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Know Your Customer: Mitigating Risks in KYC Processes and Documents

July 20, 2023

“Follow the money” has long been used as a catchphrase to locate corruption, but it is also the best way to determine where cybercriminals will strike. The latest 2023 Verizon Data Breach Investigation Report research shows that 95% of breaches are financially motivated, placing the financial sector directly in the crosshairs of cybercriminals. It’s not just that these organizations store and handle large sums of cash, but they collect and process a resource almost as valuable – sensitive customer information. 

Robbing a bank is a one-time payout, but stealing from each customer can pay off repeatedly with less risk of discovery. Crooks know this and target customer data to leverage it in other crimes such as fraud, money laundering, and direct theft of assets. Unfortunately, by a multitude of regulations, financial organizations are required to collect and retain sensitive customer information, driving them to implement strong security controls to protect it. 

In this article, we explore KYC files or “Know Your Customer” files containing sensitive customer information, investigating the inherent risks of these files and the ways to mitigate them. 

What is KYC?

The financial sector is charged with authenticating the identity of customers and evaluating their trustworthiness. KYC files are employed for this purpose. They contain a wealth of customer information and documentation, including:

  • identification documents
  • proof of address
  • financial records
  • other relevant data

This combination of data helps establish a true identity, proving that a customer is whom they attest to be. It acts as a crucial deterrent against money laundering, terrorist financing, and other illicit activities that could harm the organization and the broader financial system by eliminating the anonymity that criminals hide under.

With so much sensitive data at risk, defending these KYC files is crucial for organizations to maintain compliance with regulatory requirements, detect and prevent fraudulent activities, and evaluate the risks of establishing business relationships with customers.

Who needs to have KYC processes?

KYC processes are vital for organizations in regulated industries, including the financial sector, such as banks, credit unions, insurance companies, investment firms, and money service businesses. However, KYC requirements extend beyond finance to industries like telecommunications, gaming, real estate, and online platforms that facilitate transactions based on local regulations and risk assessments. Businesses engaged in high-value or cross-border transactions and those dealing with politically exposed persons are legally obligated or strongly incentivized to implement KYC processes. These measures mitigate risks associated with money laundering, fraud, and terrorist financing by conducting thorough customer due diligence and verifying identities, enhancing security, compliance, and protection against illicit activities.

Why is the KYC process important?

The KYC (Know Your Customer) process is paramount in business operations, serving multiple purposes. It ensures compliance with regulations and combats illegal activities, contributing to the financial system’s integrity. KYC also acts as a powerful risk mitigation tool by verifying customer identities and reducing the risks associated with fraudulent activities. Moreover, it enhances security by detecting and preventing crimes and fraud, protecting both organizations and customers. By establishing a robust KYC framework, businesses can build reputation and trust, demonstrating integrity and commitment to compliance. 

Effective KYC processes help maintain financial integrity by mitigating corporate risks related to financial crimes. These practices are globally recognized, and international standards, such as those set by the Financial Action Task Force (FATF), influence national KYC regulations. Numerous laws and directives require it including:

  • USA PATRIOT Act
  • Bank Secrecy Act (BSA)
  • Fourth and Fifth Anti-Money Laundering Directives (AMLD4 and AMLD5)
  • MiFID II

They emphasize the importance of KYC and promote harmonization of regulations. Compliance mandates like the Financial Conduct Authority (FCA) in the UK and the Payment Services Directive 2 (PSD2) in the EU further strengthen KYC procedures, ensuring stringent practices to protect the financial ecosystem.

Dangers of KYC

While the primary goal of KYC is to mitigate risk, it also brings forth potential dangers that organizations need to address. One of the main concerns is the increased need for information security to protect valuable KYC files. These files serve as high-value targets due to the sensitive data provided by customers for identity verification. Any loss or compromise of these files can have severe repercussions and cause significant damage to the organization. Therefore, safeguarding the security and integrity of KYC files is crucial to mitigate the risks associated with their possession.

<h3> KYC Value to Attackers

KYC files, which contain crucial data for verifying individuals’ identities in financial organizations, hold significant value for attackers. On the dark web, such data commands high prices, indicating the demand for this information. Attackers can exploit the data from KYC files to commit various fraudulent activities, including identity theft, using victims’ identities to attain credit, committing financial fraud, and even perpetrating crimes in their name, resulting in severe financial losses for the victims. Criminals can also access victims’ accounts by leveraging the information obtained from KYC files, facilitating highly targeted scams. The consequences extend beyond financial harm, as victims whose identities are misused in crimes or fraud often suffer reputation damage, even if the accusations are later proven false. 

Hidden Threats in KYC

The KYC process introduces hidden threats that organizations must be aware of and mitigate. Since much of the validation information comes from untrusted third parties, there is a substantial risk associated with opening these files. Even seemingly harmless files like images or PDFs can contain hidden threats like malware. When staff members open these files, the malicious payload launches, potentially causing significant damage. 

