7 Best KYC and Fraud Prevention Tips for Online Businesses

7 Best KYC and Fraud Prevention Tips for Online Businesses

With the explosion of internet and web applications, the online interaction between consumers and businesses is continuously increasing. The digitization of business operations is raising the demand for advanced technological solutions to deal with the growing digital fraud and create trust among consumers to stay ahead of competitors in the market.

With every passing year, the fraud cases are growing eventually resulting in great losses for businesses and individuals. As per the study conducted in 2018, 63% of the business have experienced either the same or increased number of digital frauds. This increased ratio in online frauds is intensifying the need for quick and effective verification processes.

As we are approaching the data-driven market, customer experience is equally important for secure business growth. As per the study by Experian 2018, 75% of the business expressed their interest in acquiring the security measures and authentication processes that have an impact on customer experience as well. No matter what the business domain is, every digital enterprise needs to maintain an effective and compliant KYC (Know your customer) onboarding process.

Understand the Onboarding Process Thoroughly

An effective customer onboarding process plays a significant role in developing a strong and long-lasting relationships with new clients. The streamlined onboarding of clients facilitates businesses in filtering the good clients from suspicious and fraudulent ones. But in order to do so, it is essential to understand the KYC onboarding process in detail. 

The process is not much complicated and contains almost the same steps. The foremost is to gather relevant data and identification documents. The collected data and documents are authenticated through in-depth background checks linked to previous employment history, financial transactions, and other activities. The authentication doesn’t end here, further investigation is carried out to get a clear history of the client in terms of fraudulent or criminal activities.

KYC Verification also includes the mapping of client data against fraud prevention and anti-money laundering (AML) protocols to figure out any red flags. Moreover, the customer is also investigated for involvement with Counter Financing Terrorism (CFT). Lastly, based on the findings and resulting information, the businesses assign clients risk rating i.e. low, medium or high. 

Once you completely streamline the onboarding process, it would be very easy to meet the regulatory compliance while building a secure customer base.

Collect Extensive data

Know your customer (KYC) and know your business (KYB) processes are specifically designed to curb fraud and financial crimes like terrorist funding and money laundering. Meeting the KYC requirement not only facilitates your business in risk management but also increases overall security and compliance with CFT and AML regulations.

To ensure comprehensive KYC compliance, the collection of relevant data is essential. When you will have inclusive information regarding the client it would be more productive to carry the KYC process seamlessly.

Use Third-Party Identity Verification Services

Digital problems need digital solutions. Manual KYC and verification processes are prone to error, time-consuming, and costly. Multiple SaaS companies are coming up with enhanced digital security measures and services. Outsourcing your identity verification and authentication processes to some third party is quite an effective, convenient and affordable solution.

The security requirements often vary from business to business depending on the type of risks associated. For instance, in the case of financial institutes, the monetary fraud risks are higher as compared to other industries. Various digital identity verification solutions and KYC services decrease the likelihood of online businesses from being targeted meanwhile complying with KYC/AML regulations. 

Enhancing Authentication Checks

In online businesses, account takeover fraud and identity theft are significantly cultivating frauds. To prevent such frauds, the best way is to enhance your authentication processes. Cybercriminals and fraudsters have become sophisticated in exploiting user credentials – which means simple password protection is no more reliable. Implementing biometric and multi-factor authentication in your business can keep the attackers at bay.

These technologies verify and authenticate the identities on the basis of their unique biometric features which are nearly impossible to steal or exploit. Moreover, as per Visa Study 2017, 71% of the respondents think biometrics are easier than passwords and 46% find biometrics more secure.

Exercise Common KYC Tests to Combat Identity Fraud

Identity theft is a major concern for online businesses these days. According to the Federal Trade Commission’s (FTC) report, around 1.4 million identity theft fraud reports were processed in 2018 with a total loss of around $1.48 billion. To prevent these frauds, your business can use some common KYC practices every now and then. 

These checks are quite imperative for every type of online business. There can be some other tests as well that you can design in a similar way to curb identity theft.

Ensure secure Payment Methods

For the startups, managing a few transactions a day is no big deal. But as you scale to hundreds of transactions per day, throwing caution to the wind can land you in big problem. Whether your organization accepts credit cards, PayPal or Skrill payments, it is essential to be aware of their security policies that are likely to impact your business.

According to Statista 2018 report, US merchants lost around $6.4 billion due to payment card frauds. Among the victims, small businesses suffered most – i.e. an estimated loss of $155,000.

