Adhering to Know Your Customer regulations is more crucial than ever as equipment financiers increasingly embrace digital solutions and face fraud as a result.
The Know Your Customer (KYC) section of The Patriot Act, which allows law enforcement and regulators to share information more easily, is a federal regulation that requires financial institutions to verify a customer’s identity in order to prevent financial crimes like fraud, corruption, money laundering and terrorist financing.
More than 80% of 135 surveyed professionals in the financial services industry have seen a nearly 14% increase in small- and medium-sized business lending fraud, according to a September report by LexisNexis Risk Solutions.
As fraudsters become more sophisticated, equipment lenders are zeroing in on KYC requirements as they face new challenges in verifying borrowers’ identities, Jody Ray, relationship manager at BMO Bank North America, told Equipment Finance News. He works with KYC and Patriot Act requirements daily.
“I deal with customer information every day that would be a boon to bad actors/hackers if we, as a bank, and I, as an employee, did not take IT protocols and information compliance seriously,” he said.
Online applications come with fraud
The uptick in fraud comes at a time when 90% of financial institutions offer online loan applications and 65% offer mobile applications, according to an August report by digital lending solutions provider MeridianLink.
While online lending brings speed and convenience to the financing process, it also can make identify verification more difficult, Shari Bacsardi, partner at law firm Womble Bond Dickinson, told EFN. The firm’s specializations include equipment finance and government regulation.
“Technology and online applications make everything more anonymous and less personal. And in the equipment finance world, it’s very much a relationship business.”
— Shari Bacsardi, partner, Womble Bond Dickinson
Challenges to KYC compliance include extensive data collection and documentation requirements, but adherence ultimately helps lenders detect and prevent fraud, Ryan Thompson, of counsel at Womble Bond Dickinson, told EFN.
“KYC is sort of an additional check to make sure there’s not fraud,” he said. “I guarantee you it catches fraud from time to time just because you need to prove that this person owns this company. Then you dig into it and you’re like, well, this person isn’t this person who they say they are.”
Keys for KYC compliance
Data tracking and outsourcing to third parties is one way lenders can ensure they’re meeting KYC requirements, Sara Costanzo, partner at creditor rights law firm Weltman, Weinberg and Reis, told EFN.
It’s also imperative for lenders to run their “due diligence” for each transaction, Womble Bond Dickinson’s Thompson said.
“It’s getting the identifiable information that they’re required, running that information, having a process to make sure they’re determining if customers are high risk or low risk,” he said.
Several financial institutions have been hit with cease-and-desist letters for lack of due diligence, he said.
Tightening regulation ahead?
Thompson said he expects KYC regulations to tighten for lenders because “bad guys are getting smarter,” and this could lead to “more comprehensive, more detailed” policies.
However, Costanzo said it’s also possible that KYC changes are a long way off, as regulators are still working to understand the new technologies that both fraudsters and lenders are utilizing.
“When technology evolves so quickly, it takes so long for regulation,” she said. “And it’s a long process for a reason. Because we want to ensure that everything is being done fairly and properly. … So, trying to create more regulation around something that we can’t control on the technology side of it is going to be very difficult.
“How can I legislate something I don’t even yet understand,” Costanzo noted.
