Identity Theft: How do KYC/AML help in the prevention of frauds?

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Profit maximization shouldn’t be the only point of focus on businesses in today’s corporate climate. The more important aspect for businesses is to identify their means of profit i.e their clientele. Proper due diligence is mandatory for businesses to secure not only themselves but their existing clients as well. When a business or institution enters into a business partnership or transaction with an individual or organization without properly knowing them or conducting due diligence, it can expose them to heavy lawsuits and regulatory fines. 

Businesses sometimes won’t realize they’ve processed a fraudulent transaction until weeks or even months later. This makes fraud so troublesome – it’s a silent form of crime, and when all the parties realize, its often too late to locate the criminal or dispute charges. Therefore the best way to protect your business is to constantly observe and promote positive habits. If the hackers or scammers ever plan something fishy, you’re way ahead of them.

There were about 3 million cases of identity theft received in 2018, out of which 1.4 million were fraud-related, and money loss was reported in about 25 percent of the cases. In 2018, it was reported that consumers lost about $1.48 billion related to fraud complaints, an increase of $406 million from 2017. According to Fenergo (2019), regulatory authorities across the US, Europe, the Middle East had imposed hefty fines of $26 billion in financial penalties for AML/KYC compliance violations. This has made businesses especially financial institutions more complacent towards the guidelines of the regulatory authorities. 

Before talking about the methods to prevent fraud, it is crucial to understand what it actually is. Online fraud is the tricking of customers for money, property, inheritance or any other source of benefit by hiding or providing incorrect information using the internet. Some common types of online crimes include:

  • Identity Theft
  • Credit Card Fraud
  • Auction Fraud
  • Investment Fraud
  • Work-at-home Scam
  • Sweepstakes Scam
  • Online Dating Scam
  • West African Scam

Businesses need to get themselves secure from all sorts of online frauds and scams. Frauds and scams can adversely affect the financial health of any business, its image, and its reputation. If timely action is not taken to minimize risk, businesses may face irreparable losses. In order to prevent individuals and businesses from online frauds and scams, various compliances are introduced by regulatory bodies such as FATF, FINMA, FINCEP, GDPR, etc. The most important compliance is KYC and AML, which are mandatory mainly for banks and financial institutions (FinTech).

Introduction of KYC and AML

KYC or Know Your Customer refers to the standard protocol that banks and financial institutions need to go through in order to authenticate the identity of a client. Because of the rise in E-commerce scams, many businesses have also started integrating KYC into their systems and business processes. It was initially introduced by the Reserve Bank of India in 2002 and was globally implemented by 2005. It consists of four main components, namely: 

  • Customer Acceptance Policy;
  • Customer Identification Procedures;
  • Monitoring of Transactions; and.
  • Risk management.

KYC checks for business help to understand the clientele, monitor financial transactions, and address the potential risks associated with customers towards business relationships. Customers require to provide their personal information which includes name, address, contact information, ID card, etc. This information needs to verify before the individual or business is made part of a business transaction. KYC compliance has become mandatory for banks and financial institutions and non-compliance can result in businesses facing hefty monetary and reputational losses.

Due to technological advancement, companies have now started providing digital KYC services using artificial intelligence (AI) systems. The whole process is done automatically by AI systems. The services include Identity Verification; Document Verification; Address Verification; 2 Factor Authentication and Consent Verification. Digital KYC is not only quick but accurate and precise as well. 

AML or Anti-Money Laundering is term use by financial institutions to describe the legal controls according to which regulatory entities suppose to detect and prevent money laundering. Money laundering refers to the illegal concealment of cash or money that obtain illegally through a hidden chain of bank transfers. The money uses to fund criminal activities including terrorist financing. Many laundering generally involves three main steps: 

  • placement; 
  • layering; and. 
  • integration. 

All kinds of suspicious financial transactions monitor by AML procedures. By detecting and obstructing the illegal cash flow, a large number of criminal activities can be stopped. Global and local regulators are all set up to evaluate the AML standards of businesses. If a business does not comply with the guidelines set by the regulatory authorities, it is imposed with heavy regulatory fines and punishments. 

AML checks like KYC now done digitally by AI systems to reduce time and increase accuracy, at the same time. AI systems attain data from sanction lists and large datasets that update by regulatory authorities regularly. The data then extract and provide to the concern individual or business. This is to ensure that no criminal or money launderer is onboard by a business or institution. The services include Ongoing AML; AML for businesses and Ongoing AML for businesses. These services are provided in a range of pricing packages depending on the request of the customers.

AML and KYC compliances are essential for individuals and businesses since they not only help in minimizing risk but help identify scammers and money launderers and, protect businesses from incurring potential losses and false chargebacks.

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