Contents:

• What is Money Laundering
• What are the 3 Stages of Money Laundering
• Placement
• Layering
• Integration
• Examples of Money Laundering
• IDMERIT AML Solutions for Businesses

What is Money Laundering

Money laundering is a complex method of converting a large amount of illegally gained profit into lawfully acceptable form. The term ‘money laundering’ is derived from the idea of cleaning, i.e., laundering ‘dirty money’ into white money, for its integration into the financial system.

Money Laundering is considered a serious punishable offense involving all sorts of people, from corporate to street offenders. The proceeds of crime sources include felonious activities like narcotics trafficking, bribery, corruption, terrorist financing, human trafficking, etc.

What are the 3 Stages of Money Laundering

Let us discuss what are the 3 stages of money laundering. Since money laundering is a premeditated crime, it comprises i. placement, ii. layering, and iii. integration steps to make dirty money seem legitimate and bring it to the economy.

Placement

For money launderers, placement is the most vulnerable stage wherein the dirty money is surreptitiously introduced into the economy as monetary instruments or as direct deposits into the bank accounts. In the case of bank account deposits, smaller deposits below threshold levels are made to subvert reporting.

Since the money origin is illegitimate, placement involves the maximum risk. All jurisdictions worldwide have instituted stringent cash deposit measures to conform to Cash/Currency Transaction Reporting (CTR) filing obligations.

There are several ways of placing illicit money into the financial system, like loan repayment, gambling, fake invoicing, foreign exchange, and blending funds. Concurrently, money launderers exploit cash-intensive businesses that promote easy money movement, for instance, car washing, check cashing services, gaming, etc.

Opening foreign shell organizations or trusts and transferring cash below custom thresholds overseas to conceal the beneficial ownership is an intricate placement scheme that is difficult for the AML authorities to get hold of.

Layering

Once the money is placed into the bank in the first stage, the layering process disguises the illegitimate money source by maneuvering transactions and accounts. The purpose is to make it cumbersome for the authorities to follow the audit trail involving a series of domestic and off-shore transactions made using the different channels of payments.

Purchasing and selling expensive, luxurious goods – like land, jewelry, painting, etc. – is an example of layering in money laundering and is, in fact, the most favorable method for financial criminals to make use of their illicit funds.

One of the complex layering methods implies a series of irrational international transactions especially covering the jurisdictions that allow shell organizations and private banking. Abrupt holding company takeovers and real estate investments could also be set as pertinent examples here.

To move large amounts of proceeds of crime, money launderers hire professional bookkeepers to assist in fund transfers across international jurisdictions. Online remittance and crypto payments have aggravated the situation, especially with the ease of buying and selling cryptocurrency criminals misuse the exchanges to layer the ill-gotten funds and cover up their source.

Integration

Integration defines the final money laundering stage, wherein the illegally obtained money is returned to the legal financial system after completing the placement and layering stages. The criminal proceeds get washed off and integrated into banks and financial institutions as clean money.

Common integration tactics take in selling off expensive and luxurious items bought during the layering stage. Other instances are cash outflows from shell organizations, including fake payroll pay-outs, loan disbursement to shell company directors, shareholder dividends, etc.

Examples of Money Laundering

Drug trafficking is one of the most serious money laundering threats worldwide today. The narcotics industry is completely illegitimate and cash-intensive. Other examples of money laundering are human trafficking, arms trafficking, smuggling, bribery, corruption, etc.

Terrorist financing is a widely prevalent nuisance, and online payments and cryptocurrencies have intensified the situation. Many terrorist organizations today misuse digital finance to transfer terrorist funds across borders.

Other examples of money laundering comprise white-collar crimes such as corporate embezzlement and investment rip-offs, including insurance and mutual fund scams.

It must be noted that Trade-Based Money Laundering (TBML) is one of the most excruciating crimes, which is extremely difficult to trace and establish in front of the law. Today, Trade-Based Money Laundering (TBML) covers almost $2 trillion worth of global trade. Common TBML methods that money launderers exploit are over-under and multiple invoicing, over-under and inferior shipment, fake or phantom shipment, and shell company trading.

IDMERIT AML Solutions for Businesses

It is a general notion that anti-money laundering policies are meant for the banking and financial sector. But, in fact, all regulated non-financial industries like remittance, accounts, legal, insurance, investment, fintech, etc., now fall under the scope of AML-CFT obligations.

At the same time, regulations in high-risk sectors like cryptocurrencies, third-party payment processing, forex, casinos, gambling, etc., call for enhanced diligence methods to combat money laundering and terrorist financing threats arising from the ease of international transfers offered to individuals and merchants.

Combatting money laundering is a global effort; IDMERIT extends tailormade AML Solutions that operate in tandem with national and international AML-CFT guidelines. Contact IDMERIT IDMaml consultant and book a demo to understand more about AML requirements for your business.

The post Money Laundering Explained: What are the 3 Stages of Money Laundering appeared first on IDMERIT.

• Fintech and Money Laundering Pain Points
• Why Fintech AML Compliance is Important
• AML in Fintech-Associated Risk and Challenges
• How to Select an Effective Fintech AML Solution

Anti-money laundering, AML in fintech has several risk mitigation requirements, and fintech AML compliance holds equal gravity as compliance in conventional financial institutions. Fintech is one of the fastest-growing industries that has been rising at a meteoric rate in terms of technology, usability, and revenues.

The word ‘fintech’ is extremely broad, and its scope is still unknown to many. Fintech chiefly includes mobile banking, digital banking, crypto trading platform, decentralized finance (DeFi), payment apps, mobile wallets, lending apps, crowdfunding, insurance, and trading apps.

Be it e-wallet, lending, trading, etc., all have one common feature, i.e., they deal with user onboarding and transaction processing in volumes. Hence, financial technology or fintech businesses have absolutely no escape from anti-money laundering (AML) and combating the financing of terrorism (CFT) regulations.

AML in fintech is also essential as financial technology faces huge competition from traditional financial services, and there is constant pressure on fintech businesses to follow AML-CFT guidelines, overcoming all the challenges and frictions coming in the way of achieving optimum fintech AML compliance.

AML in fintech

Fintech and Money Laundering Pain Points

Modern-day financial miscreants always look for platforms with high transaction volumes and mass payment processing options. Hence, fintech is the most convenient platform for criminals, and more and more money launderers today prefer laundering illicitly gained money via transaction aggregation, also known as transaction laundering.

Fintech money laundering also involves channelizing money by misusing e-commerce platforms for fake payments. For instance, many fintech and money laundering methods are carried out by camouflaging banned products or services beneath a front site or a legitimate-looking site. Fintech and money laundering nuisances thus go hand in hand. At times, the process is extremely difficult for the authorities to capture to bring the perpetrators of the crime to justice.

Why Fintech AML Compliance is Important

Financial technology has achieved its new zenith with advancement and sophistication in technology, user experience, and global internet capacity. However, this comes alongside an ongoing risk of identity theft, financial fraud, and terrorism threat. The fact is that innumerable financial technologies are sprouting at unprecedented levels, and since fintech is mainly technology-based, they face much pressure to remain fraud-proof. AML in fintech is an emerging regulation, and regtech firms are offering special fintech AML solutions for those startups that find it challenging to cope with fintech money laundering.

