Quick Tips: Prevent Fraud by Knowing Your Member (KYM)
By Alloya's Fraud Experts
November 14, 2024
Did you know that over 50% of banks, fintechs and credit unions have recently reported an increase in business fraud?1 The numbers are sobering, but your credit union doesn’t have to become another statistic! There’s no time like the present to combat fraud by improving your Know Your Customer (KYC) process. In a nutshell, KYC is a process that seeks to prevent fraud and money laundering by verifying the identity, suitability and risks involved with maintaining a business relationship with your member. All U.S. credit unions are required to adhere to this process. Specifically, the Financial Industry Regulatory Authority (FINRA) Rule 2090 states that financial institutions must use reasonable diligence to identify and retain the identity of every customer and every person acting on behalf of those customers. For the purposes of this article, as we look at KYC in the world of credit unions, we will refer to the process as Know Your Member (KYM).
Why is KYM Important for Your Credit Union?
First and foremost, KYM is essential for preventing fraud at your credit union. By verifying the identity of your members, you can reduce the risk of fraudulent activities. But it doesn’t end there — KYM is also an essential aspect of compliance, as many regulatory bodies require businesses to adhere to KYM protocols to prevent money laundering and terrorist financing. A thorough KYM process also builds trust between your credit union and its members, helping you to foster long-term relationships. Read more for some quick tips on KYM to help you prevent fraud and keep your credit union safe.
Quick Tips for Effective KYM
1. Implement a Comprehensive Verification System
Many fraudsters are masters of disguise, but by verifying the identity of your members, you can beat would-be-scammers at their own game. To prevent them from preying on you and your members, establish a comprehensive, airtight verification system that includes checking government-issued identification, verifying addresses and cross-referencing with other data sources.
2. Utilize Advanced Technologies
Skilled scammers use cutting-edge technology to dupe their victims, but by implementing advanced technologies in your KYM process, you can outsmart them before they outsmart you. Technologies such as biometric verification, artificial intelligence and machine learning can enhance the accuracy and efficiency of your KYM process by identifying patterns and anomalies that may point to fraudulent activity.
3. Regularly Update Member Information
“Has anything changed?” Regularly asking this question is essential to an effective KYM process. Keep your member data up to date by conducting periodic reviews to identify any changes in your members' profiles that may be relevant to their risk assessment.
4. Conduct Risk Assessments
Risk and reward can go hand in hand, but not when it comes to preventing fraud. Evaluating the risks associated with each member is an essential piece of your KYM process. Assess factors such as members’ transaction history, geographic location, and the nature of their business/request. By subjecting higher-risk members to more stringent KYM procedures, you can keep your credit union safe.
5. Train Your Staff
A well-trained staff is your first line of defense against fraud. To keep your staff up to date on KYM procedures, provide regular training sessions that cover the latest trends and techniques in fraud detection. During these trainings, equip your staff with general questions to validate requests and flag potential fraud, such as:
- What is the purpose of the transaction?
- How do you know the beneficiary?
- Where did you locate this business?
- Is there a website you can provide?
- Where did the funds to process the website come from?
- Are you a new member?
The value of training your staff well cannot be overstated. For a real-life example of how a robust training program can equip your staff to effectively fight fraud, read this article on how a well-trained Iowa credit union is successfully fighting overseas scams.
6. Monitor Transactions
Always keep your eyes peeled for suspicious activity by implementing a system for ongoing monitoring of member transactions. This can help in detecting suspicious activities in real-time, enabling you to act quickly if a transaction seems fishy.
Potential Challenges in KYM Implementation
Improving your KYM process is more than worth the effort, but there are some challenges to prepare for as you get started.
1. Data Privacy Concerns
Collecting and storing member data does come with privacy concerns, so ensure that your KYM processes comply with data protection regulations such as General Data Protection Regulation (GDPR).
2. High Costs
Implementing a comprehensive KYM process can be expensive but the benefits far outweigh the costs. In the long run, an effective KYM process can save your credit union from exorbitant losses from potential fraud and regulatory fines.
3. Keeping Up with Regulatory Changes
Regulations related to KYM are constantly evolving. Make sure to stay informed about the latest regulatory requirements to ensure that your KYM processes remain compliant.
Knowing Your Member Starts Now!
As fraud in financial institutions is on the rise, there’s no time like the present to tighten up your fraud prevention measures through KYM. By implementing a robust KYM process that taps into the latest technologies, training strategies and fraud prevention techniques, your credit union doesn’t have to become another statistic.
We're Here to Help
Have questions? Feel free to reach out to our Compliance team at BSACompliance@alloyacorp.org or Member Services at 800-342-4328.