Imagine this scenario – Daenerys Targaryen round 20 years ago bought a money-back life insurance policy. Remember, it was 20 years ago and the documentation process was not strict and meticulous back then. As you guessed, Daenerys had not submitted any proof of age at the time of purchasing the policy as KYC (Know Your Customer) was not compulsory then. As a result, when Daenerys went to claim the policy once it reached maturity, she had to resubmit all her documents.
Luckily, now we have e-KYC (electronic Know Your Customer) which helped faster processing and settlement of her claim. If there was only KYC, the physical verification of the documents could have taken forever.
So now the real question is why would an insurance agency or any financial institution make their customers go through such a painful process of identity verification? Let’s find out.
Why Do Financial Institutions Implement Stringent Identity Verification Methods
So, why do financial institutions such as banks and insurance agencies insisting on KYC or Watchlist Screening or such verification methods? The answer is simple – to prevent fraudulent transactions and money laundering. Anyone could have walked in and claimed the insurance claim taken 20 years ago by Daenerys Targaryen. However, when you have an efficient AI based system to cross verify information provided by a customer, things can become pretty scary for fraudsters.
Global Anti Money Laundering (AML) Regulations
Before discussing how e-KYC and Watchlist Screening help combat fraud and money laundering the insurance industry, let us look at the global regulations put forward by agencies like FATF (Financial Action Task Force) and IMF (International Monetary Fund)
In 1989, FATF put forward an international standard for combatting money laundering. The objective was to promote legally credible finical markets. Today, around 38 countries are members of the organization including India, United Kingdome and the US.
After the tragic event of 9/11, the IMF stepped in to strengthen the already existing AML rules and activities by including Combating the Financing of Terrorism (CFT). AML/ CFT has helped member countries prevent finical fraud and money laundering which can be even used fund terrorist activities worldwide.
It is mandatory for any financial institution to comply with the AML rules and failure to do so can invite fines. For instance, in 2018, ING, the Dutch bank was fined $900 million for failing to meet the Dutch AML compliance. It was unraveled in the investigation done by the Netherlands Public Prosecution Service that the bank’s Dutch branch did not employ any due diligence standards to monitor suspicious transactions.
Setting up rules and regulations is one thing and adhering to them is another one. Insurance agencies, banks and traders, in order to comply with AML/ CFT regulations, are adopting many customer information verification practices. KYC and or e-KYC and watch list screening are the two most popular methods amongst them.
Let us see how they can be used to enforce anti-money laundering.
The Impact Of e-KYC On Mitigating Fraud
KYC or Know Your Customer, as the name indicates is a process that any organization uses to identify its customer. e-KYC makes use of technology for the same process. Countries like India have an Aadhaar based e-KYC system in place where countries like Estonia uses eID. Countries like the US and UK use social security systems issued by the government for verification.
A system like e-KYC not only helps companies mitigate fraud and money laundering but also makes the process faster and paperless. The e-KYC process also aids a financial firm to comply with the regulations set by their government inline with international laws.
Now the question is how exactly eKYC helps combat fraud. In order to know that we need to understand the most common type of frauds in the insurance industry: fronting and money laundering.
Fronting– Fronting is when an insurance claim or policy is taken out by using the details of another person. (For instance, Cersei Lannister claiming the insurance of Daenerys Targaryen using the latter’s details). But using e-KYC this kind of frauds can be busted as e-KYC makes use of digitally signed and biometric based details for verification.
Money Laundering – As the name suggests, money laundering is a way of making money through illegal means including drug trafficking and inside trading. Standard Chartered, one of the biggest banks in the world, was shaken by money laundering accusations. It was accused that the bank was helping the then Iranian government launder around to $265 billion. During the period of 2012 to 14, the bank had to pay $700 million as a fine for not putting in place proper AML compliance measures.
If KYC or e-KYC checks were in place most of these issues could have been identified and avoided. E-KYC verification process makes use of state-of-the-art AI based platforms to carry out multiple checks and it is nearly impossible for an imposter to commit fraud when these screening systems are in place.
Watchlist Screening And How It Helps Combat Fraud
Watchlist screening is a process that facilitates the automated screening of a customer’s records and financial transactions. It also enables insurance and other firms to ensure AML/ CFT and other such compliances. The AI based watchlist screening system can effortlessly and almost instantly perform the below tasks:
- Ensure adherence to compliance
- Implement sanctions after the screening of publicly available sanctions
- Perform comprehensive screening against politically exposed persons (PEPs)
- Screen financial transactions supported by ACH, SWIFT and FedWire protocols
Our Two Cents
Digital solutions such as watchlist screening and e-KYC not only ensure your organization’s legal compliance with various money laundering directives but they also help you effortlessly detect and mitigate hidden, reputational and financial risks. It takes years to build a brand and all it takes is one scandal to break your reputation. As we say, it is better to be diligent today than to regret tomorrow.
About Melissa
Customer data is the lifeblood of your organization. But it goes bad (up to 25% per year). Much of it is incorrect, outdated, or unstructured and fragmented across multiple systems – preventing operational efficiency, successful marketing and sales efforts, and a rewarding customer experience.
For more than thirty years, Melissa has been a leading provider of global identity verification and data quality solutions. Using cutting-edge technology and multi-sourced global reference data, we provide the solutions to support your Know Your Customer (KYC) initiatives, prevent fraud, reduce costs and improve fulfilment – at every point of the data chain.