Moreover, customers themselves may have compromised endpoints that inadvertently infect the files they send without their knowledge. This creates a challenging situation as the threats constantly evolve, making them difficult to detect by antivirus software for a certain period. To ensure the security of the KYC process, organizations need to implement robust measures to detect and mitigate these hidden threats, protecting their systems and customers from potential harm.

With KYC data, even the customer becomes a target. Current attacks against MetaMask, a crypto company, spoof KYC requests, using convincing branding and a lack of standard triggers such as misspellings, embedded ads, or giveaways to prevent raising customer suspicions. The KYC request tricks users into turning over their passphrase, allowing cybercriminals to make off with the contents of the customer’s crypto wallet. 

Loss of KYC

The loss of KYC (Know Your Customer) data can have far-reaching consequences for the organization responsible for its protection. Firstly, there are compliance issues to consider. Regulations such as:

  • GDPR (General Data Protection Regulation)
  • SOX (Sarbanes-Oxley Act)
  • GLBA (Gramm-Leach-Bliley Act)
  • PCI-DSS (Payment Card Industry Data Security Standard) 

All impose penalties for the loss of sensitive data of this nature. Violating these regulations can lead to significant financial penalties and legal repercussions for the organization, tarnishing its compliance record. 

The loss of KYC data also causes severe reputation damage. Being associated with a breach of customer information erodes trust and confidence in the organization’s ability to safeguard sensitive data. A data breach’s negative publicity and fallout can result in customer attrition, as existing customers may lose faith and seek alternative service providers. Potential new customers may think twice about engaging with an organization that has experienced a data breach, leading to missed growth opportunities. 

Eliminating Hidden Threats in KYC

To effectively protect the organization from hidden threats within KYC  files, the best approach is to eliminate these threats completely. This requires implementing comprehensive measures to identify and eradicate any potential risks. A single control method, such as antivirus (AV), cannot combat the threat. As cyber criminals continuously innovate with attacks, it takes a combination of defenses to cover known threats and newly developed zero-day attacks.  

Remove the Threat, Keep the Data

One effective approach to addressing threats in files while preserving the underlying safe information is using Content Disarm and Reconstruction (CDR) technology. CDR provides a comprehensive solution for eliminating threats while maintaining the fidelity of the files. This technology works by dissecting the files and removing potentially malicious elements, such as embedded malware or hidden threats, without altering the essential data or compromising the file’s integrity. 

Organizations can effectively neutralize the threats and ensure the data’s safety by sanitizing the files through CDR. This approach minimizes the risk of introducing harmful elements into the organization’s systems while preserving the valuable information necessary for KYC processes. CDR technology offers a robust and reliable method for eliminating threats while allowing organizations to retain the integrity of their files and ensure the security of their operations.

Embed Protection Into Perimeters

Embedding protection into perimeters is a crucial aspect of countering threats, and Content Disarm and Reconstruction (CDR) technology provides a seamless solution that can integrate into existing process flows. By implementing CDR, organizations can effectively halt threats as they pass through various perimeters, including email systems, web browsers, and cloud storage platforms. This proactive approach ensures that files are thoroughly scanned and cleansed of potential threats, safeguarding the organization’s infrastructure and data. 

Moreover, CDR offers the advantage of retroactive cleansing, allowing organizations to go back and eliminate accumulated threats that may have gone undetected. This is particularly valuable when considering data obtained through mergers and acquisitions, as these files may carry hidden threats that have been present all along. By embedding CDR protection into perimeters and adopting a comprehensive approach to threat detection and mitigation, organizations can enhance their security measures and maintain the integrity of their processes and data.

Votiro Seamlessly Protects KYC

Financial organizations have a lot on the line, demanding nothing but the best regarding file sanitization and CDR. Votiro is a leader in the CDR field, dedicating itself to delivering top-quality CDR solutions instead of treating it as a supplementary feature within a suite of tools. Votiro’s advanced CDR generates high-quality reconstruction by rebuilding files with intact, safe functionality. This ensures that no necessary context or functionality gets lost in the rebuilding process. 

Votiro goes beyond CDR, integrating optional AV and RetroScan, which generates auditable tracking of threats eliminated by Votiro as they become discoverable by AV. With Votiro’s well-established CDR solution, financial institutions can achieve a proven return on investment, meeting their stringent performance requirements while effectively safeguarding customers against hidden threats.

Votiro is designed for rapid implementation, using an API-centric solution that seamlessly integrates into existing business workflows, enabling immediate protection against cyber threats. Implementation times are impressively short and, upon deployment, organizations see immediate value.

Contact us today to learn more about Votiro sets the bar for preventing hidden threats in KYC files.