Maximising Security and Fraud Prevention

The pandemic has pushed more companies to use online services than ever before and while the pandemic recovery is well underway, the discussion of online security has only just begun. Countless businesses began implementing new technologies without considering how to secure them properly against online fraud. Now, businesses are scrambling to maximise their security and make sure that their innovative updates do not end up becoming vulnerable points of access for criminal fraud.  

First port of call for businesses—to elevate their strategies and update their tools for quickly detecting or preventing fraud to match the evolving cyber landscape. Phishing e-mails—simple yet effective scams currently targeting the strapped mortgage rate market—continue to plague companies as new insidious threats emerge that are powered by AI. There has even been an uptick in fake job postings being used to collect the personal information of applicants which can be damaging when those posts are impersonating a real company. In the payments industry, Invoice fraud, the fake invoice email scam costing UK businesses £81 million and Irish businesses €6 million also continues to be the proverbial thorn for many businesses.  

Most recently, voice messages are being manipulated to impersonate someone synthetically with AI by using audio clips found online which are now more readily available with options to record Zoom meetings, seminars, conferences, and other webinar content. According to the McKinsey Institute, synthetic identity fraud is the fastest-growing form of financial crime and accounts for 85% of all fraud right now.  

In 2022, instances of identity fraud doubled year-over-year with 79% of forged identities using male personas. In the same year payment fraud increased by 40% and even the e-sports industry has become a major avenue for fraud, now accounting for 2.9% of all fraud cases. Thankfully, implementing optimised ID identification methods such as KYB and KYC techniques have been shown to significantly improve a company’s ability to prevent fraud.  

Obviously, preventing fraud altogether is preferable, but that is harder to guarantee in a society that is becoming more dependent on digital services by the day. As a result, many organisations have had to address the possibility of company fraud and prepare a rapid response plan to mitigate the costs or damages in the event of unavoidable fraudulent activity—especially as global fraud costs balloon to $5.4 trillion. Not only that, but failure to take adequate fraud prevention measures and falling short of due diligence can result in hefty penalties which should make this a priority for every business.   

Optimised ID Identification

Digital ID verification is a process that compares the identity a person claims to possess by sending a text or e-mail message with a link to verify that identity in real-time. Now that more businesses are moving online and 20% of the British population has not even visited a bank in person since the start of the pandemic, improved ID verification solutions that are instant, accurate, and secure are critically needed.  

It is essential for government businesses and the contractors that work with them that have to meet verification standards for Know Your Customer (KYC) and Anti-Money Laundering (AML) requirements that have become stricter in recent years. KYC is just one component of an AML programme. 

Role in Fraud Prevention

The compulsory compliance and identity verification checks help prevent instances of fraud from occurring.  

The KYC verification process helps protect user identity by requiring them to provide proof of their identity when conducting business transactions which, being highly trackable, also discourages illicit activity. Many documents can be used for the purposes of verification such as social security numbers, birth certificates, and driver’s licences, but these are all easily forged for fraudulent purposes which is why the industry has begun using secret password questions instead.  

AML compliance blocks individuals or businesses from hiding their true source of income with the intent to launder their money to fund terrorist operations or other criminal activity. 

Choosing the Right System for Your Business

Over 71% of businesses already plan to add improved ID verification to their anti-fraud strategies. It is important to choose a fraud prevention system that will protect your business, but it can be daunting to choose the right programme that meets your needs. Here’s how: 

Step 1: Identify Security Needs 

The first step is to evaluate what your business needs are for security and authentication. This can include identifying access points that may require badge scanners that allow employees access to restricted areas, or other forms of verification such as uploading documents with their ID.  

Smaller enterprises that are not handling critical data should not waste resources securing information beyond what is necessary, but larger companies will need to choose a system solution that is able to verify identities on a global scale in real time and still maintain compliance. 

Step 2: Determine Verification Requirements 

The next step is to analyse the steps in the verification process to determine the information you will need to verify the identity of your customers or employees. If documents are sufficient then facial recognition or other complicated biometric technology is unnecessary.  

Step 3: Track Employee Behaviour 

The last step is to track the behaviour of employees across mobile and desktop devices to guide whether your strategy should be mobile-first or not. Tracking the verification process can help reveal whether the process is functioning consistently, so you can make sure you are balancing security with providing a smooth functioning work environment for your employees.

Overview of Fraud Detection Techniques  

Know Your Business Techniques

KYB is a due diligence procedure designed to clearly establish the structure and ownership of a company. This process involves collecting any information that identifies the company including its name, registered number, registered office, address of place of business, as well as the personal contact information of senior management, board members, and legal owners. KYB also entails the scrutiny of transactions of business partners and tracking their source of funds in order to ensure they are consistent. 

Other supporting documents that may be collected during the KYB process can include articles of association, governing documents, proof of legal existence such as certificate of incorporation, documents that disclose beneficial ownership structure (articles and memorandum of association), as well as proof of registered and physical address.  

In order to verify beneficiaries—those who directly or indirectly own 25% of the company—documents such as their passport, proof of address, and a declaration of trust may also be required.  

Importance in Fraud Prevention

The KYB process allows companies to determine the authenticity of other entities they work with to ensure they are not being used to conceal the identity of the owner for illegitimate purposes. KYB can also help prevent other common types of bust-out merchant fraud by revealing fake merchant accounts before initiating business with them.  

The KYB process allows for greater transparency between business partners which ultimately leads to a more meaningful understanding of the business relationship and ensures their goals are in alignment. This also allows companies to target desirable business partners that are in compliance more effectively and avoid high risk corporations or companies on sanctions lists. 

