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Trusting The Process: Why Effective AML And KYC Procedures Are A Major Business Asset

The meteoric rise of the financial technology (FinTech) industry and the increasing prevalence of online transactions in our daily lives offers a glimpse of a safe and seamless financial future. However, digital finance is still confronted with significant obstacles: the same advances that have improved it has allowed for new forms of digital fraud. 

Businesses that rely on online transactions should familiarize themselves with two key concepts: anti-money laundering (AML) regulations and know-your-customer (KYC)  procedures. As Dave McGibbon, CEO of Passbase–a leader in digital identity verification, specializing in biometric authentication and liveness detection-based KYC solutions–says, “Companies who implement effective AML and KYC procedures will get an early start on shaping the future of digital finance.” 

Keeping Updated on Cybercrime

While great progress has been made in cybersecurity, there remain gaps that malicious actors are able to exploit. The most large-scale cybercrime is money laundering, which is estimated to account for about 2-5% of the global GDP. While often used by individuals to disguise the origins of illegally obtained currency for their own benefit, money laundering is also central in the financing of terrorist activities, making AML strategies a primary concern for many governments

On a more individual level, fraud committed through account takeover (ATO) threatens internet users of all kinds. ATO is a form of identity theft that consists of gaining access to another user’s account and using their information to make fraudulent transactions. This kind of fraud caused $52 billion in total losses in 2021 alone, impacting nearly 42 million internet users. “The sheer scale of this threat shows that one need not be a high-ranking government official or business owner to be concerned about being targeted for fraud,” says McGibbon

Understanding AML and KYC

Companies can take the lead in reversing these alarming trends and building trust with users. Businesses wishing to distinguish themselves in the market will need to ensure AML compliance and implement effective KYC procedures.

AML is a broad category referring to regulations designed to curb money laundering and terrorist funding. AML compliance is especially significant for digital-first companies, as these enterprises tend to be at a greater risk of being targeted by fraudsters. 

KYC requirements are essential to AML compliance. KYC practices refer to the authentication of a potential client’s identity to ensure that they actually are who they claim to be. These programs typically consist of an onboarding process during which the customer provides identifying information that they verify alongside a government-issued ID. Once verified, users typically perform ongoing checks to ensure that they remain in control of their accounts.


Different Nations, Different Regulations 

In the European Union, penalties for AML non-compliance are laid out in the Sixth Anti-Money Laundering Directive (6AMLD), which includes stricter criteria and harsher penalties than the fifth. The new directive has expanded the definition of criminal liability for money laundering from the individuals who directly benefit from it to any “legal persons”–including companies and partnerships–who aid, abet, or incite the process. The directive also raises the minimum jail sentence from one year to four. 

The U.S-based watchdog group FinCEN (Financial Crimes Enforcement Network) has also increased the scope of its regulations in order to curb the fraudulent activity. Like the 6AMLD, FinCEN’s recent suite of regulations has focused on ensuring compliance among third parties to a given transaction. Given the threats that financial fraud poses not just to individuals, but to national security and the integrity of the economy, the organization is paying increased attention to the FinTech and crypto sectors.  

According to McGibbon, “Complying with these regulations is not a necessary evil, but an opportunity to build a more vibrant and trustworthy digital economy. Staying ahead of the cybersecurity curve is a great way to establish strong and lasting relationships with clients of all kinds.”

The Biometric Revolution

One of the main obstacles that most companies face when implementing KYC procedures is striking the right balance between security and accessibility. All internet users are familiar with passwords and two-factor authentication, but these longstanding practices have serious faults: 52% of respondents of a Google survey reported using the same password for multiple online accounts, increasing both the likelihood and the severity of ATO.

Biometric technologies, such as fingerprint scanning and facial recognition, provide clear advantages. However, deep fake technologies have made it so that even facial recognition-based authentication procedures can be bypassed by malicious actors.

Liveness detection offers a solution strong enough to withstand even these highly sophisticated attacks. An expert in this exciting new technology, McGibbon sees it as a potential disruptor: “By requiring users to take selfie videos that monitor voluntary and involuntary movements such as moving your face to fit circles on the screen, or blinking and pupil dilation, liveness detection ensures that an active user is present. It can also reauthenticate returning customers within seconds, providing an unprecedented degree of security without compromising end-user experience.”

Trusting in the Future

While the current trends in cybercrime are troubling, innovations in cybersecurity technology are outpacing these threats. As more businesses adopt these technologies, public trust will increase, ushering in a brighter future for FinTech firms and for all businesses invested in online transactions.

According to McGibbon, the future of digital finance is a bright one: “Liveness detection shows that convenience does not have to come at the expense of security, but can actually enhance it. It’s a great example of how effective KYC procedures can benefit both businesses and consumers.”

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