AML in Fintech-Associated Risk and Challenges

The financial technology methods are extremely fast and huge in capacity, making money launderers exploit the fintech platforms while keeping pace with its technological advancement. For instance, fintech payments are fully remote over the internet. The financial miscreants leverage the virtual nature of the payments, take advantage of its anonymity, and conceal their identities to perform high-level frauds linked to identity thefts.

Secondly, speed has been directly linked to user experience in fintech. However, fraudsters often take advantage of this feature by exchanging large transactions across domestic and international accounts, even before the authorities can respond to the alerts and initiate an investigation. Experienced and sophisticated fraudsters get away with huge illicit money transfers in a jiffy, even before the risk team can determine whether they should file a suspicious report to the concerned state authority.

Third-party payment systems have spread sporadically in the form of apps across phones, tablets, and computers, paving the way to money muling, smurfing, and structuring illicit money to the point that it is untraceable. It is extremely important for the fintech AML compliance team to monitor and understand the crime pattern constantly and scrutinize the payment vulnerabilities to outpace the AML fintech financial crimes.

How to Select an Effective Fintech AML Solution

Fintech is fast growing and equally competitive; fintech payments are preferable to those users and merchants looking for speedy transactions and faster receivables. Fintech payment platforms, be it digital banking, crypto trading, payment app, or e-wallets – mainly all process user payments in batches to speed up the account settlements. Money launderers take advantage of this process and exploit the blindspots in fintech AML compliance, making the industry extremely vulnerable to aggregating batch transactions.

AML fintech noncompliance could cost businesses huge financial penalties or even bring them to the brink of permanent closure. IDMERIT offers IDMaml, a world-class fintech AML solution with end-to-end fintech AML compliance functionality. IDMaml extends individual and business identity verifications; sanctions, PEP, adverse media screening; and transaction monitoring all on one platform.

IDMERIT’s custom-made fintech and AML solution is an all-in-one payment risk mitigation platform for companies requiring bulk payment batch processing daily. For companies seeking an optimum fintech AML solution, contact IDMERIT AML fintech connoisseur and understand the complete nitty-gritty of fintech and money laundering risk mitigation procedures today.

The post AML in Fintech: A Guide to Fintech AML Compliance, Challenges, and Solutions appeared first on IDMERIT.

• Why is AML in the Payment Sector required?
• AML Transaction Screening
• AML Transaction Monitoring
• Challenges in AML Transaction Monitoring
• Selecting the Best AML Solution for Payments

Why is AML in the Payment Sector required?

AML in the Payment Sector has an inevitable role in mitigating the risk of transaction laundering, the online form of money laundering currently posing the most imminent cyber threat. Payment processors must exert due diligence during merchant onboarding and transaction processing and remain vigilant during the complete payment processing cycle. Payment gateways and payment processing businesses owe enhanced anti-money laundering measures to the banks and financial institutions they are linked to, as any negligence on the security part while aggregating the payments might lead to a financial and reputational loss of the payment entity as well as the financial institution.

Anti-money laundering, or AML, in the payment sector has a broad scope, and there are two core technological components for risk mitigation in this field. The first is AML Transaction Screening for verifying merchants against the global sanctions listing to determine the risk levels they brought to the payment business. The next is AML Transaction Monitoring, an AI-ML-based engine to monitor merchant behavior and activities and their transaction risk levels.

As payment aggregators process mass transactions, a due merchant onboarding process to ascertain the risk levels of the merchants is an important degree of AML-CFT execution. Drafting terms agreement with the merchant, a thorough examination of the business by the designated compliance officer, AML training for the onboarding division staff, and continuous merchant review as part of the due diligence are all important steps to achieve compliance for AML in the payment sector.

AML Transaction Screening

Screening merchants against the global sanctions database eliminate the risks of doing business with individual and entities detrimental to the AML-CFT standards. High-volume transaction merchants bring the maximum revenues to the payment gateways and processors, but this should not come at the cost of illicit money laundering activities many high-risk businesses might be involved in. Politically exposed persons (PEPs) and adverse media screening are the next two important screening phases to accomplish the requirement of AML in the payment sector.

A more advanced and comprehensive AML Transaction Screening has multiple security features for pre-screening, merchant KYC and identity verifications, background checks, and past transactional record proofs. Website content analysis and compliance security checks are the screening tools for underwriting the merchant credit risk.

AML Transaction Monitoring

Recently, the significance of live transaction vigilance has grown manifold, and even the international AML-CFT regulators, like the FATF and EU AMLD, have emphasized AML Transaction Monitoring. The regulators maintain that filing Suspicious Transaction Reports (STRs) and Suspicious Activity Reports (SARs) is the most substantial part of AML risk mitigation obligations.

The AI Machine Learning algorithms build a logic to relate the live data from transactions with the static customer data from CRM. In keeping with the pre-defined logic, the business transactions must match the thresholds set at the time of merchant onboarding. Different merchants have different payment thresholds depending on the transaction volumes, nature of the business, and country of operation.

This whole AML Transaction Monitoring automation is hence operated via a detection engine. The engine is built on a rule-based scenario model. It senses whether any merchant transaction or activity poses a risk to the AML-CFT security standards of the payment provider. The system sends an alarm as soon as a threat is determined, and the compliance team must review the alert. Any suspicious or threatening behavior or activity must be filed with the concerned authorities in the form of Suspicious Transaction Reports (STR) and Suspicious Activity Reports (SAR).

Challenges in AML Transaction Monitoring

False positives have been considered the biggest challenge. It is equally time-consuming and affects the business bottom line as genuine merchants often feel harassed and choose a different payment vendor instead because of excessive friction. However, the primary challenge that the payment providers find is to accomplish a frictionless integration of the AML Transaction Monitoring solutions in the existing organizational infrastructure. A comprehensive AML solution for payments with an easy cloud-based API solution doesn’t require additional hardware. It is much more scalable for integrating into the payment gateway and processing systems.

Thirdly, transaction laundering is a growing form of online money laundering and currently stands as the most significant challenge or threat to the payment industry. In transaction laundering, legitimate-looking merchants sell illegal goods or services via genuine-looking sites; the technique is highly sophisticated, and capturing it requires an advanced AML solution for payments.

Selecting the Best AML Solution for Payments

A cutting-edge solution for AML Transaction Monitoring comes with dual Know Your Merchant (KYM) and Know Your Payment (KYP) features. IDMERIT offers global payment providers its flagship IDMkyX AML-KYC and Identity Verification products.

IDMkyX is a complete one-stop solution to the requirement for AML in the payment sector. To learn more about AML Transaction Screening and AML Transaction Monitoring, please schedule an IDMkyX demo with our AML professional to learn more about our AML solutions for payments.

The post The Inevitable Role of AML in the Payment Sector and AML Transaction Monitoring Best Practices appeared first on IDMERIT.

• International AML-CFT Standards
• The U.S. Bank Secrecy and PATRIOT Acts
• The U.K. POCA Act and FCA Compliance
• The EU AMLDs and eIDAS Guidelines
• COAF and BCB Identity Verification Compliance in Brazil

In the past two decades, the concepts like global AML regulations and identity verification compliance have begun to gain much attention, mostly in the wake of the 2001 United States terror attacks that brought in laws such as the US PATRIOT Act, making the identity verification of individuals and businesses compulsory as part of AML-CFT measures.

