Money laundering and fraud is a serious threat to the UK economy. Fraud accounts for nearly 40% of all crime, while the National Crime Agency estimates over £10 billion is laundered in the UK each year via money muling alone - the act of moving criminal funds through clean bank accounts on behalf of malicious actors, either in return for payment or through exploitation.
While these numbers are certainly worrying, they do not convey the true cost of fraud - the human impact. Fraud can be emotionally devastating for victims and can ruin lives, in extreme cases people have been scammed into losing their life savings. As well as this, fraudsters target our society's most vulnerable; children as young as 11 - primary school age - have been found carrying out money muling activity.
Trends show fraud spreads rapidly across regions and industries, shape shifting as it does so thanks to advances in technology. While there is certainly lots of opportunistic fraud still taking place, fraud has become big business, and organised criminal groups carry out fraud attacks on an industrialised scale. We recently surveyed fraud prevention professional across Europe and almost four in five said they have seen a significant increase in the sophistication of fraud attempts in the past year.
In response to increasing fraud in the UK, we have seen new regulation introduced, which places the onus on financial institutions to better identify and protect against fraud. The new regulatory protections for Authorised Push Payment (APP) scam reimbursement which came into effect earlier this month is one example.
Fraud prevention from the first point of contact
In this backdrop, financial organisations need to ensure their identity verification and fraud prevention strategies are robust, right from the very first point of contact with new customers. For those organisations reviewing their fraud prevention process - a good place to start is: are we asking the right Know Your Customer (KYC) questions?
Know Your Customer (KYC) - the collection and evaluation of customer-related information to confirm a customer is really who they are - is crucial for the finance industry. Not only does it ensure regulatory compliance, helping financial institutions to avoid hefty fines and penalties but, by assessing the associated risk factors for each new potential customer, KYC is essential to preventing financial crimes such as money laundering, identity theft, and terrorism financing.
By getting KYC right, and ensuring a customer is who they claim to be, financial organisations can build trust with their customers, protect their institution from potential losses and contribute to the overall stability and integrity of the financial ecosystem by preventing illegal and harmful activities.
Asking the right KYC questions
The right KYC questions depend on various factors like business type, customer type, product segment, value, location, and sales channel, as well as risk assessment. A business' customer onboarding should reflect these risks and adapt to any risk or fraud signals, ensuring a balance between security and speed. While the checks may vary, always ask these four key questions when a new identity shows up:
With the ever-present threat of identity fraud, it won't come as a surprise that verifying an identity is real before onboarding any new customer is an essential step in any KYC customer due diligence process.
But with Generative AI in the hands of fraudsters, identity fraud is more sophisticated than ever and harder to spot. Cybercriminals often disguise themselves by creating a synthetic identity - fake identities made with a mix of stolen and genuine personal data. This is a costly threat to the financial industry, with synthetic identity fraud estimated to lose the US banking sector $6bn a year.
KYC checks use identity data verification to confirm if an identity has been seen and accepted before. They match info like name, date of birth, and ID number against trusted sources like credit agencies and voter registrations. However, with innovation bringing new identity confidence scoring technology to the market, businesses can now take a more accurate risk-based approach to onboarding. By adding match accuracy, integrity, and frequency, they can optimise and automate customer onboarding based on risk levels.
While an ID document may be genuine, proving the owner is the same person is the second stage of the KYC process. This is where identity proofing and biometric technology comes into play. This typically includes forensic tamper-proof tests on documents and liveness or 'presentation attack' detection on the individual to ensure the genuine presence of the person claiming that ID.
The use of Generative AI here presents both a threat and an opportunity; by using AI during the KYC process, financial organisations can detect and defend against deepfake videos. For example, AI-powered video analysis can detect any synchronisation issues during speech, indicating deepfake technology has been used.
Screening against global sanctions, politically exposed persons (PEPs) and adverse media lists to identity high risk individuals is critical for a robust multi-layered KYC process.
To meet regulatory standards and avoid missing high-risk individuals or entities, fuzzy matching - using AI and Machine Learning to identify records that are similar but not identical to account for variations in names, aliases and addresses - is used in the screening process. While it can identify good prospects and high risks, the best KYC solutions eliminate false positives.
For high-risk customers, perform enhanced due diligence (EDD) checks before onboarding. Additionally, ongoing monitoring of customer relationships is recommended, as these lists are constantly evolving and can flag changes in risk profiles.
Financial organisations need to detail and document a risk-based approach to KYC and customer onboarding to ensure compliance. There is plenty of guidance available, such as the recommendations published by The Financial Action Task Force (FATF) for accountancy services, banking, cryptocurrencies, legal and real estate industries.
However, to gain a more nuanced view of a prospect, the finance industry should take advantage of other identity resources available to bolster their KYC process - such as onboarding intelligence. Onboarding intelligence is the use of a network made up of shared identity insights derived from multiple businesses across a variance of industries to provide a nuanced and real-time view of an identity and its corresponding level of trust.
By linking KYC checks to positive data matches or suspicious anomalies in the network, businesses can identify excellent, good, medium and bad customer prospects right from the first contact. This allows businesses to take prospects on a personalised journey according to their confidence level. For example, a business may add more checks and friction in for a customer with a medium trust score, while fast-tracking a customer with an excellent trust score.
