Fintechs these days face stiff competition. This means user acquisition and retention are crucial to success in the market. However, fraudulent activities, including identity theft and money laundering pose a significant threat to the fintech industry. The Indonesian Financial Transaction Reports and Analysis Centre (PPATK) highlights that fintech and cryptocurrency platforms are vulnerable to organized crime due to factors such as remote account opening, rapid transactions, and real-time privacy features. As of February 2022, fraud, including cyberfraud and electronic transaction law violations, is the most prevalent type of crime prompting suspicious activity reports.

Non-compliance with Anti-Money Laundering (AML) regulations leads to severe penalties and sanctions. In Malaysia, the AMLATFA outlines maximum penalties for different crimes, including 15 years imprisonment and a fine for money laundering offenses. Even minor non-compliance can result in a warning letter from the supervisory authority.

As technology advances, cases of fraud and money laundering are increasing, a growing concern for regulated industries such as fintech, payments, and banking. Identity fraud in the cryptocurrency and banking sectors increased nearly two-fold in 2022, while payment fraud rose by 40%.

Combining transaction monitoring, KYC, and KYB for enhanced security

In addition to identity fraud, transaction fraud has become a significant issue in the financial industries. Fraudsters frequently rely on stolen bank cards to commit this type of crime, targeting industries such as financial services, e-commerce, and gambling.

What’s more, the emergence of image and voice AI-generated deepfakes has opened up new avenues for fraudsters to exploit.

Indonesia’s rapidly growing digital economy, spearheaded by e-commerce, has positioned the country as a leader in the sector. However, this growth comes with challenges, as Indonesia ranks among the top ten countries with the highest percentage of identity fraud cases. Though over 95% of the population possesses e-KTP cards linked to a government database of citizen identities and biometrics, the ID card continued to be the most commonly forged document in 2022. This highlights the need for stronger security measures and fraud prevention strategies in the Indonesian digital landscape.

Companies must implement robust verification processes and anti-fraud measures to combat this trend.

Know Your Customer (KYC) verification has traditionally been the go-to method for verifying users’ identities. However, KYC verification alone is not enough to stay compliant with the law and fight fraud. Recently, a more comprehensive approach that combines transaction monitoring, KYC, and Know Your Business (KYB) processes has gained traction in the industry. This integrated method offers a more robust verification system, better equipping companies to mitigate risks and maintain regulatory compliance.

Combining these processes helps financial institutions and other businesses identify potential money laundering or fraud risks faster – and take appropriate action to mitigate them.

Source: Sumsub

Effective anti-money laundering (AML) measures require ongoing vigilance to prevent financial crimes. The onboarding process involves KYC and KYB, verifying the identity of customers and businesses, and assessing their likelihood of engaging in money laundering or terrorist financing activities. Ongoing activities also include transaction monitoring, which involves analyzing customer transactions to detect suspicious patterns.

Together, KYC, KYB, and transaction monitoring form an interconnected cycle of activities that companies must undertake to maintain AML compliance and prevent financial crimes.

The consequences of non-compliance are severe.

In November 2022, the Dubai Financial Services Authority (DFSA) levied a US$1.1m fine against the Dubai branch of Bank of Singapore for multiple DFSA regulation violations, including insufficient AML systems and controls.

The DFSA identified issues in the bank’s AML business risk assessments, client risk assessments, customer due diligence procedures, suspicious activity reporting, and client fund source identification. Additionally, the bank was found to have exceeded its DFSA license by arranging investment deals linked to long-term insurance contracts without proper authorization. The bank has since sought the required permissions from the DFSA.

In the APAC region, China handed out the highest fines, with UnionPay facing a US$9.4m penalty for AML shortcomings. Outside of China, Singapore sanctioned Vistra Trust with an US$818,329 fine for an AML-related violation. Hong Kong fined Commerzbank AZ US$764.6m, although the total fine value and count of AML-related fines decreased compared to previous years.

Evidently, ensuring compliance from the outset is a far more cost-effective approach to conducting business.

The use of AI

The financial industry is increasingly reliant on AI to fulfil important functions such as transaction monitoring, compliance, and fraud prevention. Through AI-powered solutions, financial institutions can identify suspicious transactions, reduce manual labor, and improve the accuracy of compliance and fraud detection. Additionally, these solutions enable businesses to maintain high pass rates and continue to grow while remaining fully compliant and protected against fraud. This is particularly relevant in cases where the number of applicants increases, ensuring both growth and security.

AI makes it possible to monitor a high volume of transactions and recognize patterns in transaction histories and customer behavior, to detect potential money laundering activities. Financial institutions are required to comply with KYC and KYB regulations to prevent financial crimes like money laundering, terrorist financing, and fraud. AI can improve the accuracy of customer identification and verification by analyzing data points such as facial recognition and document authentication.

Source: Sumsub

By detecting patterns and anomalies in transaction data, AI can also help financial institutions prevent financial losses due to fraud.

Combining transaction monitoring, KYC, and KYB verification with AI-powered methods is the most effective way to ensure compliance, reduce risk, and mitigate fraud. Transaction monitoring provides additional security by identifying fraudulent activities such as multiple transactions from the same IP address, large transactions, and suspicious behavior patterns, while KYB verification ensures that businesses are legitimate and not used for illegal activities by verifying their ownership structure.

How Sumsub can help companies address pain points

Sumsub provides a one-stop solution for fintech companies seeking to implement AI-powered transaction monitoring, KYC, KYB, and compliance automation. Its tailored solutions cater to fintech, crypto, gambling, and trading businesses and offer region-specific products like 1click verification for Asian users. By combining transaction and KYC information to calculate risk scores, Sumsub provides more accurate and efficient risk assessment, helping clients protect against financial fraud, chargebacks, money laundering, and regulatory penalties.

Sumsub has proven effective in addressing pain points for companies like hi. Based in Singapore, hi is a fintech company that has created a financial super-app for traditional and digital assets. The app features technological advancements, customer onboarding, and product offerings, such as personal IBAN-incorporated crypto wallets, which bridge the gap between neobanks and crypto exchanges.

hi takes security and compliance seriously, conducts customer due diligence, and adheres to the latest FATF guidelines for KYC. The company is actively seeking licenses in different jurisdictions to become a leading global digital assets platform.

To ensure compliance and verify customer identity, hi relies on Sumsub’s KYC/AML checks, which include ID verification, liveness checks, face matching, email verification, phone verification, and more. Sumsub was integrated through hi’s web and mobile SDKs from day one, making it a reliable solution for the company. hi immediately saw positive results, with onboarding taking less than 2 minutes, and an approval rate of 95%.

“Sumsub enabled us to scale our KYC – verified member base from a couple of hundred applicants to more than 3 million in the span of less than a year. Something that would have been really straining on our limited manpower at the time. Verifying users across multiple regions and locations was equally easy, fast and secure,” said Sean Rach, Co-Founder at hi.

With the increasing threat of fraud and money laundering in the fintech industry, companies must prioritize compliance and anti-fraud measures to ensure long-term success. Click here to learn more about Sumsub.

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