Integrating AI into KYB, KYC can protect your business from cyber fraud

As incidents of harassment, blackmail and harsh clawback practices by China-linked predatory loan apps continue to rise, the Union Home Ministry has called for urgent and strict action from the forces order to stem the threat. Despite RBI regulations, changes in Play Store policies and India’s financial industry adopting several measures to prevent these apps from negatively impacting unsuspecting Indians, more and more citizens, in especially in rural areas, are plagued.

The threat

These “Chinese-controlled” mobile loan apps provide small instant loans at a higher interest rate, ranging from 15-20%. Compared to banks, these apps follow more flexible procedures to verify customers for loan disbursements. Loan amount is instantly transferred to borrowers accounts after approval based on Aadhar and pan cards. The only caveat is full access to the contacts, pictures and video gallery of the applicant’s phone, which may seem like a small price to pay for those in desperate need of money.

But soon borrowers start receiving harassing calls and their private data is compromised. After several cases of harassed borrowers being pushed into self-harm emerged from various states, the ED initiated an investigation under the criminal provisions of the Prevention of Money Laundering Act (PMLA). Recent raids by the Enforcement Branch on payment gateway companies and multiple arrests of perpetrators across the country unequivocally demonstrate the scale of these rackets.

What led to this?

One may wonder how these illegal apps have managed to carry out their activities so far and why these payment gateways have failed to detect the discrepancies. For this, we need to understand how a payment gateway works. To grow exponentially, payment gateways need to integrate as many merchants as possible. While it is mandatory that every merchant be verified before boarding, unscrupulous merchants exploit the urgency of these payment gateways and use underhanded means to circumvent the legal framework.

Before onboarding a merchant, a payment gateway does its due diligence with KYC. Everything is fine for the first few weeks and the “merchants” are making valid transactions. Gradually, they start funneling the illegal money to the authorized trader’s bank account. Given the high volume of transactions, there is not much the payment gateway can do to detect this change. And when detected by the payment gateway detects and reported, fraudsters remain discreet for a period of time before registering with a new merchant ID.

Since the start of the Covid-19 pandemic, the volume of digital payments has exploded exponentially. Therefore, systems and processes must be in place to prevent such fraudulent transactions. Therefore, a solid compliance foundation is essential for every business using Know Your Business (KYB) and Know Your Customers (KYC).

Why is compliance necessary?

For businesses, it can be difficult to make the connection between expansion and fraud prevention. Most companies only adopt strict identity verification procedures if something goes wrong. Knowing if you can trust a potential customer is crucial for any business. Businesses must follow Anti-Money Laundering and Anti-Terrorist Financing (AML/CTF) protocols to ensure safe and secure financial interactions with customers.

Importance of KYB/KYC checks

Before doing business with other organizations, companies should be aware of potential financial abuse by dishonest shareholders, business owners and money launderers. KYB Compliance tracks the financial transactions of companies, businesses, and organizations over time to verify their legitimacy.

KYC focuses on people applying to open accounts at banks, financial institutions, or cryptocurrency exchanges to calculate a risk score. It checks their financial history and past behaviors for signs of financial fraud and illegal activity. Banks and other financial institutions benefit greatly from these risk scores and profiles, designed to help them comply with increasingly stringent AML regulations.

Maintaining KYB and KYC compliance

Compliance checks require validation that official documents are authentic and always up-to-date. For example, these lending apps were operated by Chinese nationals who used fake Indian citizen documents to register legal entities and create merchant IDs and bank accounts. The validity of the business entity can also be assessed by the age of an email id. During investigations, officials also discovered that the fraudulent companies were not operating from addresses provided in official Ministry of Corporate Affairs (MCA) records, many of which were fictitious. Again, these inconsistencies could have been detected through proper workflows that look for anomalies in the content of these documents.

In a KYB workflow, a business can be verified based on PAN and GST, registered address, owners details and date of incorporation. A fraudulent business will have red flags such as recent incorporation date, discrepancies in KYC information, etc.


To be fully effective, KYB and KYC must be integrated into workflows beyond simple compliance checks. Businesses should also look for AI solutions to project accurate results. This way, a business can get to know their prospects better, convert customers faster, and grow their business with the proper identity checks in place. Using technology that allows teams to perform real-time KYB/KYC, including monitoring and alerting, allows them to stay constantly on top of vulnerabilities rather than waiting for the next pre-scheduled review. Advanced KYB/KYC platforms already offer the ability to issue alerts triggered by a number of factors, such as a change in a business’s location or operating status. Perpetual monitoring is more effective than periodic manual checks for staying on top of things. Another advantage is that client companies can be onboarded faster, which significantly speeds up the time to revenue creation.

Key points to remember

Organizations must follow KYB and KYC guidelines to identify anyone engaging in illegal tax avoidance and money laundering activities, whether alone or in association with a business. Although they focus on different groups of people, KYB and KYC share the same goal. These compliance checks reduce the frequency of financial crimes while detecting extortion and making financial transactions safer and more accessible worldwide. Incorporating advanced technologies, such as AI, into KYB/KYC procedures is imperative for businesses to stay compliant and filter out fraud.



The opinions expressed above are those of the author.


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