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4 Reasons Why Brokerage Firms Need ID Verification?

James Efron
October 08, 2019
4 minutes read
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According to Steve Grobman, Chief Technology Officer for McAfee, “The digital world has transformed almost every aspect of our lives but bought risks and crimes too. Crime is more efficient, less risky, more profitable and has never been easier to execute. Financial institutions of all stripes- banks, credit unions, brokerages, and payment companies need to take a layered approach to cybersecurity and fraud prevention.”

Moreover, the New Global Cybersecurity Report Reveals Cybercrime Takes Almost $600 Billion Toll on Global Economy. Financial institutions are required to abide by AML and KYC regulations. They are required to perform KYC and AML compliance. Financial institutions need to practice in-depth KYC and AML compliance to prevent themselves from falling prey to cyber scams like a data breach, money laundering, ransomware, etc.

An Insight to Brokerage Firms

Want to trade stocks? You’re going to need an online broker. Brokerage firms are financial institutions that help you buy and sell securities. They act as the middle man between the buyer and the seller. Depending on the brokerage firm type you choose, you can either make your investments via telephone, internet, or smartphone. Brokerage firms generally charge per buy or sell order. Online brokerage houses may not have any physical office at all. They operate via the internet only so they are more prone to falling for cyberattacks. Isn’t it?

Online Identity verification can serve the best in this regard.

ID Verification- Requirement for Brokerage Firms

To comply with the US. government law, Brokers collects personal information from their customers. It may include tax identification and financial information. Rules imposed by a Self-Regulatory Organization (SROs) brokers request information from new customers as well as customers having a long-standing relationship with the firm. Also to fulfill the KYC and AML requirement they need to know who they are dealing with plus if they are exchanging the money between the right two parties.

Following are a few reasons why ID verification is crucial for brokerage firms:

To Fulfill Suitability Law

According to FINRA suitability and SRO rule when a broker recommends that a customer buy or sell particular security he must have a reasonable basis for believing that its suitable for the customer.

To Fulfill Record-keeping Requirement

SEC rule requires the brokerage firms to create a record for each account with an individual customer. It should cover name, address, DOB, government-issued ID information. To be sure about all the record brokerage firms need to verify all this information first. ID verification plays its part here. Brokerage firms need an online address verification tool to confirm that the person is not lying about his residence. Online ID verification is important for brokerage firms not only to combat fraudsters but also to fulfils the record-keeping requirement by SEC (Securities and Exchange Commission). Brokers must make a good faith effort to obtain and verify the information of their clients.

To Combat Terrorist Financing:

Money laundering is committed to hiding the money trail or black money. Financial institutes are often deployed by criminals to launder black money in other countries for various purposes including terrorist financing. The brokerage firms can be a victim of this too. So to adhere to Counter Financing of Terrorism (CFT) brokerage firms need to know who they are dealing with and where the exchange is taking place.

To Counter Fake Identities and Frauds:

According to a study, 3 million identities were stolen in 2018 and 1.4 million of those stolen identities were fraud-related. Criminals use fake identities to open accounts at financial institutions to conduct their illegal activities. The most common victims of identity thieves are the financial institutions because they serve well the money motive of criminals. Online KYC and AML solutions help the financial institutions in preventing the risk that comes from a diverse clientele. Identity thieves and money launderers can be identified at the very first stage and help the businesses in serving only legitimate businesses.

Wrapping it up, the brokerage firms (online or physical) are common victims of criminals. The product of brokerage firms is exploited for hiding the black money or to transfer funds to the terrorists anonymously. Hence, the reason why brokerage firms are advised to run in-depth KYC and AML screening on their investors. It helps them onboard a secure clientele and getting a good credit rating due to regulatory compliance.

Disclaimer: No warranty is herein provided that the information contained in this document is accurate, up-to-date, and/or complete. In no circumstance(s), does such information constitute legal or any other advice. Any person who intends to use, rely, pass-on, or re-publish the information contained herein in any way is solely responsible for the same. We suggest to verify the information and/or obtain expert advice independently if required.

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Multi-Tier Security - Another Line of Defense Against Bank Account Scammers
An Insight to Brokerage Firms
The banking sector has been witnessing a significant rise in criminal activities is a major concern of security authorities these days. The latest reports revealed that banks have been violating KYC and AML regulations and there were skyrocketing penalties in 2020. Protecting banks and customers is necessary and identity verification is one of the best ways of doing so. However, conventional methods like manual document verification do not suffice for the needs. There must be more robust and automated systems like digital identity verification and video KYC that can enhance the efficiency of the process.

A single line of defence does not work when it comes to technologically advanced fraudsters. There must be layers of security to filter them no matter how hard they try to surpass ID checks. Hence, multi-tier security is what the banking sector needs. Multiple layers of security checks and identity verification methodologies will make it impossible for fraudsters to enter banks.

What is Multi-Tier Security?

