4 Reasons Why Brokerage Firms Need ID Verification?

4 Reasons Why Brokerage Firms Need ID Verification?

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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.