Why KYC is an effective tool against Digital Fraud in Money Services Businesses (MSB)

MSB services have come to the rescue of many, who can’t access banks immediately and want to transfer money or carry out trade exchanges. So, it surely provides time and place convenience.

We all know MSB services include cash acceptance for a transaction or currency exchange, global remittance services, check cashing outlets, and facilitating payments between payer and provider without the performing KYC verification.

As digitalization flourished, the demand for money exchange services increased, and thus the MSB sector also prospered. Over the last few years, this industry has witnessed monumental growth. At the same time, MSBs have been constantly facing money laundering issues. Besides, it has also been associated with serious crimes such as human trafficking, narcotics smuggling, and terrorist financing.

Many banks have terminated their services of MSB, like Barclays chose to close around 250 MSB accounts a decade ago which may not be the right decision, as it affected the economy of a developing country.

In 2011, the United Nations Office on Drugs and Crime (UNODC) estimated that $1.6 trillion, or 2.7 per cent of global GDP was laundered by criminals.

How Money Service Business is becoming a tool for Money launders

MSBs are vulnerable to money laundering because a small amount of cash movement and just one-off transactions are difficult to trace.

Money launders legitimize their illicit money and fund existing businesses. They even open up a new set-up backed by their illegal source of income. Generally, they amass a large amount of money through criminal activities like Human or drug trafficking, and terrorism. And to make it look clean, they circulate this money using Money Service businesses operations like

• Money transmitters or payment facilitators e.g., PayPal, Western Union, and many other payment facilitators
• Administrators or Exchangers of convertible virtual currencies (CVCs) e.g. Bitcoin exchangers; which may become a challenge to grapple with regulators in the future.
• Currently one of the most popular payment methods is a prepaid card e.g. Payroll cards, General purpose reloadable (GPR) cards, retailers, or websites selling gift cards, mall or hospital cards, and mass transit system cards.
• Traders in foreign exchange e.g., Travelex and similar businesses that trade in or facilitate the exchange of foreign currencies

Thus, Money laundering activities are smoothly blended with various MSB services available in the market.

Let me explain with an example of a drug dealer whose main source of income came from his illegal drug trafficking. To make the government believe that his income was from a legitimate source, he opened up a chain of fast-food restaurants and also hired people for it. Although he was not making any profit, he showed the local authorities he is making huge profits by showing erroneously maintained accounts, prepaid cards, and small daily transactions of the business. To portray such commercial activity, he used MSB services as a conveyance, for bringing inside his illegitimate money into economic transactions.

Most of the time they can successfully mislead regulators and financial services.

The types of fraud in Money Service Businesses (MSB) 

A large number of organized crime groups are operating across the world

The instant money transfer services provided by MSB are appealing to criminals to make their illicit money legal.

Money Laundering

It is the major issue being faced by MSB. In this, the fraudster does multiple transfer transactions, with his illegal earnings, in relatively smaller denominations using a Money transmitter. The source of these funds is drug dealings, human trafficking, or arms and ammunition. Most of the time it is transferred to an overseas location.

Exploiting Currency exchange convenience

Fraudsters exchange low denomination notes from their illegal money for clean higher denomination currency. This kind of high-value note exchange, in any currency, can be a red flag for MSB to screen the transaction for money laundering risk. They break the criminal lump sum cash into multiple low denomination cash and exchange it with high denomination (usually foreign) notes such as the €200 to €500 note.

Cheque Casher enables them to remain unidentifiable

The imposter easily hides his identity by presenting checks to banks. Money launders manage to acquire these checks in exchange for their illegal cash. Which they may present as salary cheques or business sales money or deals.

Few basic measures to be adopted by MSB to safeguard their businesses and reputation

It is essential for Money Service Business (MSB) to examine the customers at the time of the onboarding process and identify any risks factor involved.

Identity Verification

Online cross-check through third-party verifiers the validity of the document submitted by the parties involved

Artificial intelligence

Inspect thoroughly the ‘Personal identifiable information (PII) collected, for red flags like recurring bank default payments or criminal records.

Understand behaviour patterns

Using technology like Biometric face verification and liveness detection one can ascertain if the same person has uploaded the document.

How MSBs can comply with the regulations set by the government for Anti Money Laundering (AML)

• To safeguard against any financial crime MSBs must have Anti-Money Laundering Compliance programs.
• Government authorities across the world have established regulations for AML.
• MSBs who adopt measures to control money laundering incidences, build a good reputation with existing and new customers, and eventually it adds up to the profit.
• On the other hand, any negligence or assistance in laundering activities within MSB business not only invites stringent action by the authority but also ruptures investors’ confidence in the business.

Know Your Customer (KYC) is already integrated with AML compliance. MSBs can reduce levels of fraud and criminal activity at the initial stage itself through AML compliance.

KYC data compilation and apt verification techniques will aid in the detection of red flags, unlawful behaviour patterns, and suspicious activity.

At a later stage, in case of any adverse transaction takes place, then the diligently acquired customer data helps to track down the criminals.