Rising Threat of Financial Crime and Implementation of Online Know-Your-Customer

Society has experienced a thrust technological transformation since this century. Further, the Covid-19 pandemic proved that digitization will continue to increase rapidly. During this era, remote capabilities expanded as the outside world shut down, and many of these advancements flourished even after the pandemic due to their efficiency. Procedures like Know Your Customer (KYC) have greatly enhanced, revolutionizing tasks such as bank account opening or scheduling a doctor’s appointment. 

With the advent of digitization, everyday tasks and work-related activities have become more efficient. However, advanced technology has also been harnessed for illegal purposes. The use of new technology and online procedures is now under threat from scammers who employ ever-more sophisticated techniques to evade the security measures put in place by companies.

From 2021 to 2022, the global rate of fraudulent activities experienced a noticeable surge of 18%. Specifically, in 2022, there was a significant increase of 24% in instances of ID document forgery compared to the 18% rise observed in 2021. Notably, passports accounted for almost 40% of the reported cases among all stamped ID documents, indicating that fraudsters might be focusing on document-related fraud due to the greater difficulty associated with biometric fraud. Fortunately, advancements in security measures such as liveness detection have made it more challenging for scammers to deceive such systems.

Rising Threat of Financial Crime and the Implications of KYC Verification 

Financial institutions, credit unions, e-commerce platforms, and other businesses face significant vulnerabilities as financial crime reaches unprecedented levels. This form of crime holds immense allure due to its potentially lucrative outcomes. As industries embrace digital transformation with the widespread adoption of digital Know Your Customer (KYC) processes, they expose themselves to a broader range of cyber threats and fraud. Consequently, implementing robust KYC verification becomes crucial to ensure optimal security.

Implications of KYC Bypass

If a criminal manages to evade KYC due diligence protocols successfully, organizations may unknowingly become accomplices in facilitating money laundering. It is often associated with activities like terrorist financing, drug trafficking, tax evasion, smuggling, and various other criminal acts. Such circumstances place organizations at significant risk. Failure to comply with global and local regulations can lead to severe reputational harm and financial losses due to substantial penalties. Therefore, KYC transcends a mere verification procedure; it is a compliance standard that every company must uphold.

What is KYC? 

KYC, short for ‘Know Your Customer,’ refers to a process that verifies and confirms the identity and reliability of individuals or entities. This procedure aims to determine if a person or organization is genuinely what they claim to be and if they pose any risks as a customer.

The verification process involved in KYC is quite detailed. Its purpose is to establish the authenticity of customers by answering questions such as: Is the individual or entity accurately representing themselves? Can they be considered trustworthy to engage in business with? These critical inquiries are comprehensively scrutinized by a dedicated KYC analyst.

KYC holds immense significance in the customer due diligence process, as it serves to prevent fraudulent activities and other financial crimes. Moreover, it plays a crucial role in maintaining the overall integrity of the global financial system. Exploiting a loophole or flaw in the KYC process can result in severe consequences for the monetary ecosystem.

AML Screening

Upon completing KYC verification, another aspect of security and compliance known as anti-money laundering 

 regulations becomes relevant. Merely verifying a customer’s authenticity through a one-time process does not ensure their adherence to the law. Therefore, industry-wide implementation of AML screenings is necessary to identify any instances of financial crime once a customer has passed the banking KYC procedures.

This risk mitigation strategy involves establishing transaction criteria. If these criteria are met, the customer’s account is promptly flagged for an internal investigation. In cases where financial crime is detected, the bank must report the incident to the appropriate authorities. Ongoing AML screening indicators include:

  • Transactions exceeding the designated threshold.
  • A high volume of frequent transactions.
  • Unusual or suspicious activities.

Corporate KYC 

Know Your Business, often referred to as ‘KYB,’ is commonly known as ‘corporate KYC.’ It is a process implemented to verify the authenticity of businesses or corporate entities with which other businesses engage. Emphasis is placed on adhering to industry regulations and fulfilling the requirements for verifying the ultimate beneficial owner. The primary objective of KYB is to establish a client base that is both legally compliant and trustworthy, fostering strong and transparent business relationships.

KYC is a Necessity for Businesses

Having explored the legal dimensions of KYC compliance, it becomes evident that efficient KYC solutions are necessary across all industries in the current digital transformation era. This encompasses not only verification but also keeping up with the constantly evolving KYC and AML regulatory framework, which has undergone significant changes to combat financial crime.

Key Takeaways 

The rising threat of financial crime in the advanced digital world calls for implementing robust Know Your Customer (KYC) verification processes. Rapid digitization and technological advancements have brought efficiency to everyday tasks. But they have also opened doors for scammers and fraudsters to exploit vulnerabilities. The global rate of fraudulent activities has witnessed a significant surge, with instances of ID document forgery and passport fraud on the rise

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