To familiarize yourself with your payment service providers’ policies and applying security measures to secure the payment methods is a great business practice. Doing so prevents fraud while tightening reins on cybercriminals and imposters.

Fight against Chargebacks

Chargebacks are becoming a major issue for online businesses. They are mostly the result of consumer fraud contrary to identity fraud – occurred due to unauthorized payments from customers’ accounts or cards. Different credit card companies have different chargeback policies, so it’s better to go through them thoroughly. 

It is better to take precautionary measures than suffer chargeback loss. You can always track your payments. It helps you to claim your proof against chargebacks. By providing the delivery receipts and invoices, you can have the case in your favor and prevent financial loss. 

The Definitive Guide to Anti-Money Laundering & Countering of Terrorist Financing

The Definitive Guide to Anti-Money Laundering & Countering of Terrorist Financing

In this modern globalized era, money launderers, terrorist financiers and other criminal elements came up with a slew of resourceful ways to accomplish their malicious desires. It is a common practice of these groups to misuse the services of legitimate businesses such as banks and other Financial Institutions (FIs) to convert ill-gotten gains into ‘good money’. Whereas, to counter such criminal activities, FIs rely on procedures and systems that aim at acquiring customer knowledge.

One of the major issues is that most legitimate entities turn out not to be compliant with the AML (Anti-Money Laundering) regulations. This increases the probability of bad actors to finance terrorists and drug dealers. Any legal entity that knowingly or unknowingly became part of money laundering or terrorist financing will suffer from enormous regulatory penalties. Therefore, it is crucially important for FIs to establish a strong internal system of controls that, even when criminals are using the best effort and abilities to elude the rules. It allows them to identify fraudulent entities and unusual money flows. 

When an entity makes substantial profits, it finds ways to use or save funds without moving the attention of inspectors on underlying suspicious activity or on criminal entities that are doing so. In money laundering, criminals disguise their sources of money, change the form or transfer it to a place that seems less likely to grab attention. Embezzle funds are converted into good money to ‘enjoy it’. 

Palermo Convention or United Nations Conventions Against Transactional Organized Crime states money-laundering as:

“The conversion or transfer of property intentionally knowing that it is a proceed of crime, to conceal the illicit origin of money or helping an individual who is involved in predicate offence and wants to evade legal consequences of his action.”

“The concealment of the true source, nature, location, movement, ownership, property or disposition, intended that it a proceed of crime.”

“The acquisition, ownership or use of property, which at the time of receipt was known that it is a proceed of crime.”

Financial Action Task Force (FATF) is an inter-governmental body established in 1988 by a group of seven industrialized nations to combat money laundering. FATF cleared the notion that money laundering only takes place with cash transactions. Actually, it’s not the only case. Money laundering can be performed by any medium virtually, could be a financial institution or any business. 

Sources of Dirty Money

In simple words, money laundering means “the conversion of dirty money into good money.”

Following are some of the sources of dirty money:

  • Drugs and arms Trafficking
  • Criminal Offences
  • Gambling
  • Smuggling
  • Bribe
  • Online fraud
  • Tax evasion
  • Kidnapping and many more…

Methods and Stages of Money Laundering

Money laundering involves three stages; placement, layering, and integration.

  • Placement

This process is the movement of illicit funds from its source. At that time, the origin is manipulated or concealed. This process is followed by money circulation through FIs, shops, casinos, legal sector, or other businesses (both abroad and local). In simple words, in this phase, illegal funds get introduced into the financial system.

The process of placement includes many other methods:

Currency Smuggling: The physical movement of currency out of the country.

Bank Complicity: When FIs are involved with criminal entities such as drug dealers or organized criminal groups. This makes money laundering an easy process. Lack of AML procedures and checks also pave ways for money launderers. 

Currency Exchanges: Foreign currency exchange service providers open ways for money launderers for seamless currency movements.

Securities Brokers: The money laundering process can be facilitated by brokers by structuring enormous funds in such a way that it conceals the original source of illicit money.

The blending of Funds: A small number of illicit funds are blended with a huge deposit of legal funds. 

Asset Purchase: Assets are purchased with dirty money. This process is the most common method to hide dirty money. The real estate sector is misused by money launderers and real estate agents knowingly or unknowingly facilitate bad actors.

  • Layering

This process involves the transfer of funds to several accounts or FIs’ accounts to further separate the original money source. This makes complex layers of transactions that help conceal the source and ownership of illegal funds. Hence, makes it difficult for law enforcement agencies to track the money flow. 