This article spotlights how international organizations like FATF, EU AMLD, and sanctions bodies like OFAC eventually became prominent with important overhauls in identity verification requirements for banks and regulated sectors to combat the growing nuisance of money laundering and terrorism financing.

International AML-CFT Standards

The Financial Action Task Force (FATF) is an international AML-CFT policy-making body that sets global AML regulations. The 40 FATF AML and 9 CFT Recommendations are the pillars of international AML CFT standards. The 40 FATF AML Recommendations comprise guidelines on customer identity verification, risk-based KYC, Sanctions, PEP, and confiscating of assets.

Alongside verification of individuals and entities, FATF underscores the gravity of transaction monitoring and setting up Financial Intelligence Units (FIUs) by each FATF member nation. The financial and obligated institutions must monitor their customer transactions in real-time and submit Suspicious Activity Reports (SARs) and Suspicious Transaction Reports (STRs) to the state FIU for advanced scrutiny.

To combat the growing money laundering threats at the onset of virtual assets/cryptocurrencies, FATF has set forth Crypto Travel Rule to ensure the origins and movements of virtual currencies/tokens are monitored to combat money laundering predicate crimes linked to anonymous crypto transactions.

In addition to FATF, other international identity verification compliance-setting bodies observe identity verification requirements in banking and financial institutions. These institutions are the Wolfsberg Principles, Egmont Group of Financial Intelligent Units, Basel Committee on Banking Supervision, and FATF local chapters known as FATF Style Regional Bodies (FSRBs).

The U.S. Bank Secrecy and PATRIOT Acts

In the United States, the 1970 Bank Secrecy Act (BSA) forms the core of AML-KYC compliance; over the years, the BSA Act has evolved from time to time. The two most important thresholds for AML reporting under the BSA mandate are the Currency Transaction Report (CTR) and Suspicious Transaction Report (STR).

In the United States, the US PATRIOT Act 2001 mentions the state’s identity verification requirements, such as the Customer Identification Program (CIP), Customer Due Diligence (CDD), and Enhanced Due Diligence (EDD) for individuals and organizations.

The Bank Secrecy Act (BSA) authorities work with the Office of Foreign Assets and Control (OFAC) to impose various domestic and international sanctions on individuals, trade, and organizations. On the other hand, the Financial Crimes Enforcement Network (FinCEN) acts strategically with the U.S. AML authorities to disseminate BSA regulations.

The U.K. POCA Act and FCA Compliance

In the United Kingdom, KYC, CDD, and Transaction Monitoring measures are the three-core AML compliance that regulated businesses must follow. Proceeds of Crime Act, POCA 2002 defines all money laundering predicate crimes in the country. Additionally, the Sanctions and Anti Money Laundering Act, SAMLA 2018, gives the U.K. AML authorities the right to impose prompt sanctions against non-abiding entities and potential high-risk individuals.

The Financial Conduct Authority (FCA) is an important regulatory body that sets and examines the banking and financial sector’s AML compliance program in the U.K. The FCA works with Her Majesty’s Revenue and Customs (HMRC) to set AML-CFT standards for all the non-financial regulated sectors in the U.K.

The EU AMLDs and eIDAS Guidelines

Within Europe, the European Union (EU) Anti-Money Laundering Directives (AMLDs) are followed by the member states. The EU AMLD sets shared AML regulations based on regional typologies, and these guidelines are mandatory for the member nations to comply. The EU AMLDs recommend important AML-CFT guidelines, including risk-based intelligence, virtual assets rules, Politically Exposed Persons (PEPs), bribery, and corruption measures.

The EU adopted eIDAS guidelines in 2014 to homogenize digital identification and electronic signature and to ease inter-European business processes. The electronic IDentification, Authentication and Trust Services (eIDAS) brings remote video identification compliance for digital reforms in the EU and establish the region as a ‘Digital Single Market’.

COAF and BCB Identity Verification Compliance in Brazil

Money Laundering crimes linked to narcotics trafficking have been extensively prevalent in Latin American nations. The Brazilian Central Bank (BCB) works with the Conselho de Controle de Actividades Financieras (COAF) in Brazil, the largest South American economy, to bring AML reforms. The COAF is the main AML-CFT authority in Brazil that guides identity verification requirements, sanctions, PEP, adverse media, and transaction monitoring compliances to the financial and obligated sectors.

To learn more about international AML-CFT standards and your industry identity verification compliance, you may contact our IDMerit AML-KYC compliance officer. Thousands of businesses worldwide use IDMerit products and services; we ensure our clients always keep up with the global AML regulations and remain AML regulatory compliant with national and international standards.

The post Major Global AML Regulations and Identity Verification Compliance appeared first on IDMERIT.

Contents

• What is KYT – Know Your Transaction 
• KYT is the Future of KYC
• Why KYC isn’t Enough
• Which Industries Need KYT
• KYT and Transaction Laundering
• Know Your Transaction (KYT) in Cryptocurrency
• Important KYT Regulations
• IDMkyX: The X Factor

What is KYT – Know Your Transaction

Know Your Transaction (KYT) is a derivative of AML Transaction Monitoring and refers to examining both fiat and crypto financial transactions. KYT is considered the future of Know Your Customer (KYC) as merely identifying individuals and businesses isn’t enough today. There is a growing need to examine the onboarding clients’ transaction activities continuously. Transaction Monitoring or KYT is essential to determine money laundering, fraudulent activities, or suspicious behaviors, sometimes as serious as a mass proliferation of weapons or drug trafficking.

Certainly, the Transaction Monitoring method applies to both fiat and cryptocurrency; it cannot be denied that the KYT gained its prominence with the advent of cryptocurrencies, as because of the anonymous nature of crypto transactions, the investigative authorities have to follow the provenance of transactions to track fraud rather than following the identities behind it. Thus, it is indisputable that KYT has become the new KYC.

KYT is the Future of KYC

The fintech and international regulatory experts perceive that Know Your Transaction (KYT) is the future of KYC. The rising adoption of cryptocurrency has further amplified the scope of KYT as it gives institutions the aptitude to break down and structure crypto transactions for AML monitoring and risk mitigation. KYC is identifying and verifying the authenticity of individuals and businesses; performing due diligence based on the risk factors they bring to the institutions that offer services to them. While KYT is a step further, programmed to drill down the granular datasets of client transactions based on their risk profiles and detect bad or fraudulent transactions they perhaps perform.

What is KYT

Why KYC isn’t Enough

The identity world is constantly shifting, and institutions must keep up with continuous due diligence on their client base. At a global level, there is an ongoing deliberation wherein institutions are trying to realize why KYC isn’t enough to deter financial fraud and that they would now require KYT as part of AML measures. Businesses must understand that Know Your Customer (KYC) is one of the most vital of all AML procedures as it fulfills the onboarding procedure of verifying ID documents, proof of address, and beneficial ownership.

However, one may still argue that KYC isn’t enough as there must have ongoing due diligence in the process to ensure client risk levels in the long run. Altogether, all these AML activities must be achieved without compromising the customer experience. Hence, KYT Transaction Monitoring has probably been weighed as the most sought-after method, wherein individual and business activities are monitored in real-time without creating extra hassle for the clients. Clients are only approached when a transaction hits a red flag.

