It is commonly perceived that transactions conducted without face-to-face interaction are more prone to risks as verifying the customer's identity becomes challenging. To mitigate this, some institutions may require in-person branch visits for identity verification.
The pandemic has significantly increased the number of customers opting for non-face-to-face transactions, making it crucial to be aware of the necessary precautions for such transactions.
Transactions that do not require physical customer presence are known as non-face-to-face transactions. Internet banking is one such example, which has become increasingly popular due to technological advancements. Personal customer contact services can be costly, leading to a rise in remote transactions.
However, non-face-to-face transactions are perceived as riskier due to the lack of client identification procedures that verify the customer's identity and official documents, including their face. This poses a potential threat as financial institutions never get to meet the customer.
Risks of Online Transactions
Companies conducting business in a non-face-to-face manner may encounter various risks, including the following:
- Increased potential for fraudulent activity: Non-face-to-face transactions provide an opportunity for customers to submit multiple fictitious applications without the immediate risk of detection. The absence of physical documents and the lack of official identification, such as identity documents and signed contracts, pose significant risks.
- Challenges in data verification: The speed at which electronic transactions are processed can make it challenging to verify data before completing a transaction. Due to delayed controls, there is a heightened risk of recording inappropriate or suspicious activities.
Companies working with customers online must establish risk-based policies and procedures incorporating adequate controls. These measures serve two important purposes: ensuring compliance with AML regulations and minimizing associated risks. The specific additional procedures required will depend on the nature and extent of the transactions. Here are a few key considerations:
- Customer identification and independent data validation: Companies should prioritize customer identification and implement additional measures to validate customer documentation. Seeking independent data sources can enhance the reliability of customer information.
- Certification of documents: Depending on the jurisdiction, companies may need to adopt specific measures to certify documents that require confirmatory certification. Compliance requirements may vary, so it's essential to understand and adhere to the regulations of the relevant jurisdiction.
- Assessing payment profiles: Companies can effectively manage risks by considering the payment profiles of their customers. Analyzing transaction patterns and identifying any unusual or suspicious payment activities can help detect potential fraudulent behavior.
Risk-Based Approach To Non-Face-To-Face Customers
A risk-based approach should be applied to assess the implementation of money laundering deterrent measures. This approach should align with the company's understanding of the products or services offered and their risk tolerance for money laundering.
Firms must be flexible in determining which transactions pose a higher risk of money laundering or terrorist financing and establish appropriate systems and procedures to address those risks effectively.
The risk-based approach and AML and compliance measures are critical to a company's operations. Financial institutions face the challenge of millions of dollars being laundered annually. Money laundering often stems from serious crimes such as terrorism financing, bribery, corruption, drug trafficking, human trafficking, and arms smuggling.
Implementing an AML compliance program has become mandatory for organizations at risk. Regulators have imposed specific obligations on organizations to combat financial crimes effectively. Additionally, regulatory inspections of organizations have increased in recent years, with significant fines and penalties being imposed on those who fail to fulfill their AML obligations.
Financial Action Task Force (FATF) Report
According to a report published by the Financial Action Task Force (FATF), online payment methods can be categorized into three groups:
- Online banking: This refers to digital institutions offering online access to traditional banking services through customer accounts held with the institution. However, the FATF document did not specifically cover internet banking in its scope.
- Prepaid internet payment products: Non-credit institutions provide these products, enabling customers to send or receive money through virtual prepaid accounts accessed online.
- Digital currencies: Customers typically purchase digital currencies or precious metals that can be exchanged between account holders of the same service or converted into real currencies and withdrawn.
The report emphasizes the importance of monitoring systems as effective tools for reducing the risk of financial crimes. Such systems should enable providers to identify and address:
- Unusual or suspicious transactions.
- Inconsistencies between customer information and IP addresses.
- Cases where multiple users access the same account.
- Instances where a single user opens multiple accounts.
- Situations where multiple products are financed from the same source.
For products exempted from Customer Due Diligence requirements, monitoring systems should detect when a customer approaches a limit (either per transaction or cumulatively) that necessitates full customer due diligence.
The report acknowledges that setting value and transaction limits can be a robust risk mitigator, making products less appealing to money launderers, particularly when combined with effective monitoring systems and procedures that prevent multiple purchases of low-value cards or repeated use of low-value cards. Mobile payment service providers imposing restrictive value limits have contributed to the scarcity of identified money laundering cases involving mobile payments.
Additionally, the report outlines several red flags, particularly in cross-border operations. To explore these red flags further, it is recommended to refer to the original report for detailed examination.