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KYC is a Useful Weapon Against Online Fraud in Businesses That Provide Money Solutions

As everyone is aware, Money Service Business or MSB include accepting cash for a transaction or exchanging currencies, providing aremittance services, operating cheque cashing businesses, or facilitating payments between payers and providers without completing KYC verification. The MSB has grown as digitisation advanced the rise in demand for monetary exchange services. This industry has grown dramatically in recent years.

MSBs have also frequently encountered problems with money laundering. In addition, it has been linked to severe crimes like financing terrorism, drug trafficking, and human trafficking. Many banks have stopped offering MSB services. For example, Barclays closed over 250 MSB accounts ten years ago, which may not have been the best move given how it impacted the economy of a growing nation.

However, MSBs are now secured from financial frauds by the use of KYC, or Know Your Customer, process. KYC in banking is now mandatory in India and is a process of identifying and verifying the customer’s identity. Keep reading to learn more about the function of KYC in banking.

How MSB is Becoming a Tool for Money Launderers

MSBs are susceptible to money laundering since it is challenging to track tiny currency movements and one-time transactions. By legalising their unlawful funds, money launderers finance already-existing enterprises. They even start a new business, funded by an illicit source of revenue. They typically amass a sizable sum of money via criminal operations like terrorism, human or drug trafficking. Additionally, they move this money through MSBs that carry out activities like:

  • Money transmitters and payment processors, such as Western Union, PayPal, and others.
  • Convertible Virtual Currency (CVC) administrators or exchangers, such as Bitcoin exchangers, may present a difficulty to regulators in the future.
  • Prepaid cards, such as payroll cards, general purpose reloadable (GPR) cards, stores or websites providing mall or hospital cards, mass transit system cards, and gift cards are currently among the most widely used payment methods.
  • Foreign exchange traders include companies like Travelex and others that deal in or help ease the exchange of different currencies.

Thus, many MSBs in the market are seamlessly incorporated with money laundering activities.

KYC as a Useful Weapon Against Online Money Laundering

Banks do face the risk of being involved in shady financial dealings. That is why banks must complete all KYC procedures in order to avoid the financial and reputational harm that could follow from such situations. KYC in banking is an essential requirement. KYC in banking is required when obtaining a bank locker, applying for a credit card or a loan, etc.

Be aware that banks are responsible for ensuring KYC compliance. If the bank doesn’t make the guarantee, there may be severe consequences. MSBs should have Anti-Money Laundering (AML) compliance programmes in place to protect themselves against financial crimes. Globally, AML is governed by laws that have been enacted by governments. MSBs that implement efforts to reduce money laundering incidents develop a positive reputation with both current and potential customers, which eventually increases profit.

On the other hand, any carelessness or help in money-laundering activities within the MSB firm draws harsh punishment from the authority and erodes the trust of investors in the company. AML compliance already incorporates KYC. Through AML compliance, MSBs can lower instances of fraudulent and criminal behaviour right away. Red flags, illegal behaviour patterns, or suspicious activities will be easier to spot with the help of KYC data compilation and suitable verification processes.

In the future, if an unfavourable transaction occurs, the rigorously collected consumer data will aid in locating the culprits. The current processes for KYC in banking adopt a risk-based strategy to combat financial fraud, money laundering, and identity theft:

  • Identity Theft: Financial firms can establish a customer’s legal identification with the use of KYC. This helps stop identity theft as well as the creation of phoney accounts using falsified or stolen documents.
  • Money Laundering: Dummy accounts in banks are used by both organised and unorganised criminal groups to keep money from narcotics, smuggling, human trafficking, racketeering, and other crimes. KYC in banking restricts their ability to hide assets by distributing funds among many accounts.
  • Financial Fraud: KYC in banking aids in the prevention of fraudulent financial practices including applying for loans using forged or stolen identification and thereafter receiving funding through fictitious accounts.

Benefits of KYC

A crucial to guaranteeing top-notch security for clients among other things is KYC, meaning in order to prevent the data from falling into the wrong hands, UIDAI has created the service to electronically confirm the identity of clients. You should be confident that the information you provide is protected and won’t be misused as only specific UIDAI-authorised organisations can access the data.

Combating financial fraud and identity theft are also functions of KYC, meaning you don’t need to worry at all about any data privacy issues. In addition to this, eKYC is crucial for opening accounts, acquiring financial products, and reimbursing those same purchases.

The Bottom Line

The importance of KYC in banking has risen for practically any entity dealing with money. While banks are obligated to comply with KYC processes and rules in order to reduce fraud, they also pass those requirements forward to the businesses that they do business with.

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