KYC and screening against PEP, Sanctions, and Adverse Media give fundamental profiling on the onboarding clients. Nevertheless, KYC is a static approach lacking an advanced investigation to monitor client transactions and estimate their risks. KYC and screening procedures rely heavily on publicly available data; the information could be outdated, manipulated, or completely made up. There are instances when institutions have even lost potential valuable clients due to false positives and inaccurate red flags.

At the same time, the Know Your Transaction (KYT) method leverages identifying transaction laundering activities that involve illegal, suspicious events. KYT Transaction Monitoring program reveals the true business activities of the clients; it brings data-driven conclusions by examining transactions in real time. Based on patterns and traits derived from the raw transaction data and relating the same with the nature of the business, red-flag indicators are derived on location, payment velocity, timing, originating bank, etc.

Which Industries Need KYT

Every industry today that deals with mass onboarding and bulk transaction processing of clients would require Know Your Transaction (KYT). It can be said that KYC and screening procedures provide identity insights. At the same time, KYT gives transaction insights on bits of information that could otherwise be difficult to follow without proper techniques. Thus, KYC and KYT offer a comprehensive AML risk mitigation solution, in which KYT programs are always custom-built per industry requirements. The customization is based on the transaction type, i.e., cash or card payments, SWIFT transactions, inward/outward remittance, payment using trade finance instruments, third-party payment processing, etc.

However, the term KYT has recently become more synonymous with crypto AML, as in blockchain and cryptocurrencies, the focus is more on the transaction than the identity. Here, the authenticity is attributed to the transaction history linked to patterns, not the blockchain clients. KYT has become more prominent in banks and financial institutions that serve digital assets or blockchain clients. With the introduction and adoption of the FATF Travel Rule, it’s now inevitable to complement KYC due diligence with the KYT efforts to complete the compliance measures related to crypto exchanges and VASPs.

KYT and Transaction Laundering

Transaction Laundering is an online form of money laundering. The mechanism is rather skillful as it involves shell website operations to disguise fraudulent activities from the AML regulators. Transaction Laundering involves a front legitimate-looking site with visibly clean advertising, but the website sells illegal/prohibited products or services via a camouflaged or shell website in the background. This type of money laundering method deceives the banks and credit card networks as they assume to be processing the payments for a legitimate site.  KYT Transaction Monitoring has tremendous potential to examine uncanny merchant activities and their behavioral patterns to unearth prohibited ecommerce websites disguising their products or services from the authorities via ingenious Transaction Laundering schemes.

Know Your Transaction (KYT) in Cryptocurrency

It is now apparent that Know Your Transaction (KYT) is an offshoot of KYC, and it’s only when the two work in conjunction that the customer risk mitigation process is complete. Particularly in the Blockchain industry, the KYT in Cryptocurrency checks suspicious wallet addresses, large buying or selling cryptos, anonymous crypto exchange activities, etc.

Since KYT is the KYC of Blockchain, the crypto AML process also comprises flagging sanctioned individuals or entities, filing irregular asset transfers crossing thresholds, continuously monitoring dark markets, and halting possible scamming activities and misusing of cryptocurrencies.

Important KYT Regulations

The Know Your Transaction (KYT) monitoring system aims to assist the national AML authorities and Financial Intelligence Units (FIUs) in timely actions against money launderers, miscreants, and lawbreakers. The KYT Transaction Monitoring programs are based on international AML standards, including payment reporting thresholds and red-flag indicators, as set by Financial Action Task Force (FATF) 40+9 AML-CFT Recommendations, EU Anti-Money Laundering Directives (especially the 5^thAMLD) and other such international organizations. The international AML standards are mainly integrated with fines and imprisonment set by national laws pertinent to money laundering and financial crimes.

The financial transactions are monitored in real-time, using predetermined programming algorithms to track suspicious behavioral patterns. It is on the part of the Money Laundering Reporting Officer (MLRO) of the regulated institutions to report the identified fraud and criminal transactions to the state FIUs which further investigates the data-driven reports and takes sufficient actions against those individuals or businesses accountable for such activities. The recent FATF Travel Rule suggests continuous tracking of transactions involving various cryptocurrencies for Virtual Assets Service Providers (VASPs). The FATF Trave Rule calls for appropriate KYC due diligence and risk scoring of crypto users and digital asset investors.

IDMkyX: The X Factor

Boost your KYC efforts with IDMkyX KYT from the brand of IDMerit. Understand the importance of KYT Transaction Monitoring on Blockchain and AI-based Machine Learning technologies.

Explore various vigilance possibilities for your business, and abide by the latest FATF, AMLD, and your national AML-CFT guidelines with IDMkyX. Book a free Know Your Transaction (KYT) consultation and clear your doubts about why your KYC capabilities are incomplete without an effective KYT Transaction Monitoring compliance program.

The post Know Your Transaction (KYT) – What is KYT and Why KYC isn’t Enough Today? appeared first on IDMERIT.

Contents

1. Why is Transaction Monitoring Important?
2. AML Transaction Monitoring – The Flow of Events
3. Transaction Monitoring Software in Today’s Digital Milieu
4. FATF Recommendation Mentions of SARs and STRs
5. Red-Flag Generation Via Machine Learning Algorithms
6. Potential Transaction Monitoring Red-Flags
7. Transaction Monitoring and Client Screening Solutions

Why is Transaction Monitoring Important?

With an increasing number of touchless payment methods overwhelming the market, risks and financial crime experts are on the go with introducing extra vigilant AML methods of risk mitigation. As a result, AML-CFT compliances like KYC, due diligence, Sanctions screening, and Transaction Monitoring have emerged as inevitably important compliance standards. In addition, there are regulatory penalties for AML non-compliance, and filing suspicious reports is a crucial part of fulfilling AML obligations.

An end-to-end Transaction Monitoring solution analyses client transactional activities and matches them with their historical data and onboarding profile to determine the risk levels. In this blog, we will discuss why Transaction Monitoring has become the need of the hour and various peripheries involving transaction tracking and reporting suspicious activities to avert serious money laundering and terrorism crimes. 

AML Transaction Monitoring – The Flow of Events 

• Transaction Monitoring fulfills the AML-CFT, KYC, and due diligence requirements of the financial and obligatory non-financial institutions. 
• It’s an ideal AML system that monitors the transaction patterns of businesses on rule-based, preset scenario models.
• The engine generates an alarm every time an activity trespasses a rule. 
• The Transaction Monitoring analyst then scrutinizes the transaction pattern, generating a Suspicious Transaction Report (STR) or Suspicious Activity Report (SAR). 
• The SARs and STRs are then filed with the respective state’s Financial Intelligence Unit (FIU), which takes necessary actions to determine whether there is a threat. 

Transaction Monitoring Software in Today’s Digital Milieu

An effective Transaction Monitoring Solution must protect all financial and non-financial institutions using non-face-to-face methods for client onboarding and payments. Banks, money service businesses (MSBs), payment gateways and processors, legal, accounts, property agents, and insurance fall under this ambit.

For banks and financial institutions, Transaction Monitoring covers cash payments, deposits, withdrawals, ACH payments, wire transfers, currency exchange, credit extensions, UPI modes, and national and international payments. In addition, with an increasing number of Virtual Assets Service Providers (VASPs), suspicious transfer monitoring calls for both fiat and cryptocurrency modes of payments.

