for businesses to avoid risk management failures is by staying compliant with all the regulations. Following regulations can help businesses prevent fraud risk and ensure businesses don’t fall into legal trouble.

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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.