In the new digital economy, digital identity is a key component to ensuring security, privacy, and convenience for people and businesses.

Many times, when we speak about digital identity and the benefits /advantages it promises to users we think about faster and friendly user experiences, process digitalisation, real-time transactions, quick identity verification experiences via biometrics. But digital identity promises more, as it can enable transactions where A can find out specific info about B, without A having to reveal all info about it, thus avoiding that (unnecessary) tons of personal data to be passed between parties. With customer consent processes in place, digital identity can also enable wider use cases such as streamlined account opening, shared KYC, and ongoing fraud monitoring.

Overall, within digital identity technologies resides great potential to boost effectiveness of controls and efficiency of compliance by red flagging suspicious transactions and providing financial crime compliance teams with SARs reporting and CDD.

A survey conducted by ACAMS and RUSI revealed the top 5 benefits a digital identity layer encompasses in the fight against financial crime:

  • Supporting the digital onboarding process – as digital identities would overcome a lack of documentation, avoid human error, enable remote onboarding checks, and can be useful also for client exiting.
  • ‘Golden source’ of customer identity – consistent customer ID information supports the analysis of data to better inform red flags and known typologies.
  • Connecting the dots – detecting hidden network relationships coupled with digital identity use in conjunction with other data points such as geolocation data helps detect suspicious behaviour.
  • Information sharing between regulated entities and law enforcement.
  • Digital IDs would improve the quality of identity matching in analysis of bulk Suspicious Activity Report (SARs) data by Financial Intelligence Units (FIUs).

However, the survey also revealed that despite compliance officers desire to use digital identities for financial crime compliance, a lack of standardisation, followed by a lack of guidance, and cyber security concerns are stopping them from doing so.

Benefits explained

Because digital identity enables information sharing among parties, it can support financial crime officers/departments’ goal to modernise enforcement and monitoring of criminal and terrorist financing.

Strictly referring to digital onboarding, digital identity could help to overcome compliance hurdles such as labour-intensive manual checks to verify and authenticate customer identities, to detect the use of forged documents and/or identity theft, customer friction, and costs. As the current COVID-19 pandemic has forced banks to close their branches, and people to work remotely or stay at home due to lockdowns, there have been situations when onboarding checks could not be conducted in person and digital identity solutions helped overcome this challenge and customers could open banks accounts. Furthermore, if we think about innovations around the concept of digital identity such as a decentralised solution, Anne Bailey, Analyst, KuppingerCole agrees that verified and reusable decentralised identities can be used to uplift the security and trustability of user accounts for KYC processes. Shifting most of the KYC process to automated and digital exchange of verified identity attributes can decrease the time and cost for financial institutions.

As sometimes it is hard to track a customer’s activity, especially if its data is scattered in transactions, networks, and multiple data bases, digital identity is a reliable tool for conducting payment screening, ongoing monitoring, and transaction monitoring. Payments beneficiary screening is a control employed within Financial Institutions (FIs) to detect, manage, and prevent sanctions risk. This control is applied to domestic and cross-border payments. However, cross-border payments should be unquestionably screened more for risk and there is more rigour around the monitoring of these types of payments. According to Verity Snelson, Product Manager, Encompass, if the payee or payer is on a sanctions list, the FI must notify the regulator. Failure to do so carries a real risk of regulatory action, often leading to large fines and associated reputational damage. For transaction monitoring the main benefit perceived by compliance officers/banks/institutions, when using digital IDs techs, is having ongoing assurance that their customers are who they say they are.

The data privacy and data protection risk

Data privacy and data protection are a key concern for many compliance officers and Financial Institutions when considering the utility of digital identity technology in financial crime compliance.

Depending on geographies, on where the digital identity solutions are developed, existing data-privacy legislation can allow the use of digital ID, or not (for instance in South America, present laws on data privacy would hinder adoption of digital ID, while in the Middle East existing data-privacy legislation permits the use of digital ID). Overall, as national legislation and technical standards relating to digital identities differ from country to country, especially when it comes to data privacy and security, it is difficult to reach a standardised process for using digital identity in compliance.

Overall, the lack of standardisation of digital identity across the globe, as national legislation and technical standards differ from country to country, especially when it comes to data privacy and security, is the biggest hurdle to integrating the technology in every market their institution operates in.

FATF guidance

The international standard setting body for financial crime controls, the Financial Action Taskforce (FATF), issued the guidance for the use of digital identity in financial crime compliance in March 2020. The guidance aims to assist entities who wish to use digital ID to identify their customers with a high level of assurance.

The primary takeaway from this guidance according to Justin Gage, Principal Consultant, Consult Hyperion is that the robustness and assurance levels of digital identity systems based on FATF guidance can be used for CDD. This decision process can support organisations in properly evaluate the risks involved in digital and remote onboarding, while also leveraging the benefits of streamlined digital services.

All in all, the integration and evolution of digital identity schemes into digital onboarding and ongoing AML/KYC monitoring processes should inevitably lead to meeting compliance and ultimately a better user experience for customers.

Like this story? To learn more about fraud prevention, identity management, digital onboarding and KYC, transaction monitoring, financial crime compliance, regtech, and more, download The Payper’s Financial Crime and Fraud Report 2021 – How to Fight Fraud and Master KYC, Onboarding & Digital ID .

About Mirela Ciobanu

Mirela Ciobanu is a Senior Editor at The Paypers and has been actively involved in drafting industry reports, carrying out interviews, and writing about innovation in payments and fintech. She is passionate about finding the latest news on AI, crypto, blockchain, DeFi and she is an active advocate of the need to keep our online data/presence protected. Mirela has a bachelor’s degree in English language and holds a master’s degree in Marketing. She can be reached at mirelac@thepaypers.com or via LinkedIn.



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