Identity verification in brokerage houses is mandatory to combat fraudsters from misusing the system and conduct financial crimes and malicious activities.
Brokerage firms are prone to high-risk customers and fraudsters that misuse the system. Especially, money launderers and terrorist financiers use the legitimacy of brokerage houses to convert ill-gotten gains into good money. In stock markets and security assurances, fraudsters come up with tricks and buy properties with embezzling funds.
Firms facilitating these fraudsters knowingly or unknowingly are subjected to harsh penalties by regulatory authorities as it affects the overall global economy. Therefore, identity verification for each customer is more than mandatory for these financial institutions.
Role of Brokers
For stocks trading, a broker is a need. Brokerage houses are financial institutions that help you buy and sell securities. Brokers act as the middle man between seller and buyer. A broker gets commission after finalizing the deal among buyers and sellers. Brokers help clients in selling investment tools such as bonds, mutual funds, and stocks, etc. Brokers charge money to clients for their services of dealings.
Online brokerage firms provide facilities to customers online via the internet or smartphones. Instead of a physical office, brokerage businesses operate online and deal with stock exchanges and investment of people. Coming to point, what happens is, fraudsters roaming over the internet are looking for loopholes in the online systems. Where there is money, money launderers come into the field to find opportunities that can help them transfer dirty money across the world.
Regulatory Compliance and Brokerage Firms
Brokerage houses require to stick to the rules and regulations of the US government. Brokers collect information from clients which include personal and financial details. As per the requirements of regulatory authorities, identity verification is crucially important for these firms to perform to combat financial crimes and prevent bad actors from performing malicious activities.
KYC and AML verification are important to ensure the credibility of customers. For this, especially, online brokers can verify customers through the online document and biometric verification. In addition to this, for AML compliance, brokerage firms can integrate AML verification API with the system that can help verify each identity against watchlists and criminal records. Identity-check against these parameters deters the risks of fraudulent activities and financial crimes.
Need identity verification for IDV in Brokerage Firms
Other than this, online brokerage houses are prone to several cyberattacks that vary from data breaches and identity theft to payment scams. Such incidences compromise the highly confidential information of customers that affect their lives as well as the reputation of the organization. Brokers can integrate the best identity theft protection API to combat the aforementioned frauds. The following are some other reasons that make identity verification mandatory for brokerage firms.
Fulfill Obligations of Suitability law
As per the requirements of SRO and FINRA, brokers while recommending customers for security trade, the broker must verify the reason behind that trade and make sure that it would be suitable for that particular customer. For this identity verification should perform that identifies the need and basis.
Efficient Record Keeping
Online brokerage houses suppose to create records of identity information for customers. This information should include the name, address, DOB, and ID card. All this information should be verified to deter the risks associated with that identity.
Combat Money Laundering
Brokerage houses are prone to terrorist financing and money laundering activities. Fraudsters come with bad money and buy stocks and invest in mutual funds. The origin of money should be verified. So other than this identity should be screened against the AML checklist that includes AML screening against global watchlists, sanctions lists, and PEPs (Politically Exposed Persons) records. This helps ensure that no fraudulent entity is facilitated through your business.