With the rise of online platforms giving instant loans completely digitally, online identity fraud has skyrocketed. Several have been in the news recently for lax checks and improper KYC (Know Your Customer) practices that allowed fraudsters to use manipulated images of PAN cards and other documents belonging to the victims of identity theft to avail loans with great ease. In the very competitive landscape of digital lending, the quest to show fast user growth has meant that some companies have compromised KYC checks prescribed by regulations.
Loans taken by fraudsters with the intent to default not only put the financial liability on the person whose identity is stolen but also hurts their credit score. Thankfully, in the stockbroking world, identity theft isn’t as big a problem because no money is lent to a customer and any fund transfer only happens to verified bank accounts. We have heard of cases in the industry where fraudsters created false identities using the PAN of another person to avoid paying income taxes on capital market gains.
The uproar on social media on this matter has resulted in a number of our concerned customers writing to us asking whether something like that could happen to them at Zerodha. This post explains in detail the checks and processes that we employ when onboarding a new customer, even beyond the ones prescribed by regulations. In addition, our processes and systems are regularly audited by multiple regulatory bodies and internal and external auditors.
When a new customer signs up online with us, the three most important checks are:
- Verifying the authenticity of their identity and address proofs.
- Verifying that the bank account really belongs to the customer.
- Verifying that the person opening the account online is the one in the proofs.
Validating documents
When a user starts the onboarding process, first, their mobile number and e-mail address are verified by sending OTPs.
1. Obtaining PAN
The customer enters their date of birth and PAN (number), and we fetch the details of the PAN, including their legal name, from the Income Tax Department’s systems in real-time. We do not ascertain the validity of a PAN-based on an uploaded photocopy.
2. Obtaining Proof of Identity (POI) & Proof of Address (POA)
We obtain a digitally signed copy (in machine-readable form) of the customer’s Aadhaar directly from UIDAI via the DigiLocker.gov.in portal (Govt. portal for storing and sharing authenticated, digitally signed documents) once the customer logs in and consents to share. DigiLocker logins are based on Aadhaar verification and SMS OTPs via the mobile linked to Aadhaar. We do not obtain the actual Aadhaar number as prescribed by the law.
3. Verifying PAN against Aadhaar.
At this point, the customer has not uploaded any documents. They have been obtained directly from govt. systems, establishing the authenticity of the documents. Letting customers upload photos of PAN, Aadhaar, or other identity proofs and using them for verification is a flawed process as those can be easily manipulated.
The next step is to verify the name and date of birth on the PAN obtained from the IT Department against the name and date of birth on the Aadhaar obtained from DigiLocker. This check is done both by an automated system and human verifiers. This one critical step significantly reduces the probability of easy identity theft as seen in lending platforms.
4. Verifying the bank account.
A customer has to explicitly link one or more bank accounts they own to their trading account. SEBI regulations mandate that fund transfers (paying in to fund the trading account or withdrawing the trading balance) are only to be allowed to be linked, verified bank accounts. This, again, significantly reduces the probability of fraudulent fund withdrawals.
We collect the customer’s bank account number and IFSC code and do a “penny drop” (sending a few paise) to their bank account to ensure that it is a valid account. The bank systems return the name of the account holder, which is then verified against the name on the PAN (obtained earlier from the IT Department’s systems) using both automated and human checks. If the customer opts for a UPI-based verification, the banking systems are again used to verify that the UPI ID is linked to the original PAN.
This establishes that the bank account really belongs to the person whose name PAN and Aadhaar are in.
5. Supporting documents.
We obtain copies of supporting documents depending on the kind of accounts they open, for example, bank statements, canceled cheques, etc., whose details are verified against the validated bank account by automated systems and human verifiers.
The customer is now asked to upload a copy of their ePAN (generated from the Income Tax Department’s portal) or a copy of their physical PAN. This merely acts as an additional check for a better audit trail to the PAN data that has already been obtained and verified from the Income Tax Department’s systems.
6. In-person verification (IPV – Video KYC).
At this point, the authenticity of the documents and the bank accounts are verified as they have been obtained directly from their issuers various govt. departments and banks. Since DigiLocker involves mobile (OTPs) that are linked to Aadhaar, it is also established that whoever is opening the account has access to the mobile device linked to the original documents.
IPV helps establish that the person who is going through the account opening flow is really the person who the original proofs and the linked mobile number belong to. To do this, we generate a short-lived numeric OTP and send it to the customer’s mobile. They write the OTP down on a piece of paper and appear in front of their webcam to do a video KYC.
IPV
We record a short video clip of the customer while they are doing the IPV. Three important things happen here:
- The short-lived, handwritten OTP ensures that it is not a pre-recorded clip. If someone goes to extreme lengths to manipulate a pre-recorded video clip and insert a handwritten OTP using video manipulation within the brief period of time when the OTP is valid, it establishes a clear audit trail of the intent to defraud.
- Our systems do an automated face match between the IPV video clip, the Aadhaar photo obtained from DigiLocker, and the secondary copy of the PAN or ePAN the customer uploaded.
- All these are verified by systems and again by human verifiers.
Although regulations do not mandate IPV for KRA verified customers (already KYC verified at another broker) or customers opening accounts via Aadhaar/UIDAI authentication, we do this for all customers regardless as it is a critical step in verifying identity and liveness during online onboarding.
7. eSign (digital signature).
The final step in the account opening process is the act of the customer digitally signing (IT Act, 2000) the account opening PDF document, which collates all the information, proof, and documents they have submitted, legally ratifying the submission and various declarations and terms as prescribed by regulations. The customer digitally signs the PDF via Digio, a frontend to the Aadhaar/UIDAI based digital signature confirmed via an SMS OTP to the mobile linked to the customer’s Aadhaar. Once the customer digitally signs the document, the name on the cryptographic digital signature is verified against the name on the ID proof that was originally obtained from DigiLocker, ensuring that the owner of the digital signature is the same person as the one verified in the previous steps. Again, this is a critical step. This also leaves a strong audit trail for the customer, Zerodha, and the regulator to verify the provenance of the account opening agreement and the documents involved in it.
8. Standard measures.
All the checks described above are done at multiple levels, using automated systems as the first line of check, and verification by multiple human checkers (a maker-checker system). There are also periodic quality checks and regular internal audits of random samples to ensure that these checks and processes continue to run as designed.
In addition, standard measures such as recording audit trails of the account opening processes, including IP addresses, are employed. If a mismatch is found, like the geographic IP location not matching a customer’s country of residence in the proof of address, a flag is raised.
Moreover, once an account is opened and customers start trading and investing, the trading activity passes through multiple comprehensive checks that raise flags for trades of fraudulent nature, money laundering checks (PMLA), etc., as prescribed by regulations. For instance, a common check is comparing the volume of trading activity against the annual income range declared by the customer during the onboarding.
For customers, we offer strong 2FA (TOTP) on their accounts and instantly notify them of logins to their accounts from unusual geographic locations. The Nudge system blocks dubious-looking trades from being executed, which significantly reduces the incentive for scammers to commit fraud in trading accounts via common means such as trading using highly illiquid derivative instruments.
In addition, the SEBI regulation that instituted a mandatory SMS OTP verification on selling shares (debiting stocks from a demat accounts) at the depository level has almost entirely eliminated the possibility of a customer’s securities being moved from their demat account without their knowledge at the hands of not just third parties, but brokers themselves.
The effectiveness of these checks.
Each of these checks and security measures reduce the probability of fraud by a significant degree. While none of them individually are foolproof, combining all of them together is a highly effective way of reducing the ease of doing fraud. No anti-fraud system can guarantee 100% efficacy, but a cautious and holistic approach can reduce the probability of fraud to a small fraction. Over the years, we have instituted measures over and above what regulations prescribe to reduce the vector for many kinds of frauds. It is unfortunate that companies forgo caution and checks and balance in the name of rapid growth, not only increasing the probability of damage to themselves and their customers but whole industries.
How to protect oneself from identity theft.
- Check your credit ratings regularly. If any loans have been taken in your name, they will show up in the credit report. You can access this for free on CIBIL or Experian.
- Register for CDSL and NSDL Consolidated Account Statements (CAS). Any equity or mutual fund transactions done using your PAN will appear in this statement.
- Create a login on the income tax website and track the Annual Information Statement (AIS) for your PAN. The AIS provides complete information about a taxpayer for a particular financial year. Taxpayer’s income, financial transactions, tax details, bank accounts and large purchases (> Rs 2 lakhs), etc. The drawback with AIS is that it updates all the details only at the end of the financial year. Here is an FAQ on how to set up and use AIS.
- Keep a close track of all your banking and credit card transactions. Identities are stolen not just to create new accounts and loans that you are not aware of, but it is also used for conducting fraud using existing bank, mobile, credit cards, and loans as well.
- Do not reveal sensitive information on public channels and social media (accurate geographic location, mobile numbers, etc.).
- Finally, NEVER share account logins or SMS OTPs with anyone. No bank or the financial institution (or any legitimate institution for that matter) will ever call you and ask you to share OTPs or any sensitive details like card or bank account numbers.
Hopefully, you find this useful,
