The rise of digital banking and other financial technology has created new opportunities for thieves and criminals to steal and launder money. Financial institutions have kept up by implementing a wide range of anti-money laundering (AML) and Know Your Customer (KYC) systems. Today, the KYC regulatory process is ubiquitous across many nations, and banking institutions who fail to properly verify the identities of their customers face stiff fines and risk losing the ability to conduct business in the states and countries where they are noncompliant.
The emphasis on effective KYC management has become paramount over the last couple of years due to a couple of high profile cases. British multinational HSBC paid almost $2 billion dollars to authorities in the United States back in 2012 once evidence of money laundering surfaced. The bank admitted they did not properly verify details on some account holders, which gave Mexico’s Sinaloa cartel and Colombia’s Norte del Valle cartel the ability to launder $881 million dollars. Just a year later, the Reserve Bank of India slapped fines on 22 banks who ran into issues with money laundering after failing to follow the country’s KYC policies.
Current KYC safeguards focus on the proper identification of customers and strict monitoring of bank accounts. Many institutions collect and store verified identification documents for customers, and then name match the information against databases that are reported to contain the identities of criminals and terrorists. Some create digital profiles of customers, chart out expected financial behavior, and then cross-check transactions for suspicious activity.
However, these types of safeguards have started to become obsolete due to the technological expertise of modern criminals who can hack into financial institutions to steal customer data. Some banks have started to send push notifications, or they’ll use vocal recognition software to verify the identity of customers with smartphones, but these measures have also started to fall short in the face of voice-altering technology.
The most forward-thinking financial entities across the world have started to look towards more sophisticated biometrics to simplify KYC verification and improve security. Biometrics rely on the biological characteristics of a person to verify identity, which can come through fingerprints, vein patterns, iris scanning and facial recognition. Biometrics have become a popular alternative because they eliminate the need for hiring specialized personnel to screen and process identification documents like driver’s licenses or passports. Many biometric processes can be completed in a matter of seconds, making it an attractive alternative to cumbersome and often tedious paper-based verification.
Biometric details are virtually impossible to alter or copy. Information can be easily shared and stored in a digital identification system. India’s Aadharr proof of residence biometric system has enrolled about 99% of its population as of November 2017. Many banks and financial institutions have started to look into biometrics for KYC because they tie real people to real accounts, virtually eliminating the likelihood of creating fake accounts for nefarious reasons.
Companies like Optherium are now taking KYC and biometrics to the blockchain, not just to bring cryptocurrencies in compliance with international regulations, but to provide customers with an innovative yet simple way to protect and access their digital assets.
In the case of Optherium, a high value is placed on the security and privacy of sensitive personal information, and all data is stored on a separate KYC blockchain network, after a third party confirms the validity of identification documents. Users are still able to own their information and retain access to KYC services whenever they want. Rather than just building a system of KYC verification, the Optherium team is creating a larger ‘proof-of-identity’ service where people can also exchange tokens that simplifies the entire KYC verification process. The vision is for people to use their dynamic biometrics to access ecommerce or other websites simply by looking at their device’s camera, instead of a lengthy process to verify personal information through Google or Facebook.
Simplifying and further securing the KYC process is projected to increase liquidity in the lending world since financial institutions will have increased confidence in the customers they are able to evaluate and verify.