By Derek Smith Jr
The fraud industry is booming. A few months before COVID-19 appeared, the Financial Cost of Fraud Report 2019 published: “Fraud is costing businesses and individuals across the world US$5.127 trillion each year.” Moreover, the results of a survey completed by the Association of Certified Fraud Examiners noted that due to the COVID-19 pandemic, fraud experts have observed an increase in various types of fraud. Historically and recently, financial institutions (FI) and designated non-financial businesses and professions (DNFBP) are targets of fraudsters.
Globally, the Financial Action Task Force (FATF) recommendation 10, which was adopted by the FATF plenary in February 2012 and later updated in October 2020, speaks to customer due diligence measures and in particular, “identifying the customer and verifying that customer’s identity using reliable, independent source documents, data or information”. Locally, the Financial Transactions Reporting Act, 2018, Section 8(1) requests that every FI “shall undertake identification and verification measures before opening an account or establishing a business relationship”.
Based on recent press releases by the Financial Intelligence Unit (FIU) within The Bahamas cautioning the public of an apparent real estate scam and the need to ensure robust know-your-customer (KYC) procedures are deployed, this article is a reminder to compliance professionals to not “check boxes” during the customer onboarding process and ongoing customer reviews.
There is general acceptance that there are a multiplicity of ways to identify a natural person. The Appendix B of the Central Bank of The Bahamas Supervisory and Regulatory Guidelines allows two items from Category A, one of which could be “a passport (from any jurisdiction)” as a requirement “to open a deposit account, become a signatory on a deposit account or access a service provided by an SFI”.
To appreciate “not checking the box” as it relates to customer identification and verification, I implore risk and compliance colleagues to deploy refresher training for key stakeholders surrounding the verification process and identifying red flags. Based on the above, I will touch briefly on identifying fraud in a passport.
Passport security features
Security features are built into most passports. They may include holograms, complex background print, unique ultraviolet features, textile features and transparent holograms. There should be careful consideration when reviewing the passport. Ensure those data barcodes that are normally found at the bottom of the personal identifiable information (PII) page match throughout the document. Additionally, the photo should be a straight-on and have not veered to the left or right in the face. To mitigate the risk of accepting a fraudulent passport, employees should be trained on comparison material at least annually.
The passport photo and FOG passports
Studies completed by Robertson et al (2017) quantified the acceptance of morphed passport photos in the absence of a real comparison photo. Moreover, research has concluded that modern passports now incorporate counterfeit prevention measures. Fraudsters are now moving to fraudulently obtained but genuine (FOG) passports. In this passport fraud scheme, a person with a true passport submits a renewal application with the photo of someone who seems similar to the client and the passport is wrongfully issued to the person. Although there is training available, even the best results have shown an error rate of 10 percent.
In short, a significant threat to national security and a substantial reputational and financial risk comes from using fraudulent passports as identification documents. It is crucially important that careful attention is taken when reviewing documents instead of just acknowledging that a document has been received and not expired.
Derek Smith Jr is a Top 40 Under 40 leader; the compliance officer at Higgs & Johnson, a leading law firm in The Bahamas; and the former assistant vice president, Compliance & Money Laundering Reporting Officer (MLRO), at an international private bank. He is also a CAMS member of the Association of Certified Anti-Money Laundering Specialists (ACAMS) and an executive member of the Bahamas Association of Compliance Officers.