The Tribune

The fraud industry is booming. A few months before COVID-19 appeared, the Financial Cost of Fraud Report 2019 stated: “Fraud is costing businesses and individuals across the world $5.127tr each year.” Moreover, the results of a survey completed by the Association of Certified Fraud Examiners (ACFE) noted that due to the COVID-19 pandemic, experts have observed an increase in multiple types of fraud. Both historically ,and recently, financial institutions and designated non-financial business and professions (“DNFBPs) are targets of fraudsters.

The Financial Action Task Force’s (FATF) recommendation ten, 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’s Section 8(1) requests that every financial institution “shall undertake identification and verification measures before opening an account or establishing a business relationship”.

Following recent releases by the Financial Intelligence Unit (FIU), warning the Bahamian public and industry of an apparent real estate scam and the need to ensure robust Know Your Customer (KYC) procedures are deployed, this article serves as a reminder to compliance professionals not to simply “check boxes” during the customer onboarding process and ongoing reviews.

There is general acceptance that there are multiple ways to identify a natural person. Appendix B, of the Central Bank of The Bahamas’ supervisory and regulatory guidelines, allows two items - 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 a supervised financial institution”.

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 prints, unique ultraviolet features, textile features and transparent holograms. There should be careful consideration when reviewing the passport. Ensure those data bar codes 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 not veered to the left or right in the face. To mitigate the risk of accepting a fraudulent passport, employees should be training on comparison material 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

Conclusion

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 paid when reviewing passports instead of just acknowledging that one has been received and not expired.

NB: Derek Smith Jr is a compliance officer at a leading law firm in The Bahamas, and a former assistant vice-president, compliance and money laundering reporting officer (MLRO), at a local private bank. His professional career started at a ‘Big Four’ accounting firm and has spanned more than 15 years, including business risk management, compliance, internal audit, external audit and other accounting services. He is also a CAMS member of the Association of Certified Anti-Money Laundering Specialists (ACAMS).