FATF Recommendation Mentions of SARs and STRs

Transaction Monitoring, also known as Client Screening, is an inevitable responsibility that any obligatory business must accomplish to meet national and international regulations. The Financial Action Task Force (FATF), in its 20^th Recommendation, describes the importance of the Suspicious Activity Report (SAR) and the Suspicious Transaction Report (STR) as part of suspicious report filings related to Transaction Monitoring. The FATF mentions instant SAR and STR filings from regulated institutions to FIUs and financial authorities.

Any delay in SAR and STR filings may invite threats to the AML-CFT safety standards of the enterprise and the state. Therefore, irrespective of the scale of the transaction, the institutes must report all untoward transactional incidents without delay to deter grave money laundering or terrorism financing threats. Therefore, in number IV of the FATF CFT Recommendation IX, reporting suspicious transactions related to terrorism has been made compulsory for financial firms.

Red-Flag Generation Via Machine Learning Algorithms 

A comprehensive Transaction Monitoring system scans the financial activities in real-time; hence any suspicious behavioral patterns breaking the preset rule and scenario model are tracked/caught in real-time. For example, suspicious money transfers, unexpected inflow or outgoing cash, vague foreign payments, uneven business profits, etc., raise automated AML alerts.

There are rule-based prehistorical datasets and scenario models, and the engine is mostly customized to suit business-asset monitoring requirements. An AML Transaction Monitoring system also provides legislative solutions and screens the clients against sanctions, embargos, blacklists, and other watchlist data sources.

Potential Transaction Monitoring Red-Flags 

• Payment transactions exceeding preset thresholds within the system
• Transaction frequency over a particular period 
• Uncanny behavioral pattern, sudden inflows or outflows of payments 
• Transactions made with people, organizations, and nations are mentioned in the OFAC, HMRC, UN, EU, or other Sanctions lists.
• Transactions unmatching with the client product, onboarding profile, and historical data
• Client showing a high risk on the current Adverse Media updates 
• Business relations with high-risk countries
• Politically Exposed Persons (PEPs) are prone to money laundering and corruption owing to their powerful positions. Transactions to and fro PEPs are subject to tightened scrutiny. 

Today, most financial and other regulated firms rely on Artificial Intelligence (AI) based Transaction Monitoring systems on combating money laundering and terrorism financing. Machine Learning powered AI algorithms determine suspicious transaction patterns by screening bulk data within seconds. Alarms are generated whenever the system detects anomalies in the activity patterns. False positives are continuously sifted in the patterns to figure out the final red flags considered to be crimes and to be filed as SARs and STRs. 

Transaction Monitoring and Client Screening Solutions

IDMerit extends IDMaml & IDMkyX

An all-inclusive Transaction Monitoring mitigates money laundering risks related to fraud, terrorism financing, funding weapons of mass destruction, drug trafficking, bribery, corruption, and identity theft.

IDMerit’s state-of-art AML Compliance Program IDMaml offers broad-spectrum Transaction Monitoring Solutions to businesses that require mass-onboarding and big-scale transaction tracking solutions. Avail customizable Transaction Monitoring solutions, set your own dynamic rules and red-flag scenarios, and test them in our sandbox environment.

You may also book a demo for our premium IDMkyX product AML-KYC range of solutions and avail yourself of complete customized, end-to-end AML-KYC and Transaction Due Diligence solutions for your business.

The post The Importance of Transaction Monitoring and SAR-STR Filing for Anti-Money Laundering Compliances appeared first on IDMERIT.

1. Scope and Industry Requirements
2. Types of Online Verification Methods
3. Face Recognition vs. Face Comparison Technology
4. Global Identity Verification Regulations and Standards
5. Similarities With Other Products (CIP, CDD, EDD)
6. Identity Verification – Red-flag Checks
7. FATF Guidelines on ‘Non-Face-to-Face Onboarding

Scope and Industry Requirements

Identity Verification to fight financial crime and limit fraud – As part of AML/CFT regulations, Online Identity Verification has evolved significantly over time. Whether healthcare, travel, insurance, fintech, or cryptocurrency, today’s industries would require identity verification services to verify their businesses and customers.

With remote culture on the rise, the global RegTech industry is racing to bring well-designed Identity Verification software to the know-your-customer (KYC) and know-your-business (KYB) market niches. When we speak of substantiating an identity, the initial impression is that of biometric verification for face recognition. Biometric face recognition techniques run checks to ascertain a person is indeed the person he claims to be. The idea is to confirm the government-issued IDs to distinguish the real from the fraud. From the commercial point of view, whether it’s insurance, lending, or account opening in banks or other payment institutions, the faster the remote onboarding process, the higher the client acquisition and retention rates.

Types of Online Verification Methods

After Biometric face recognition, the next comes the document ID proof that banks, fintech, and government agencies use to evidence crucial agreements, asset papers, financial statements,

DocuSign, etc. Other more commonly used identity verifications are –

1. Users sign up to their accounts, and answer security questions (Knowledge-based authentication or KBA);
2. Users validate tokens (Two-factor-authentication aka 2FA);
3. The Credit Bureau-Based Authentication (CBA), wherein the information is pulled from the identity data stored with the credit bureaus; people with no credit history, new immigrants, etc. are excluded;
4. The Database ID method uses online and offline databases to identify and assess individual risks, but this method cannot prevent identity theft owing to the proliferation of fake identities.

Face Recognition vs. Face Comparison Technology

It’s important not to confuse Facial Recognition with Facial Comparison technology. Facial Recognition technology ensures that a real-time image has no match rate with the crime datasets; this is an important aspect of AML/KYC compliance standards. Liveness detection is an integral part of real-time facial recognition to decipher falsified records, masks, pictures, etc. Advanced real-time face recognition systems with inbuilt cameras and slick user interfaces are in vogue. But, even such technologies with AI/ML algorithms need to corroborate their level of accuracy.

Face Comparison, on the other hand, determines the biometrics of a real-time face in conjunction with the pre-verified government IDs of the person.

Global Identity Verification Regulations and Standards

There are various regulations revolving around individual and business Identity Verification. Each nation sets its standards, and member nations follow common international standards for international cooperation on AML-CFT measures. Some of the dominant Identity Verification standards are as follows –

eIDAS — Adopted on 23rd July 2014, eIDAS is a revolutionary guideline for digital identification and electronic signature in Europe. It brings the ease of doing business within the EU; eIDAS stands for electronic IDentification, Authentication, and Trust Services. It homogenizes digital identification across Europe to help businesses acquire customers remotely. The rule also brings the concept of remote video identification to meet eIDAS compliances. The EU is eventually shaping up as a ‘Digital Single Market’ after integrating Anti-Money Laundering (AML) with the eIDAS regulations.

5AMLD – The 5th European Directive on Money Laundering 2015 was set up to address the EU’s AML-CFT legal and technical compliance issues.
The 5th AMLD on AML and KYC compliance aims at digital finances, cryptocurrencies, prepaid cards, wallets, and gambling services. Video-based identification and biometric authentication for face-to-face recognition are much emphasized here. To bring more transparency in fighting ML-TF, the 5AMLD –

• talks about accurate Identity Verification data protection of natural and legal persons,
• mandates precise customer beneficial ownership records by the obligated firms,
• puts crypto exchanges and crypto wallets under the ambit of financial institutions, asking them to follow similar AML-CFT norms. The directive gives FIUs the right to retrieve KYC documents of the crypto users from the exchanges and wallet providers,
• calls for enhanced due diligence measures for trade with high-risk countries, failing which the requisite institutes are subject to risk penalties,
• needs compulsory KYC checks for prepaid cards crossing €150 for physical and €50 for remote payments,
• advises its members to maintain a clear PEP enlisted individuals, offices, and international organizations.

