KYC Verification: Securing Modern Industries from Identity Theft & Money Laundering

In the digital world, identity theft is a heinous crime that harms the well-being of the victim. Cybercriminals steal the name, date of birth (DoB) and address to commit money laundering or terrorist activities. Fraudsters can use identity credentials for their benefit regardless of whether the victim is alive or dead. In this context, the KYC verification system was introduced to combat the issue and stabilise the financial system.

According to an exclusive report, the identity verification market size was worth around $6 billion in 2019 and is expected to grow to approximately $18 B by 2027. The figures show a CAGR (Compound Annual Growth Rate) of 14.3% for the forecasted time period of 2020 to 2027.

What is the Know Your Customer (KYC) System?

The Know Your Customer (KYC) system is closely linked with the financial sector because it discourages cybercriminals from exploiting the system. According to AML/KYC standards, all businesses- gambling platforms, neobanks and more must verify the identities of their clients.

Significance of KYC Verification

The KYC verification procedure plays a critical role in the establishment of a stable financial system. Cybercriminals are always on the lookout for loopholes in the security protocols in order to exploit them for their benefit. KYC verification system fulfils the need for a foolproof security procedure and facilitates effective fraud prevention.

Know Your Customer authentication system not only minimises identity theft but also data privacy violations, account hackings, and money laundering cases. One reason behind increasing fraud cases is the poor authorisation system on digital platforms. To tackle the issue, all financial service providers and other companies must execute client identity verification during the onboarding process. Such a progressive approach guarantees both fraud prevention and compliance with AML/KYC regulations.

The alarming news of the Panama paper leaks made the global KYC regulations stricter than before. FinCEN (Financial Crimes Enforcement Network) is a regulatory body in the USA which made amendments to guidelines to counter money laundering and improve the client identity verification system. The recent changes closed the loopholes in the security protocols of all financial organisations.

The Process of KYC Verification

The AI-backed KYC system is more efficient than the traditional system deployed in mainstream businesses. The KYC Verification process is as follows.

Data Collection

This is the first step in the KYC authentication process that obtains personal data from the end-users. The software instructs the client to provide personally identifiable data at the time of registration.

Submission of Proof

In the second step, the system instructs the client to submit secondary pieces of evidence to authenticate the client’s data. This phase eliminates any doubts about information and only forwards authentic information.

Data Authentication

In the third phase, the system identifies the document template and evaluates it against different checkmarks. This step is critical to ensure zero manipulation in the given data. After comprehensive validation, the OCR software extracts information from records. Data extraction can happen in two ways, they are below.

  • The first approach uses an Optical Character Recognition system that automatically captures data from client’s records and assesses the authenticity of the data
  • The second technique is manual (without OCR) data entry into the system. In this step, the AI-backed IDV system authenticates manually entered data against the information on the consumer’s documents

KYC Compliance Laws in the USA and Europe

The regulatory body in the USA, FinCEN, demands that both clients and financial organisations adhere to the guidelines to reduce illicit activities such as money laundering. According to the guidelines, businesses must create a risk-based profile of every customer and report any apprehensible financial activities to the global regulatory bodies.

The Role of Bank Secrecy Act of 1970

The purpose behind the BSA of 1970 was to discourage the fraud attempts of fraudsters from exploiting the legal financial system. It declared that it was the responsibility of businesses to maintain transaction records of their clients and promptly report suspicious transactions to the concerned regulatory bodies. If clients make a financial transaction exceeding $10,000, the customer must submit suitable documents. Moreover, the Act defined that all businesses must execute customer identity authentication during the onboarding process and perform continuous monitoring of clients’ profiles.

The Function of the Anti-money Laundering Act (AMLA) of France

The Anti-Money Laundering Act (AMLA) of France clearly specifies the rules of client identity verification for financial service providers. According to the federal act, financial organisations must take active steps to combat money laundering and terrorism financing cases. It must be done by exercising due diligence processes depending upon the profiles of clients.

Companies can perform Customer Due Diligence (CDD) or Enhanced Due Diligence (EDD) on the credentials of their customers. CDD is a basic review process whereas EDD goes more deeply. EDD is conducted on the clients’ profiles that have high risk linked with their profiles. They are usually politically exposed persons (PEPs) who are frequently involved in money laundering cases.

Conclusion

Finally, the application of the KYC verification solution safeguards all industries. The KYC system demands its users to provide personally identifiable information to protect them from fraudsters. The KYC system also evaluates the risk linked with all clients. For ensuring compliance with the latest KYC/AML standards, the use of AI & ML algorithms can help all businesses. The system ensures data safety and the avoidance of heavy financial penalties. Various regulatory bodies in the USA, and Europe ensure stability in the system by combating financial fraud and terrorism financing cases. Therefore, the KYC verification system is an ideal approach for fighting identity theft in the modern world.

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Researcher, Fraud Preventer, Traveller, Reader, Writer, Thinker :)

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Candice Spencer

Researcher, Fraud Preventer, Traveller, Reader, Writer, Thinker :)