The risk of financial crimes and fraud continues to spiral due to the vast space of opportunities provided by technology and digitization in the post-pandemic world. Likewise, money laundering and terrorist financing have become significant threats since the dawn of the twenty-first century. These challenges primarily affect the finance sector due to the high potential of crimes and fraud through financial institutions. Therefore, organizations like banks and cryptocurrency exchanges have devised a systematic procedure to onboard their clients. It lays the foundation on which the client-organization relationship is based. Thus, the document verification process is the initial step to verify clients’ identities. It is critical for fraud deterrence and compliance with anti-money laundering and counter-terrorism financing regulatory laws.
According to statistics, about 70% of financial institutes lost more than USD 500,000 to fraud in 2022. This figure displays the risk of financial fraud posed mainly to banks, as they are the primary financial organizations. All economic activities are conducted via the banking sector, making it the most vulnerable to scams. Potential fraudsters and financial criminals use various ways to achieve their illicit ambitions. Identity theft, impersonation, document forgery, and falsification are the most common techniques to commit financial scams.
For example, a customer can borrow a bank loan using stolen or fake documents. Similarly, a shell company might launder illicit funds to multiple accounts and hide the income source. Hence, it is the need of the hour to combat these alarming circumstances through a swift document verification process. Verifying documents boosts the know-your-customer process of banks and enhances the client onboarding experience due to ensure transparency.
Banks are mandated to perform the due diligence and document verification process on their clients, whether they are individual customers or business corporations. It allows them to assess the level of risk and identify suspicious customers and businesses. Most significantly, it enables them to ensure transparency and security of their organization to prevent any chances of financial crimes, including fraud, money laundering, or terrorist funding.
Thus, understanding the minor differences between the nature of documents required for the document verification process during KYC and KYB is essential. These terminologies refer to the nature of clients getting onboarded and are comprehensively elaborated as follows.
The KYC process revolves around the identity verification of individual customers. It is the first step an organization takes during customer onboarding. KYC aims to check customers’ legitimacy and authenticity of their ID documents. The following verification documents are required during KYC:
- Government-issued identity documents, including national ID card, passport, or driver’s license.
- Tax statements
- Address proofs such as utility bills
- Other documents may include employment credentials
KYB involves verifying the legality of a business corporation. Banks must collect every essential identity verification document before establishing partnerships with business enterprises. It is significant to prevent unwanted facilitation of illegal financial transactions and money laundering. Thus, banks should perform the document verification process of the following:
- Government-authorized license, documents, or registration number of the company.
- All the legal documents and money trails as evidence of the legitimacy of the business firm and to assess its risk potential.
- All details of the Ultimate Beneficial Owner (UBO), who owns the corporation and benefits from its profits.
- Credentials of the top-tier shareholders owning 25% or above shares.
The traditional document verification process entails checking the documents manually. Banks have used these methods for decades before digitization. However, this conventional mode of document verification is inefficient because it fails to detect fake and forged documents. It also requires a hefty budget for material and human resources. Moreover, a manual document verification process is outdated and requires human effort. Thus, it is much more time and capital-consuming. Most significantly, it risks the security of a financial organization because the latter can easily fall prey to scams, fraud, and illicit transactions. Manual processes are much more susceptible to human miscalculations. Furthermore, the customer database is not protected because it is not digitally stored and can be lost easily.
Digitization has enabled the banking sector to enhance its client onboarding, document verification process, and overall efficiency to manifolds. Automated solutions for verifying clients’ documents are the only way to combat fraud. They ease identifying suspicious customers and businesses by instantly detecting false and counterfeit documents. Intelligent character recognition technology is a revolutionary innovation that renders document checks convenient. It is backed by machine learning and can digitize handwritten or typed documents with any layout.
Another advantage of automated document validation is that the data is stored via cloud technology and accessed digitally. Artificial intelligence is widely used to verify documents, eliminating human error risk and narrowing opportunities for financial fraudsters. Likewise, the AI-powered document verification process is time and cost-effective, allowing instant and hassle-free authentication. Overall, the AI-backed document verification process aids in effective AML/CFT compliance.
The document verification process is crucial in checking the authenticating legality of businesses and the legitimate identities of customers during onboarding in banks. It must be digitally optimized for swift fraud deterrence and AML/CFT compliance.