The methods of layering include;

Cash Conversion into Monetary Instruments: After the successful placement of money into FIs or banks, proceeds are transformed into monetary instruments. In this, the banker’s money orders and drafts are involved. Material assets are bought with this cash and sold locally or abroad. In this way, assets tracking becomes more difficult to trace.

  • Integration 

In this process, laundered money is moved into the economy through the banking system. Such money appears just like business earned money. In the integration process, laundered funds are detected and identified through informants. 

Integration methods include;

Property Dealing: Among criminals, property sale to hide dirty money is a common practice. For instance, criminal groups buy properties using shell companies.

Front Companies and False Loans: Front companies, incorporated with secrecy laws in the countries are used by money launderers that lend them laundered proceeds that appear to be legitimate.

Foreign Bank Complicity: Money laundering is conducted using foreign banks. It gets hard for law enforcement agencies to point them out due to their sophisticated systems. 

False Invoices: Import/export companies create false invoices and have proven to be an effective way of hiding illicit money. This method includes the overvaluation of products to justify the funds. 

This is today one of the major threats we are facing. Who knows, if our services are used for terrorist financing? Even, sometimes the legally earned money is also transferred for the financing of terrorism. 

For terrorists, no matter how small the money amount is, it is a lifeblood for them.

Just like money laundering, terrorist financing is a predicate offence. Early detection and immediate counter steps are the only ways to combat it. 

For terrorists, no matter how small the money amount is, it is a lifeblood for them.

Concerns of Countries and Governments around the World

United Kingdom

MLR-2017, the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) regulations came into force in the UK on June 26, 2017. The new regulation of the UK is tightening the reins on money laundering in resourceful ways. 

To combat money laundering, UK regulations include identity verification of customers before providing services to them. AML compliance is mandatory when it comes to screen the customers against Politically Exposed Persons (PEPs) list, sanction lists, the high-risk customers’ records, and updated criminal databases. In addition to this, employee training is also declared mandatory. Previously, regulations covered only casinos holders which now extend to all gambling providers.

China

Anti-money Laundering (AML) regulations in China primarily focus on KYC (Know Your Customer) verification of customers through identity verification protocols. China’s government has issued AML/CFT regulations on online financial institutions. FATF report for the People’s Republic of China states that China has a strong understanding of money laundering and terrorist financing risks. 

In AML/CFT regulations of China, legitimate entities are required to verify their customers with identity proof (such as government-issued ID cards). In addition to this, regular identity checks are declared important in case of a change in records of beneficiaries or regulations. In the case of any suspicious transactions crossing the minimum transaction threshold, it should be reported immediately to the relevant authority. China is taking stringent measures in the AML compliance program to combat money laundering and terrorist financing criminal activities.

The United States of America

In the USA, Bank Secrecy Act (BSA) is residing. With several amendments, this act is quite detailed and covers broad perspectives of money laundering risks of financial institutions. BSA was designed to identify the source, volume, and movement of laundered money and monetary instruments. According to BSA, banks and other financial institutions are supposed to report transactions over $10,000 through currency transaction reports. 

Not only this, CDD processes are mandatory for businesses operating in the USA. AML screening of customers against several criminal databases are updated records is necessary to comply with AML regulations. Additional federal laws are passed to strengthen the rules and regulations under BSA. Anti-money laundering programs in the USA come up with changes and scope will be extending with time.

Canada

FINTRAC, Financial Transactions and Reports Analysis Centre of Canada has recently released a final version of rules and regulations that depict amendments in the regulations to Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA). The changes in Canada’s regulations ensure the compliance procedures and policies to be significantly stringent. 

According to these regulations, the financial services industry needs to be dynamic in nature for the reduction of money laundering and terrorist financing activities. Virtual currency services and digital payment methods have opened ways for fraudsters to transfer their embezzled funds across the world. Moreover, regulations extend to prepaid card issuers, virtual currency providers and foreign Money Services Businesses (MSBs).

Risks for Banks and Financial Institutions 

Money laundering and terrorist financing affect the overall economy of the world. As regulated entities such as banks and financial institutions are primary sources that deal with the money in a country. These entities are opportunities for fraudsters through which they can transfer ill-gotten gains in different corners of the world. There are several risks associated with the maintenance and supervision of banking relationships to which FIs and employees should be aware of. The interconnection of banks should be secure and well-organized to track the unusual flow of transactions. Otherwise, regulatory scrutiny can subject hefty penalties which include monetary fines, imprisonments, business abandonment temporarily or permanently and assets freezing. 