Components of an Effective KYB Programme

When entering into a business partnership with a corporate customer, a regulated company must perform CDD procedures according to AML regulations. Businesses are required to retain documents that were obtained during due diligence for five years after a transaction is completed for both individuals and companies.  

These records should contain customer information, transactions, annual reports, money laundering reporting officer reports, information not acted on, compliance monitoring, training efforts, as well as both internal and external suspicion reports.  

The most effective KYB programmes will include regular self-audits and reviews of regulations in the different regions that a business operates in to ensure compliance. 

Know Your Customer Techniques

There are a variety of techniques for verifying customer identity in the KYC process which can include using ID cards, facial recognition, biometric fingerprinting, and verifying documents like bills or mail as proof of address or other personal information. Documents used verify identity during this KYC process can include a social security card, birth certificate, photo ID, driver’s licence, or passport and some institutions require two forms of ID.  

Importance in Fraud Prevention

The right KYC solution will help you decide whether and how to do business with certain customers to help prevent fraud. The ability to verify the authenticity of your customers will reduce the risk your company takes on when doing business with new customers. 

Components of an Effective KYC Programme

One of the main components of the KYC process is the customer identification programme (CIP) which requires that companies obtain four identifying pieces of information from the client including name, date of birth, address, and identification number. 

Customer due diligence (CDD) is one aspect of KYC, but often the terms are used interchangeably. The first phase of KYC is the onboarding process which facilitates the acquisition of new customer information. CDD is the second phase of the process where you verify that the information being entered is accurate and that the person is not pretending to be someone else. CDD also includes an aspect of risk assessment to determine the likeliness that a person would become involved in money laundering.  

There are enhanced due diligence (EDD) procedures that are stricter for addressing those determined to be in a high-risk category.  

Integrating Fraud Prevention and Security Measures

It does not matter whether your business is just getting started with fraud prevention or looking for more advanced solutions to improve your current security strategy—it is always important to stay up-to-date with the latest fraud trends.

Developing a Comprehensive Strategy

A comprehensive fraud prevention strategy should include: 

1. Automation—Embracing tools like automation will be incredibly effective for monitoring massive amounts of customer or business data with algorithms that will contribute to producing more accurate predictive analytics and risk assessments in a short amount of time. 

1. Supervision—Fraud risks can be reduced by creating a strong supervisory system that conducts regular audits with checks and balances. As many as one-in-five cyber attacks come from inside employees according to a survey by Carnegie Mellon. 

1. Restrict Access—Managing risks means limiting access to inventory, sensitive company information, and other valuable intellectual assets as much as possible by separating duties to reduce the possibility of exposure. 

1. Oversee Management Overrides—Executives have more power and responsibility that can be abused for fraud when it goes unchecked and a thorough fraud prevention strategy will address this power by assigning some form of control or systematic scrutiny. 

1. Utilise Background Checks—Hiring policy should require background checks that review criminal records and possible additional credit checks, depending on the nature of the work. Background checks reduce the kind of uninformed hiring that could lead to unqualified candidates with a history of financial irresponsibility who are most likely to commit fraud. 

Committing to a Culture of Cybersecurity and Continuous Improvement Through Training and Reporting

A comprehensive fraud prevention strategy will be about more than just the due diligence process—it requires a commitment to training and making fraud security an essential component of the company culture as well. Your company will benefit from training staff at every level on cybersecurity best practices for essentials like password security, invoice fraud, and phishing campaigns to watch out for which is becoming increasingly important as workplace theft is on the rise.  

The British interior ministry announced plans earlier this year to place the burden on companies to prove that they have taken the reasonable measures necessary to prevent or deter fraud when it is committed by one of their employees. By creating a work environment that supports whistle-blowers and empowering them with insightful industry training, you can ensure your team has the knowledge to report fraud as soon as it arises to not only minimise company losses, but potentially avoid fines for negligence as well.   

A company cannot expect to improve in general if there is not an effective and anonymous system for reporting in place, but it can be especially challenging when it involves sharing sensitive information about a close personal colleague. As many as 43% of all cases of fraud are reported through tips—half of which come from employees themselves.  

Creating a culture of inclusion through training and development with opportunities to advance can also reduce the odds that they will want to look for another job which makes them more likely to become a source of fraud—63% of employees who quit in 2021 cited the lack of advancement opportunities in the workplace. Once employees decide they are on their way out or if they feel particularly disconnected from the company mission then they will be more likely to steal, commit fraud, or fail to report other inappropriate behaviour.  On the other hand, employees may look to commit fraud for the benefit of the business via misleading sales and marketing practices In the UK, plans are underway to make businesses more liable if an employee commits fraud for the benefit of the business or if they fail to deter fraud amongst their employees.  

KYC and KYB measures are great ways to get to know who you do business with, but these fraud prevention strategies will also need to be consistently updated to keep up with changes in business and commerce. This is easier to maintain when cybersecurity is a team effort to not only prevent fraud, but quickly detect it as well. Human behaviour is typically the cause of cyber risk in the first place which means investing in training and not just becoming reliant on high-tech automation with fraud detection algorithms. 

Final Thoughts

Cybersecurity risks are only continuing to grow by day, and navigating this risk environment is challenging for businesses of all sizes—even with the help of advanced tools like automation. For businesses concerned with managing their risk and compliance services behind payment processes, consider partnering with a fintech payments specialist like Freemarket who can provide a fully automated experience with the built-in risk and compliance controls needed to protect against fraud. Contact us to learn more.