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KYC loopholes in children’s financial products

As technology evolves, more and more children are gaining ready access to the internet, with Ofcom’s latest research estimating that 55% of children now have their own smartphone. Meanwhile, the market for digital financial services is expanding and many young people are now receiving pocket money via online pre-paid cards like Go Henry or Nimbl.  

Giving young people the ability to spend and save through technology can be a great way to learn about financial management and budgeting. However, this nascent growth in digital financial services has exposed potential loopholes within Know Your Customer (KYC) processes that fraudsters can manipulate.

One such method that can be used to help close these loopholes and deter criminals, is through the adoption and deployment of KYC systems and procedures for children’s financial products.

The current state of children's financial services

Ordinarily, when a typical bank account is opened, the customer goes through a KYC process that enables a bank to assess risk and monitor any potential money laundering. However, for many of the latest children’s digital pocket money providers, KYC isn’t carried out on the child and instead on the parent or guardian who is creating and funding the account.

The risks with online subscription payment cards are generally considered to be low and the KYC is comparatively straightforward. However, the data suggests that there are serious dangers involved. A study by the Credit Industry Fraud Avoidance System (Cifas) found over 7,000 under-21s were knowingly or unknowingly taking part in money laundering in 2021 which is up 78% from the previous year.

Bad actors are offering children and young adults cash in exchange for access to their tax-free and unregulated accounts. Earlier this year, the National Fraud database reported the largest ever case numbers of under-21s misusing their bank accounts in 2021, which rose by 19% from the previous year.

Detecting the misuse of children's online banking subscriptions is not straightforward. Despite the constantly developing methods to tackle financial crime, there are still no regulations specifically for digital financial products for children.

Detecting fraud within children's financial services

Currently, the responsibility for action to be taken on illicit transfers into a child’s account is down to the account subscriber, generally a parent or guardian, monitoring for suspicious activity and reporting it themselves. For a younger child that receives a regular transfer of pocket money, it is likely that any criminal activity would be easily identified.

However, as a child enters their teenage years and may have a part-time job or transfer between friends' accounts, even the most diligent parent may not spot criminal payments. As some services leave open the possibility for the account to continue for a set period whilst the subscription is being paid, even once the child turns 18, transactions from bad actors could easily go undetected.

Another possibility is that the account subscriber is the one attempting to use the child's card. Theoretically, a parent or guardian could engage in illegal activities using their child's online accounts. In this situation, it would be very unlikely that money laundering would be detected.

It is difficult to assess if this form of money laundering is a widespread practice, but if bad actors decide to exploit it, the loophole is certainly there.

The future of KYC for kids

Currently, the risk factor for children’s financial products is automatically considered low, which is drawing criminals to the sparsely supervised environment that presents an opportunity for exploitation.

Continuous and automated risk monitoring can help to combat the loopholes facing children’s digital banking. Innovative technologies like integrated data checks and automated workflows can help to spot common factors that will support professionals in flagging connections with high-risk individual

As a result, compliance staff can utilise data checks to bridge these loopholes and guard against money laundering.

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Alex Richter

Alex Richter

Head of PassFort

PassFort

Member since

02 Aug 2022

Location

London

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This post is from a series of posts in the group:

Financial Risk Management

This network brings together professionals involved in the oversight and management of their company's financial risks and exposures as well as solution vendors, in order to discuss risk issues including interest rate risk, foreign exchange risk and commodity price risk, among others.


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