What are KYC and KYB?

Know Your Customer, KYC is a process of identity verification of the customers. It is part of Customer Due Diligence (CDD). To combat high-risk customers, identity verification plays an important role. KYC is the term most commonly used in banks and financial institutions for customer verification. Now, it is needed for almost all industries because of the extended scope of fraudulent tricks and region. 

Also, to comply with the obligations of global and local regulatory authorities, businesses need to verify their onboarding customers. To verify the credibility of customers, the KYC verification process makes sure that the person is actually who he says he is. Not only customers, but the scope of KYC extends to agents, businesses, corporate entities, and third-party verification. This is what we call ‘Know Your Business’ or KYB. 

KYB involves the verification of businesses your company is dealing with. This is important to verify that your business operations are running in association with honest and registered entities. To avoid regulatory fines, verification of Ultimate Beneficial Owners (UBOs) is declared mandatory. AML regulations of FATF have explicitly stated UBO screening importance for businesses to combat money laundering and terrorist financing. 

What is EDD?

Enhanced Due Diligence (EDD) includes additional information of customers as compared to the one collected during the CDD process. To combat the risks of high-risk customers in an organization, thorough screening is performed. In-depth verification of customers is conducted by verifying their identity, not only by collecting personal but also financial information. Following is the EDD information that is collected at verification time:

  • Business/ occupation
  • Financial status
  • Income
  • Location
  • Private/corresponding baking information
  • Continuous transaction monitoring, etc. 

Enhanced Due Diligence Factors

High-risk Customer Factors

 

  • Verification of customers if they are foreigners or non-residents
  • Personal vehicle information of legal identities
  • Verification of customers if their relatives or family members are in the list of PEPs
  • Businesses that are cash-intensive
  • Risk assessment of company against AML policies and parameters

Geography Risk Factors

 

  • Countries that lack AML/CFT practices and are prone to money laundering and terrorist financing. 
  • Countries that lie in sanctions lists or have high criminal records
  • Countries that are blacklisted for facilitating criminal activities
  • Countries that do not lie under the hood of FATF members, etc.

Importance of Watchlists and PEPs

Bad actors are spreading all around the world. Your business that is providing services across the globe should be well-aware of the policies and regulations under which businesses operate. Similarly, your businesses should know high-risk entities of friend countries. Updated records of criminals, money launderers, terrorist financiers, online fraudsters and hackers, and several other watchlists should be maintained issued by law enforcement agencies, to verify each onboarding customer and secure the organization.

In addition to this, identities should be verified against the list of PEPs and their relatives to make sure that no fraudulent identity is facilitated through your legitimate businesses. In case of any discrepancy, businesses can be subjected to inevitable heavy regulatory fines. Hence, it is a regulatory requirement as well as a security concern for the protection of business from malicious entities in the financial system.

Reporting Suspicious Transactions

In a financial system, any suspicious transactions should not be ignored. To prevent money laundering and terrorist financing activities, on an immediate basis, transactions should be reported. Under the requirements of regulatory authorities and anti-money laundering laws, reporting entities are supposed to submit Suspicious Transaction Reports (STRs). It should be reported regardless of the number of fraudulent transactions. A suspicious transaction is:

  • That appears unusual
  • Appears illegal
  • Transaction performed above the specified threshold
  • Frequent transactions from one identity
  • With no clear economic purpose
  • Shows indication of money laundering or terrorist financing

Discussed in the AMLA section, failure in reporting an STR is an offence which can be subjected to a regulatory fine.

Indications of Money Laundering

The features below are recorded in the money laundering case studies that came onto the surface after investigations:

Indications of Money Laundering

Conclusion

Anti-money laundering and countering or terrorist financing is the responsibility of every business and employee of a country. Strict regulatory requirements came into force as a result of its adverse effects od money laundering and terrorism financing on the global economy. Fraudsters that are violating the legitimacy of financial institutions should be tackled by all means. This very first step is the scrutinization of organizations against AML policies and procedures. The government can impose heavy criminal and civil penalties as a result of violations of regulatory obligations. 

Before the law, ignorance is not even an excuse.  

over a million

Over a Million T-Mobile Customers Affected By a Data Breach

T-mobile suffered a data breach earlier this month, the company confirmed this on their website this Friday. The hackers accessed people’s personal information like user’s account information which included names, addresses, phone number, account numbers, and their cell-phone plans according to the announcement. 

