Todd Nesnick
The United Nations estimates that $2 trillion is laundered annually worldwide. Less than 10% of it is discovered, and less than 1% of the money is retrieved after being laundered. Regulations mandate that businesses undertake extensive background checks on their clients and perform identity verification to confirm they are who they claim to be to combat money laundering and fraud.
Knowing the laws and regulations helps stop criminals from exploiting firms to commit fraud or money laundering. Additionally, it can help businesses avoid paying fines for non-compliance.
There is a ton of material about client identification verification available online. But regrettably, reviewing this may be time-consuming and overwhelming. We have developed this “ultimate guide” to all there is to know about identity verification so that risk management and compliance are more straightforward for you.
Let’s get started.
What is Identity Verification?
Criminals turn “dirty money,” or funds obtained through criminal activity, into “clean money” by incorporating it into the economy. Malicious actors can accomplish this by employing actual companies and false invoices. Money may also be used to buy expensive goods like real estate. Criminal activities and money laundering can also lead to identity fraud and data breaches.
Verifying every consumer that uses a financial platform is one of the key tactics in the fight against fraud and money laundering. Verifying someone’s identity is one way to be sure they are who they say they are. This is especially crucial for financial organizations where people create bank accounts, request loans, or utilize other financial services.
According to the “Know Your Customer” (KYC) requirements for anti-money laundering, identity verification is necessary for all financial institutions and investment broker-dealers. Financial organizations are not the only ones who use identity verification. All firms must research their clients in this global market to safeguard against fraud and data breaches.
Manually verifying a customer’s identity is difficult when thousands of them exist. Customers can now identify themselves through digital identity verification, a process typically used by B2C companies. Businesses may utilize digital identity verification to identify fraud and their consumers swiftly.
Biometric or facial recognition, digital identification papers, and other methods are only a few that enable the verification of digital identities. In-person client identification verification is nearly impossible with international consumers.
You may safeguard your company and adhere to requirements with the help of digital identity verification. Businesses can identify “bad” customers and verify good ones with these tools.
What is KYC?
As part of a more comprehensive anti-money laundering program, the investing and financial services business uses a set of rules called KYC, or “Know Your Customer,” to authenticate consumers. The Financial Crimes Enforcement Network (FinCEN) set these minimum requirements in 2002.
FinCEN was established to put policies into place and enforce them to safeguard the financial system from illegal usage, money laundering, and financing of terrorism. The FinCEN laws mandate that businesses exposed to consumer risk have a KYC plan.
KYC vs. KYB
Know Your Business, often known as KYB, is an extension of KYC. The concept of KYB is to validate businesses. Verify the information related to the business registration, the location, and the eventual beneficial owners.
Using corporations, criminals can mask their identities, making it easier to launder money. For instance, money launderers can conceal the true owner of the firm by using nominee directors. Identifying the corporation’s beneficial owners can aid in the fight against money laundering.
KYB can aid in detecting phony firms or shell corporations. Money launderers can use these businesses to introduce ill-gotten gains into the economy. To solve this problem, KYB shields organizations from unintentionally being exploited for terrorist or money-laundering operations and assists them in reducing fraud in their accounts.
What Is The Importance Of Identity Verification?
The importance of identity verification cannot be overstated. Among other things, it helps fight financial crime and limit fraud. Additionally, it increases trust in companies and brings stability to a country since financial crime does not stop at borders.
Several businesses transfer money across international boundaries to remove themselves and maintain secrecy. Therefore, identity verification is crucial in revealing these rogue actors and any organizations they could use as a front. Below are more reasons why identity verification matters in today’s world.
Eliminating Financial Crime
The ability of identity verification to aid in the battle against financial crime is by far its most significant advantage. The government can get the information it needs to keep up the fight against financial crimes, including money laundering, tax evasion, and terrorism funding, by conducting continuing identification verification and receiving suspicious activity reports.
Reducing Fraud
Identity verification can reduce unemployment and synthetic identity fraud, increasing problems in the current economic environment. Business losses from credit card fraud can reach millions of dollars.
Due to the quick embrace of internet shopping, this is becoming much more common. Banks impose a “chargeback fee” when a consumer disputes an amount. Companies may spend two to three times the transaction value on this fee, ranging from $20 to $100. Identity verification makes it far more difficult for fraudsters to carry out various kinds of fraud.
Establish Trust between Businesses and Their Customers
Trust between customers and businesses may be fostered and created via identity verification. Because companies feel at ease with the anti-money laundering measures at their financial institutions, a reliable economy promotes stability and investment in the nation.
Lenders may lend more money without taking on greater risk if they verify borrowers’ identities. They can offer more loans to promote economic growth if they can determine past financial history and assets owned through the identification verification procedure.
Minimize Sanctions for Non-Compliance
Identity verification also helps firms avoid penalties for breaking the law. Global fines for identity verification non-compliance in 2019 were $10 billion. Twelve top 50 banks received penalties for failing to follow KYC regulations. The business must cope with reputational harm from media publicity of non-compliance and paying financial fines.
To invest or buy from a company, investors and customers want to believe in it. Consequently, non-compliance with KYC rules can create distrust and negative brand associations, damaging businesses.
Bottom Line
Since identity fraud techniques are constantly evolving, companies must create adaptable, frictionless, risk-based strategies to prevent criminal fraud. Traditional methods of ID verification rely on static personal identifying data (PID) such as a person’s name, address, Social Security number, birth date, and phone number.
These elements, however, are not nearly as effective in predicting actual fraud risk when considered separately. Your company’s digital defenses against fraud can be strengthened by implementing emerging trends in cybersecurity. Using very effective fraud prediction models, a risk-based systematic approach to ID authentication lowers the total risk of fraud.