Electronic Authentication in the Fight Against Financial Crime

Growing concern over the threat of money laundering and identity fraud has highlighted customer authentication as a hotspot for financial service regulators. The UK’s Financial Services Authority (FSA) already provides clear anti-money laundering (AML) guidelines to many organisations in the finance sector, controlling how they process customers. However, the Money Laundering Regulations 2007, which came into force on 15 December 2007, are broadening the regulatory microscope. They will incorporate more industry sectors including auditors, individuals dealing in transactions greater than €15,000 and trust or company service providers.

One of the key aspects of the new regulations is the requirement to undertake ‘customer due diligence’ before entering into a business relationship with an individual, as stipulated under Part 2.7 of the Money Laundering Regulations 2007. This involves verifying the identity of customers using documents, data or information obtained from a reliable and independent source. It is important to establish identity at this point so that the necessary AML checks can be performed with the knowledge that the person you are dealing with is who they say they are.

Traditionally, there was little choice for organisations but to use paper documents such as a utility bill, passport or driving licence to prove that the individual is who they say they are. However, authentication technology is now much more advanced. An identity can be confidently verified electronically against a wide range of data sources in seconds in a process that is much less vulnerable to fraud. So why are 70% of financial services organisations still relying on paper?¹

Breaking the Paper Chain

Using paper documents to verify a person’s identity does achieve the tick in the compliance box. However, evidence suggests that this is not the most customer-friendly process.

Experian commissioned research in 2007 to establish attitudes towards paper-based and electronic authentication. For the research, 1,500 consumers were interviewed and 68% said that providing paper documents, such as passports and driving licences, to prove identity was either inconvenient or very inconvenient. It is rare that each individual will have all the necessary documents to hand, so the customer acquisition process is presented with a stumbling block. Either you ask them to return with the documents or send them via the post. Almost 50% of financial services organisations still do the latter, putting their customers’ data at risk. Should the documents go missing in the post and fall into the wrong hands then they are a prime target for identity fraud.

Seventy-six per cent of customers interviewed in the research said they were unlikely to use a company in the future if it received negative publicity regarding a breach of sensitive customer information. On the other hand, 37% of financial services organisations polled in the survey said that they thought that negative publicity surrounding data security would have no effect on their reputation. In light of the recent HMRC data breach, would businesses have the same attitude if polled again?

Paper-based authentication processes not only affect customer experience but also the bottom line, especially in relation to remote channels such as the Web. A large financial organisation that Experian has been working with reported a 38% decrease in Web applicants when they were required to provide paper-based authentication documents. Then there is the cost of processing and storing documents as part of the audit trail. Staff must be trained to identify genuine articles, especially as the number of forgeries increases. Consumer research conducted by Experian found that 70% of respondents believe that it is easy to forge utility bills and even passports are now easily forged.

The challenge doesn’t stop there though as there are many genuine documents that are being used for fraudulent purposes. The Identity and Passport Service (IPS) had 16,500 fraudulent applications for passports during the 12-month period to September 2006, 10,000 of which went undetected.

A Modern Approach

Electronic authentication is helping organisations to combat identity fraud and money laundering in a way that works for their business. Electronic identity checks verify and validate that the customer is who they say they are in seconds. At a fraction of the cost and without interrupting the customer acquisition process.

So how does it work? An individual’s biographical data, such as name, address, date of birth, etc, is compared against vast data sources. Matches against the data sources are sought and any irregularities in the information provided highlighted. In some solutions, a score is then returned that indicates how confident you can be that the person is who they say they are. Organisations can set their own risk-based limits in their authentication procedures, depending on the type of customer transaction. Customers that score lower than the decided threshold can then be automatically referred depending on the risk they pose. In terms of compliance, organisations are able to provide the regulator with an electronic audit trail that shows how the risk-based decision was made.

An added feature is that information is also screened against sanctions data to check that the individual is not a politically exposed person or has a known history of money laundering. As a result there is no need for two separate businessprocesses to confirm identity and screen for money laundering.

Conclusion

While national and international regulation is forcing organisations to review their authentication procedures, the more savvy organisations have put themselves in the shoes of their customers and have realised that it’s not just about compliance. Tackling fraud and financial crime opens up opportunities for businesses to strengthen their fraud prevention systems and, at the same time, streamline their customer acquisition processes.

The key is to achieve a seamless process for your customer ensuring they get what they want quickly while also peace of mind for your organisation that the interaction took place securely. No wonder then that 40% of financial service organisations plan to move to electronic authentication in the next 12 months.