The company assured its clients that the hackers didn’t get access to any financial information like credit card numbers or social security numbers. The breach affected the prepaid accounts and less than 1.5% of T-mobile customers were affected, a spokesperson told Business Insider

T-mobile said in a statement, 

“We truly regret that this incident occurred and apologize for any inconvenience this has caused you.” 

FCC requires that T-mobile notifies all the people who are affected by the data breach and according to T-mobile, they will notify all the affected users ‘shortly’.  The company also assured the affected customers that it had shut down ‘malicious, unauthorized access’ to prepaid data customers. 

If your account was breached, you must have received an SMS to notify you of the breach. If you have numbers or providers, you may not have received the message. To get information, you can reach out to T-mobile at privacy@t-mobile.com or by calling 611 to verify if your account was affected. 

fraud prevention detail

5 Industries Where Anti Fraud Solutions are Gaining Prominence

Every profit generating business has some level of risk of falling victim to fraudulent activities. The constant threat of fraud in the market encourages businesses to seek out fraud detection and prevention services. The sector that is immensely vulnerable to and affected by frauds and scams is the Banking, Financial Services and Insurance (BFSI). Fraud, in general, is responsible for a loss of one trillion US dollars to both online retailers and financial service firms. However, the finance sector is not the only industry plagued with scammers and fraudsters. Such circumstances have led companies to seek fraud analytics and anti fraud services.

Anti Fraud Solutions on the Rise

Fraud analysis, however, is not enough; for businesses to take an on hands approach to battle fraud they need proper anti-fraud solutions. Businesses are now in need of user authentication services more than ever. Such services can take the form of identity verification services, single or multi-factor authentications and face verification services. Industries more prone to fraud have been implementing such solutions for a while now. However, some industries where fraud prevention techniques are gaining prominence include;

Cryptocurrency Sector

Conventional banking has always been ailed by fraud and scams. But since the crypto industry is a relatively new find, and more or less employs the same methods as traditional financing, it has also been affected heavily by fraudulent activities. Due to its primary presence being on the web, crypto is more prone to cybercrime, wherein lies its need to employ cybersecurity measures. Authentication services are the best solution to counter such threats. Their need for such solutions has led the crypto industry to KYC verification service providers. Due to the nature of their business, they also look for AML compliance measures which allow them to avoid financial and white-collar criminals.

E-Commerce Industry

Fraud in the e-commerce sector is not new. However, online retailers have had to bear the brunt of fraudulent activities from both the customer and the banks involved in their transactions. Therefore, proper verification of their customers has had immense advantages for them. Fraud prevention measures allow them to verify the customers’ addresses, thereby ensuring that they are selling to the right person and make sure that they do not have to face any chargebacks.

Travel and Hospitality Sector

One victim of identity and credit card fraud is the travel and hospitality sector. Scammers are widely known to steal identities to use for travelling and availing hospitality services. With fraud protection services now being provided by some companies, Hotels and airlines can make sure that all bookings and reservations made with them are from authentic customers rather than fraudsters or scammers looking to avail travelling and lodging services from a stolen ID or credit card.

Online Gaming Industry

Online Gaming has been emerging as a major player in the market gradually over the years. With the growth of advancement in the tech industry, gaming has also evolved into a significant revenue generating industry. The industry is no less fraught by scams and has been in need of fraud protection. Moreover, the gaming industry is also in need of age regulation, thereby requiring age verification of its users. Therefore, implementing ID verification and face verification services from a reliable identity verification service provider, they can ensure safe business practices.

Real Estate

The real estate industry is also known to be scammed by buyers, instead of the situation only running the other way round. Scammers usually target real estate businesses by providing fake financial details and a shady story into why they wish to buy an estate. Such scams can be avoided altogether by the real industry by implementing Know Your Customer (KYC) verification solutions. They ensure the business that their buyer is authentic and is providing legitimate details into his/her financials.

When it comes to identity verification services, Shufti Pro is a veteran in the market providing top of the line anti-fraud solutions to businesses, enabling them to ensure the ingenuity of their customers. Shufti Pro provides both KYC verification services as well as AML compliance to businesses through its state of the art AI-based authentication protocols.  It can be easily integrated into a business’s existing interface and is supported by all major web browsers in addition to having SDK integration for Android and iOS.

Recommended For You: