Red Flags: What Constitutes Reasonable?

As have gotten further and further into the FACT Act Red Flag compliance world - an interesting dilemma is surfacing. Whether it is FACT Act, Bank Secrecy Act or the USA Patriot Act - when considering the Know Your Customer provisions, there is this over-arching theme that your process needs to be "reasonable". That is, you process to confirm the identity of a customer must be reasonable.

The dilemma is what is reasonable to one may not be reasonable to another. For example - most everyone would agree that verifying the consumer's credentials through a 3rd party data source would constitute "reasonable". Likewise - most would probably agree that a consumer providing documentary evidence such a valid driver's license would be a reasonable measure to ensure compliance.

Unfortunately - it is not that easy. Through repeated data studies - we have seen that verification of information through 3rd party data still routinely ends up being a fraud. Likewise - accounts that are opened with a valid driver's license end up being fraud?? When you step back and think about this for a minute - it shouldn't be a great surprise. The determined fraud artist will many times first set up a valid phone number in the victim's name. Thus - they end being "verified". Similarly - one of the easiest things to feign is a fake driver's license.

To prove a point - we took it one step further and simply analyzed the zip code for the applicant. Using nothing more than zip code level demographic information - we were able to provide a model that was more correlated with fraud than "Name Verified at the Address". This also shouldn't come as a total surprise - as we know that certain areas and geographies are much higher risk than others.

I would argue based on the empirical evidence that use of a zip code model would be more reasonable than verification. This isn't to suggest that your compliance solution only relies on zip code level of information - rather it is information that can help make an assessment and add to your overall verification and confirmation processes. In fact, doing so is more "reasonable" than not doing it.

After all - it is all information. Verification or documentary evidence is not the "truth". It is simply a measure of the truth, as is the area, household or other information that can be garnered. By putting it all together - we now have a much better measure of the overall truth - and a much more "reasonable" Know Your Customer program.