EU’s 6AMLD 2020 focuses more on penalizing the ML-TF accomplices; the regulation has widened its scope to include cybercriminal and environmental offenders and money-laundering conniving legal entities.

The USA Bank Secrecy Act (BSA) and PATRIOT Act – In the U.S., the Financial Crimes Enforcement Network (FinCEN) is mostly responsible for implementing BSA and PATRIOT Act regulations on identity verifications and due diligence. The FinCEN collects and monitors data from over 27,000 financial institutions. FinCEN also regulates the KYC, KYB, and KYT standards for customer onboarding and monitoring in banks and other obligated financial institutions.

In the wake of surging global terrorist attacks, the 2020 U.S. Anti-Money Laundering Act (AMLA) calls for beneficial-ownership verifications as an integral part of the customer due diligence for individual and business identity authentication across the United States.

In the U.S., the Office of Foreign Assets and Control (OFAC) defines individual, trade, and political sanctions to protect the nation against AML-CFT threats. In addition, regarding cryptocurrencies, the U.S. financial authorities, FinCEN, and OFAC root for FATF’s Travel Rule on VASPs and crypto exchanges for tracking and verifying anonymous and cross-border crypto transactions.

Similarities With Other Products (CIP, CDD, EDD)

Know Your Customer (KYC) in the US PATRIOT Act encapsulates the following –

Customer Identification Program (CIP) – Verifies customers using a government-issued ID document; also known as Know Your Customer (KYC).

Customer Due Diligence (CDD) – Assesses customer risk levels for protection against terrorists and law offenders.

Enhanced Due Diligence (EDD) – Detects customer suspicious behavior and deeply analyzes high-risk customer activities.

Continuous Monitoring – Ongoing monitoring of customer activities and finding out suspicious patterns in activity or transactions.

Identity Verification – Red-flag Checks

There are various provisions to verify false, stolen, high-risk business and individual identities. Potential red flag investigations under relevant individual/country sanctions, PEP, and adverse media listings —

Sanctions List

There are national and global sanction governing bodies like OFAC in the US, Financial Conduct Authority in the UK, FATF greylist and blacklists, plus EU Directive’s AMLD. Additionally, there are trade, economic, political, individual, organizational, and community sanctions at all levels. Sanction lists run-check the identity to assess the identified risks and possible ML-FT threats, including potential arm proliferation, terrorism financing, or drug trafficking rackets.

PEP List

Political Exposed Person (PEP) lists include powerful individuals, close associates, and family members; moreover, influential offices and organizations also fall under the PEPs ambit. It’s essential for financial and other obligated institutions to countercheck any possible
money laundering red flag with PEP list screening. Any financial crime, large-scale bribery, or corruption rows could be averted with effective PEP checks. PEPs are subject to enhanced due diligence because of their high-level allegiances toward the political and corporate world.

Adverse Media

Adverse media search plays an effective role in flagging high-risk customers. The research involves finding negative media records and crime data of individuals or organizations. For example, there are adverse media tools to unearth financial fraud, violence, narcotics, e-crime, law misconduct, trafficking, sexual misconduct, civil crime, and other legal offense records. These records could be electronic media, newspaper articles, renowned blogs, government publications, etc.

FATF Guidelines on ‘Non-Face-to-Face Onboarding

FATF recommends sophisticated biometric and document verification technology for digital customer onboarding. In addition, in its ‘Guidance on Digital Identity, FATF propagates the importance of individual online verification for safer digital financial transactions.

FATF Recommendation 10th on Customer Due Diligence (CDD) is the foundation of this guideline. Digital Identity Verification is vulnerable to security breaches, and FATF advises financial institutions to opt for a risk-based, sufficiently reliable approach while confirming online identity. FATF doesn’t rule out third-party reliance on regulated entities for secure onboarding of customers. The benefits of FATF’s Guidance on Digital Identity.

• It promotes no-contact account opening in times of global pandemic, thus controlling physical human interactions at banks and other institutional branches.
• It sponsors financial inclusion opportunities for the world’s unbanked and underbanked.
• It empowers the concept of a secure digital customer journey with an end-to-end digital
  process.
• As part of Digital ID Verification, the guideline roots for techniques like credentials authentication, auditable electronic signatures, eco-sign, etc., for improved customer experiences while maintaining security and regulatory compliances.

One digital identity concept for all financial products and services prospectively results in 90 percent onboarding cost reduction for financial institutions and other obligated entities.

The post The Scope of Online Identity Verification from a Technological and Regulatory Perspective appeared first on IDMERIT.

With the rise of digital identity security and the explosion of alternative ways to validate ID, automated KYC finally became a reality. Automating customer identity verification, risk screening, transactions, and background checks have been a long-time coming. For many customers and business entities, automated KYC solutions have been a welcome addition to frictionless customer onboarding. However, as businesses continue to be fined for not meeting AML compliance regulatory obligations, many have discovered that all digital KYC solutions are not even meeting basic customer due diligence.

Why You Need Automated KYC Solutions?

The first thing you need to know about automated KYC is that it’s not new. In fact, it’s been around for a while. The difference now is that it’s easier than ever to use and adapt these solutions to your specific needs. Most automated KYC solutions are designed to help you verify your customers, which involves collecting and verifying their personal details, documents, and background information.

A key component of KYC verification is Customer Due Diligence (CDD) or Enhanced Due Diligence (EDD) for high-risk customers and business entities. Customer due diligence is performed as part of a Customer Identification Program (CIP), which can use biometric technology to verify identity. Biometric technological solutions can use a variety of methods to verify the identity of customers, including facial recognition, fingerprint scanning, iris scan, voice recognition, and in some cases, behavioral biometrics.

Customer due diligence, and in some cases enhanced due diligence, needs to be performed before providing a product or service to ensure that the person using the product is who they say they are. With the help of biometric authentication, real-time identity verification of an individual or business entity is possible without requiring them to provide additional information. This removes the need for customer due diligence investigators to manually verify the identity of a business entity’s Ultimate Beneficial Owner (UBO), which in turn reduces the cost and burden of performing enhanced due diligence.

With automated KYC solutions that include biometric authentication and other Artificial Intelligence (AI) directed methods for smoother customer onboarding, the cost and burden of customer due diligence can be significantly reduced. Automated KYC solutions can not only reduce the amount of time it takes to complete a transaction but also reduces the amount of human interaction that is needed. In turn, this reduces the amount of customer dissatisfaction and refunds.

How does AI Affect Automated KYC and AML Compliance?

Artificial Intelligence is an important part of our future. Through more manageable Application Programming Interface (API) protocols, artificial intelligent programs can improve communication, security, growth, or monetization of your systems. APIs can be applied to log-ins, bookings, and third-party payment processors, and work on larger platforms such as Twitter and Google maps. As a result of different API protocols, AI can have almost limitless creative capabilities and implementations that allow institutions and citizens greater online protections and freedoms.