Multi-tier security refers to multiple layers of identity verification to enhance security in organisations. Fraudsters are developing sophisticated ways of fulfilling their malicious intent and a single layer of security cannot help companies. Therefore, there must be multiple layers of ID verification that can prevent fraudsters from entering the business.
A Summary of Bank Scams and Frauds

Over time, many different types of frauds and scams have struck the banking industry. Due to advanced technology, not only banks are streamlining their processes, but criminals have also figured out techniques to execute their plans. Many new breeds of scams have surprised organisations, especially banks. Let’s take a look at some of the fraudulent activities.

Account Takeover Fraud

Account takeover (ATO) refers to the fraud in which criminals get illegal access to bank accounts and use them for illicit activities like money laundering and chargebacks. As technology advances, fraudsters have also become sophisticated in committing account takeover fraud. There was a 43 per cent increase in account takeover fraud during the global lockdown in 2020. The numbers are expected to increase this year as well due to rapid digitisation.

New Account Fraud

A new breed of frauds struck the world a few years ago by the name new account fraud. With time, the rate of this fraud has increased and defeated all other kinds of scams. For a new account fraud, fraudsters use stolen, forged, or synthetic identities to open a new bank account, get a new credit/debit card, or loan money from the bank. According to Javelin Strategy, 3.2 million customers were affected by this fraud alone in 2018.

Identity Theft

Identity theft has been a threat to businesses for a very long time. The numbers are continuously increasing and banks are the primary target. Unfortunately, identity theft has taken various forms as well, including child identity theft, medical identity theft, and social identity theft. This enables criminals in making purchases, opening new bank accounts, and enjoying numerous other benefits with false names.

Data Breach

Data breach is a social engineering technique that fraudsters use to acquire customer information. The stolen data is later used for bank account scams, identity theft, and numerous other illegal activities. The identities stolen from a data breach are also used for new account fraud. Around 8,000 data breaches were reported in 2019. In the first half of 2020, 540 data breaches were reported only in the United States according to Statista.

Biometric Authentication – The Additional Security Layer

Biometric authentication is the additional layer of security that not only enhances the level of security, but it is also a rigid measure that fraudsters cannot dodge. Fooling biometrics is not a piece of cake for criminals because biometric authentication requires the live presence of the individual for identity verification. Voice, face, palm, iris, pupil, and retina are some of the biometric traits of an individual that are required for biometric verification.

Biometric verification employs various artificial intelligence models and the following techniques are used for authentication:

3D depth analysis

Micro-expression analysis

Skin texture analysis

Liveness detection

All these techniques ensure the live presence of individuals and any spoof attacks or deepfakes can be identified within seconds.

How will Multi-Tier Security Help Your Bank?

Digital identity verification is a multi-tier security measure that your bank needs. This system has multiple methods of verifying identities that prevent fraudsters from entering the business. Here is how the process of multi-tier security works:

First, the individual has to register on your bank’s website for the identity verification process

Along with the registration details, government-issued ID documents are also submitted

Then, the information submitted is verified with the government-issued ID document

Once the documents are verified, biometric authentication comes in action and face verification checks are performed

Customers have to submit their selfie or video during verification which is matched with the image on the ID document

Lastly, consent verification checks are also performed in which the customer has to submit a handwritten or typed consent note

Conclusion

All in all, verifying identities with the manual method is not an adequate option in the digital world. Digital identity verification is an automated process of verifying identities with layers of security to increase the efficacy of the process. One of the strongest layers in this method is biometric authentication that ensures the live presence of the customer for verification. Fraudsters cannot bypass these checks through any of their techniques. Due to the robustness of this technique, bank account scammers fear from the additional layers of security to verify identities and transactions. Identity theft, account takeover fraud, new account fraud, and data breaches are some of the criminal activities that have increased over time. Now, banks need a multi-tier security system to ensure the security of the customers as well as the organisation.

Get in touch with our experts and learn more about the digital ID verification system and biometric authentication.

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4 Reasons Why Brokerage Firms Need ID Verification?

An Insight to Brokerage Firms

ID Verification- Requirement for Brokerage Firms

To Fulfill Suitability Law

To Fulfill Record-keeping Requirement

To Combat Terrorist Financing:

To Counter Fake Identities and Frauds:

A Summary of Bank Scams and Frauds

Account Takeover Fraud

New Account Fraud

Identity Theft

Data Breach

Biometric Authentication – The Additional Security Layer

How will Multi-Tier Security Help Your Bank?

Conclusion

Let’s prove your

customer’s identity

with Shuftipro.

Let’s prove your customer’s

identity with Shuftipro.

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4 Reasons Why Brokerage Firms Need ID Verification?

An Insight to Brokerage Firms

ID Verification- Requirement for Brokerage Firms

To Fulfill Suitability Law

To Fulfill Record-keeping Requirement

To Combat Terrorist Financing:

To Counter Fake Identities and Frauds:

What is Multi-Tier Security?

A Summary of Bank Scams and Frauds

Account Takeover Fraud

New Account Fraud

Identity Theft

Data Breach

Biometric Authentication – The Additional Security Layer

How will Multi-Tier Security Help Your Bank?

Conclusion

Let’s prove your

customer’s identity

with Shuftipro.

Let’s prove your customer’s

identity with Shuftipro.