What is New Account Fraud in Anti-Money Laundering?

Definition

New Account Fraud, in the context of Anti-Money Laundering (AML), is a type of financial crime wherein fraudsters use stolen, synthetic, or fictitious identities to open new financial accounts, such as bank accounts, credit card accounts, or loan accounts, with the intent to deceive and exploit financial systems for illicit gain. This type of fraud aims to create seemingly legitimate accounts that can be used to launder money, obtain credit, or conduct fraudulent transactions before detection occurs.

Purpose and Regulatory Basis

New Account Fraud presents a critical risk to AML regimes as it facilitates money laundering and other financial crimes by creating channels through which illicit funds can enter the financial system undetected. Its prevention is essential to uphold financial integrity and comply with regulatory standards.
Key global and national regulations addressing this risk include:

• The Financial Action Task Force (FATF) Recommendations, which emphasize customer due diligence (CDD) and enhanced scrutiny on new accounts.
• The USA PATRIOT Act in the United States, which mandates rigorous verification processes for new customers to prevent and detect fraud and money laundering.
• The European Union’s Anti-Money Laundering Directives (AMLD), which require careful identification and verification to prevent illicit use of new accounts.
  These regulations collectively require financial institutions to implement stringent verification, monitoring, and reporting systems to detect new account fraud early and mitigate associated money laundering risks.

When and How it Applies

New Account Fraud typically applies during the customer onboarding or account-opening process in financial institutions and regulated entities. Real-world scenarios include:

• Fraudsters opening accounts with stolen or synthetic identities to establish credit or move illicit funds.
• The use of accounts for layering in money laundering schemes by transferring illicit funds through multiple new accounts to obscure origins.
• Exploiting promotional offers by creating multiple accounts (bonus abuse).
• Recruiting money mules to open accounts for laundering purposes.
  Triggers for investigation include suspicious documentation, unusual application patterns, or transaction behaviors inconsistent with a customer’s profile.

Types or Variants

New Account Fraud can take different forms:

• Stolen Identity Fraud: Using real individuals’ personal information without their consent to open accounts.
• Synthetic Identity Fraud: Combining real and fabricated information to create new identities that pass traditional identity checks.
• Money Mule Accounts: Accounts opened by individuals recruited to transfer illicit money, often unknowingly facilitating laundering.
• Bonus Abuse: Opening multiple accounts by the same individual to exploit financial incentives fraudulently.

Procedures and Implementation

To comply with AML obligations and combat New Account Fraud, financial institutions implement the following steps:

• Rigorous customer identification and verification procedures during onboarding (KYC).
• Use of advanced identity verification technologies, including AI, machine learning, and biometric verification, to detect synthetic or stolen identities.
• Transaction monitoring systems to flag suspicious patterns indicative of new account misuse.
• Risk-based customer due diligence to apply enhanced controls for high-risk profiles.
• Regular staff training on fraud detection and AML compliance.
• Maintaining audit trails and detailed documentation to support suspicious activity reports (SARs).

Impact on Customers/Clients

From the client’s perspective, New Account Fraud controls may result in:

• Enhanced identity verification requirements during account opening, which may require biometric or multi-factor authentication.
• Potential delays in account activation due to thorough screening.
• Restrictions or monitoring of account activities deemed high-risk by the institution.
• Protection measures that safeguard from unauthorized use of personal information.

Duration, Review, and Resolution

Compliance with New Account Fraud prevention is ongoing:

• The review of new accounts continues beyond the onboarding stage with ongoing monitoring of transactional behavior.
• Regular reassessment of risk profiles based on updated customer and transactional data.
• Resolution of suspected fraud cases involves investigation, filing SARs, account suspension or closure, and potential reporting to regulatory authorities.
• The timeframe of review varies based on institutional policies but should be aligned with regulatory guidance.

Reporting and Compliance Duties

Institutions bear responsibilities including:

• Filing Suspicious Activity Reports (SARs) when New Account Fraud or suspicious openings are detected.
• Documenting and maintaining records of identity verification and monitoring activities.
• Cooperating with law enforcement and regulators during investigations.
• Facing penalties or sanctions for non-compliance with AML regulations related to fraudulent account openings.

Related AML Terms

New Account Fraud intersects with several AML concepts such as:

• Know Your Customer (KYC): The process of verifying customer identity to prevent fraudulent openings.
• Customer Due Diligence (CDD): Assessing the risk level of customers at onboarding and throughout the relationship.
• Transaction Monitoring: Automated systems flagging unusual activity linked to new accounts.
• Suspicious Activity Reporting (SAR): Reporting mechanism triggered by potential fraud or laundering detected in new accounts.

Challenges and Best Practices

Common challenges in combating New Account Fraud include:

• Difficulty detecting synthetic identities that pass standard verification.
• Balancing customer experience with thorough AML controls.
• Keeping up with sophisticated fraud techniques and evolving regulatory requirements.
  Best practices include leveraging AI and machine learning for enhanced identity verification, implementing multi-layered controls, continuous staff training, and fostering collaboration between institutions and regulators to share fraud intelligence.

Recent Developments

Recent trends highlight increased investment in AI-driven fraud detection software that analyzes vast data points to identify anomalies in new account applications. Regulatory frameworks are also evolving to address synthetic identity fraud specifically, with enhanced due diligence measures. Additionally, financial institutions are using advanced risk-scoring models like “Money Mule Scores” to identify potential laundering risks tied to new accounts.