According to Nanonets, manual reviewers cannot guarantee 100% accuracy on whether a photograph or a signature is fake or in their data entry processes. Once KYC data is compromised due to improper adherence to security policies, the AML compliance penalties given by your local Financial Intelligence Unit (FIU) will be very stiff — up to 2% of global annual revenue, in some cases. And with new regulations arising in Japan and the last update to the Bank Secrecy Act, you can’t trust that your manual reviewers will be on par with all the needed changes in a timely manner.

You may know automation is required for a productive KYC verification process, but do you know how you automate can make a difference in customer experience and actual AML compliance. Document verification is a basic requirement for standard customer due diligence and should be part of your automated KYC solutions. For business enterprises, like large corporations, global identity verification of the owner cannot suffice. Especially, if ownership isn’t as clearly defined as with sole proprietorships. Seeking out the ultimate beneficial owners can be complicated by proxy-sold shares and unknown beneficiaries. UBOs can own, control, or profit from a business and they must be identified when conducting financial transactions.

AI reduces and streamlines all the bureaucratic procedures involved in your CIP by making global identity verification, document verification, and the entire KYC verification process painless and transparent. Instead of requiring customers to provide personal information, perform a background check, and provide documents, digital KYC solutions give you the ability to identify and verify customers without the need for human interaction. This not only saves you time and money but also helps you build a better customer database, which in turn helps with enhanced targeting and personalization for marketing and sales.

Challenges with Automated KYC

Not all digital KYC solutions are created equal. And this is why how you automate is so crucial to meeting your AML compliance regulatory obligations. According to the Financial Action Task Force (FATF), your automated KYC solutions need to perform these main tasks to meet AML compliance standards.

• Real-time Identity Verification
• Document Verification
• Transaction Monitoring
• Risk Screening and Assessment
• Watchlist and Sanction List Screening
• Inhouse CIP Supervision and Independent Auditing
• Global Identity Verification of UBOs
• Data Protection
• Digital Identity Management for Regulatory Reporting and Suspicious Activity Reports (SAR)

And that is the beginning of the challenges customers and business owners face when trying to fulfill their AML compliance regulatory obligations. KYC verification and AI individually come with their own challenges. In the case of KYC, the issue of creating a comprehensive CIP that checks all the boxes for AML compliance and customer experience while avoiding high AML compliance costs.

Then on the side of the technology that powers your digital KYC solutions, it may not fully validate ID, verify documents or even manage your customer database effectively. That’s because many available automated KYC solutions, don’t perform all that is required to meet even basic customer due diligence. Few even consider the importance of protecting your customer database, risk screening, and UBO identification. And next to none cares about SAR, independent auditing, and regulatory reporting.

This happens because several companies that provide KYC as a service, only do so with either Robotic Process Automation (RPA), Intelligent Document Processing (IDP), or extremely limited task-based AI. This means their digital KYC solutions can only perform one or a few robotic tasks. So when it comes to creating a cohesive customer onboarding process and electronic KYC (e-KYC), it will be near impossible for the processes to be smooth or even remotely meet AML compliance.

Benefits of Automated KYC Solutions

With an extensive automated KYC or e-KYC solution, you are not only guaranteed AML compliance, but you can reduce AML compliance costs as well as protect your business from fraud, money laundering, and terror financing. One primary benefit of using an automated solution for KYC verification is that it allows you to verify a customer without requiring them to provide additional information. This shaves up to 80% off of customer onboarding time and has allowed financial institutions to increase their total number of onboarded clients per annum according to Nexus Frontier.

Enhancing customer experience with automated KYC solutions can reduce onboarding costs by 70%. According to Reuters, 85% of corporations that did not have a good KYC customer experience, resulted in 12% of their customers changing banks. This means that to retain your current customer base and build new ones, you need to be able to process payments as quickly and smoothly as possible.

According to a 2019 study conducted by Forbes of 302 senior executives surveyed, 92% said that employee satisfaction had risen as a result of intelligent automation initiatives. Easing AML compliance costs and the burden of KYC verification by removing 80% of manual KYC could save firms £8 billion per year according to Encompass Corporation. And that’s not even including what is possible with biometric authentication of UBOs or other environmental benefits.

The average customer turnover rate for online businesses is around 76% annually. This means that over the course of a year, your customers will spend a total of 76% less with you than they did the previous year. This is a lot of money that is slipping through the cracks. But with an e-KYC solution, you can save yourself a lot of time and money by retaining as many of your current customers as possible without spending additional human effort to do so.

The above benefits may not apply to all types of KYC. After all, it comes down to having an extensive CIP and digital KYC verification solution. You won’t get all the benefits of an e-KYC solution if you still retain a heavily paper-based operation. With automated KYC solutions, to receive all the benefits it is best to invest fully in KYC as a service with a world-class automated KYC solutions provider.

What to Look For In a World-Class Automated KYC Solutions Provider?

Customers have come to expect to be able to move through the checkout process quickly. They expect to be able to buy your product or service without having to provide any additional information. This is especially true when it comes to investing their hard-earned money. But this also means that you need to be able to process payments as quickly as possible.

And while there are many ways to achieve this, in today’s world, the most effective way is by using a world-class automated KYC service provider like IDMERIT to not only provide digital KYC verification but handle digital identity management as well. We use industry-leading technology based on machine learning APIs to provide frictionless global identity verification. And we’ll help your company fulfill its AML compliance regulatory obligations through real-time identity verification, document verification, behavior, and transaction monitoring during risk screening and assessment, watchlist, and sanction screening while reducing your overall AML compliance costs.

Instead of trying to piece together your customer journey using various robotic tasks online thinking it’s an e-KYC solution, get a truly extensive automated e-KYC solution through our IDMkyc API. When paired with IDMaml, you get a complete AML compliance solution that provides risk assessments and protects your business from fraud while providing a frictionless customer experience. Global identity verification of UBOs is guaranteed with our access to over 500 business and governmental databases around the world.

We monitor over 2000 watchlists and sanction lists for real-time identity verification of potentially high-risk customers like Specially Designated Nationals (SDNs) and Politically Exposed Persons (PEPs). Take the guesswork out of enhanced due diligence with IDMtrust and ensure your business is fully covered for Know Your Business (KYB) with IDMkyb. And don’t forget, all document verification is being done by IDMscan.

Companies like Amazon, which is one of the leaders in the field of biometric customer due diligence, understand why you need to utilize the best AI possible when you need trustworthy biometric authentication. And as industry leaders ourselves in the field of AML compliance solutions, we are trusted when it comes to digital identity management and security which is sorely lacking in the industry. We understand that the customer experience and business processes must come first. Therefore, we cater to microservices that can be smoothly assimilated into your existing business processes.

Or you can save time by speaking to one of our Customer Service Reps about getting the complete IDMkyX platform. Verify anyone through their devices, anywhere across the globe, through the social media platforms and live video anytime they choose to interact with your business. Biometric identity verification of UBOs is only the start. We can even monitor your team and assist in employee onboarding of CIP monitors. Don’t waste time and money on KYC providers that only get a quarter of the job done. Get complete AML compliance certification with IDMERIT.

The post A Complete Guide to Automated KYC Solutions appeared first on IDMERIT.

Difference between Face Verification and Face Recognition

Face recognition and face verification are used almost interchangeably, but they are not the same thing. To understand the differences, one simply has to understand the meanings of recognition and verification. Recognition is all about recognizing the face and verification is about matching an identity to the face.

Maybe the confusion over face recognition and face verification stems from the fact that face recognition has a history and face verification is only a recent term. Because of that history, we know more about face recognition than its descendant face verification. Though face recognition is used to identify and verify a person’s identity, in terms of identity verification solutions, it’s called face verification.

The funny thing about face recognition technology is that a lot of millennials view it as tech created in their era. When in fact, facial recognition research started way back in the 1950s. It was already being used way before the millennials arrived. One thing millennials can take credit for is the various applications for face recognition.

Uses of Face Recognition

As much as many of us admire face recognition as a cute feature on our smart devices, face verification does so much more for digital identity security. However, that doesn’t lessen the risks facial recognition apps put all their users in for entertainment. And with some major corporations refusing to share their data with law enforcement officials, what exactly is your face recognition data being used for?

Global ID Verification

Facial verification systems are installed at airports, borders, and points of entry into countries, states, and regions. As people move through these points of entry and across public spaces, security systems are equipped with facial detection and recognition software ready to identify those who try to evade the system. Due to its cross-border nature, it needs global ID verification capabilities to get the job done.

Real-Time Identity Verification

Law enforcement agencies were one of the first adaptors of face verification and continue to push for its widespread adaptation across the globe in the name of digital identity security. This is why they are always clamoring for access to private corporate facial verification systems to increase match success. Real-time identity verification is a crucial factor for these agencies.

Age Verification

One place face ID verification can be put to good use is on online gaming and gambling platforms. Facial verification systems can protect minors while being a deterrent to bad actors who have a tendency to infiltrate these sites. Age verification will keep minors out of age-restricted sites and reduce the impact of scammers who love to pretend to be kids.

KYC Verification and AML Compliance

Next to global security, automated KYC verification is the best use of face verification. As part of your user or customer onboarding strategy, face verification can be part of your permanent digital identity security system. In banking or other high-risk industries with assets to protect, global ID verification will give your face verification system an added edge in terms of asset protection and transaction monitoring. You can choose to implement your own face verification system (a bad idea) or outsource from a face verification service.

Mobile Face Verification

Do you want to find out who is related to you or not? There’s a face app for that. It’s one of many face recognition apps that perform different functions depending on the algorithm. For instance, popular face recognition apps like AppLock which allows users to unlock their smart device, and FaceAPP which allows them to change their identity can be utilized for mobile face verification.

What your face verification system is capable of will be based on the type of algorithm that guides it. How the data is used will be based on the people controlling the face verification system. And many of the benefits or problems with face verification will be based on the algorithm and the people that control the system.

Benefits of Face Verification

Face verification is rooted in artificial intelligence, the Internet of Things (IoT), and machine learning and when used correctly there are a lot of good things that can come from that. In the last few years, there has been a push into the blockchain which has the potential to redefine face verification and digital identity security. Even without the addition of blockchain, there are still a lot of benefits of using face verification.

• Safer online
• Improved security systems for law enforcement
• Better picture quality with camera autofocus
• Smoother user and customer onboarding
• Age verification
• Automated KYC
• Improved digital identity management

Overall, the convenience of not remembering passwords or looking for keys

In fact, many of the uses of face recognition and the benefits we reap with face verification. The convenience of not having to memorize passwords and the connectivity of global ID verification makes a huge difference in our personal data security and how we do business. Real-time identity verification gives us the ability to validate the ID in real-time and save lives that could have been lost to human trafficking and protect the vulnerable in our society.

Though we love those facial recognition apps that allow us to unlock phones, make silly faces, and play games, improved digital identity management is supposed to be one of the major benefits of face verification. However, unsecured face recognition applications have made digital identity security a challenge. And knowing cybercriminals, it won’t be long until your child’s biometric features can be aged to open his adult accounts.

The Trouble with Facial Verification Systems

Of course, once you are dealing with ever-changing technology, there are going to be a few hiccups along the way. Ironically, what held back the development of face verification was technology, public fear, and proper databases for comprehensive global ID verification. Even with everything in place, face verification can be your best bet for digital identity security or your worst.

Because after all, the human factor is still involved, and with it comes a bit of trouble. One particular irony of face verification is that it can actually end up not matching faces! And while we can expect some technical issues, sadly having the technology used for ill, is something all developers and users must be wary of.

Mismatches and Poor Match Rates

As mentioned before, 100% perfection isn’t expected, but 58% means a child had better chances of identifying that person than that algorithm did. The harsh reality of the facial verifications systems industry is that miss-matches and low match rates do exist. Glitches, settings issues, database access, and compatible software and hardware makes acquiring higher match rates more difficult.

Digital Identity Management

To acquire high match rates, you need access to a database that is credible and has validated images of the individual like the U.S. Department of State. And that is the problem with most facial verification services. No credible database and no access to one. Then there is the added nightmare of improper security around the faceprint data that can lead to leaks, stalking, and identity theft.

Altered or Tampered Images

As the technology evolves there is becoming less and less of an issue with altered or tampered images. However, as technology evolves, altered images are getting more sophisticated over time. Not only that, but masks also as we have been wearing for the last two years, can complicate matters when attempting to match a complete image. Computer Generated Imagery (CGI) allows face recognition app users to alter their faces and that is why most of the data generated on these apps are practically useless, but not harmless.

Bias and Privacy Concerns

There is a lot of concern around the management of faceprint data and rightly so. Even government security agencies can’t guarantee absolute protection. Tech giants like Google and Apple go to extreme lengths to protect personal data even from potential governmental interference. And they may be right in their approach as government agencies have been found in putting their human biases into the system leading to racial profiling and increased miss-matches.

Marketing Data Collection

Research and data are necessary for continued success in marketing. How that data is collected and used is another matter altogether. Imagine walking past a TV and based on the recognition software, you are now bombarded with ads that match your assumed age, race, and gender. That is how far marketing data collection has become and though it benefits marketers and businesses, customers are not fully on board with using their facial images to sell them goods and services.

Face Verification as Part of Your Identity Verification Solution

Despite the fears over privacy, bias, deep fakes, and racial profiling, face verification is already a part of our everyday existence in cameras, smart devices, machine-readable passports, and other forms of face ID. So, embracing face ID verification is not the real issue, using it correctly is. In fact, many of the problems with face ID verification stemmed from its users and applications.

A face verification system is supposed to have a match rate of a minimum of 91%. Anything with an error rate above 9% needs to be re-tested and should not be considered an identity verification solution. Pay attention to the level of human involvement in guiding the application. Too many increases the risk of biases and mismatches.

That’s why our face verification APIs have limited human interaction with no racial demographic segmenting to reduce bias. Control and access to large credible global databases increase our match rates to 95%.

IDMscan is not just about face verification. IDMscan validates documents and when paired with IDMdevice and IDMaml, it is a complete identity verification solution for customer onboarding and AML compliance. Providing real-time identity verification, device fingerprinting, and watchlist screening to identify potential bad actors.

Biometric identification is the future of digital identity security. And though using the last thing that is uniquely yours to safeguard your personal and business data, seems like taking an unnecessary risk, done correctly it can be the highest form of protection you’ll have to date. All it takes is reaching out to an expert at IDMERIT to learn how we can develop a secure face verification system for your business.

Let Us Prove It! Contact us, today!

The post The Importance of Face Verification for Digital Identity Security appeared first on IDMERIT.