For decades, policymakers and bankers have battled the paradox of fostering financial inclusion without compromising financial integrity. Policymakers want to bring the unbanked into the formal banking channels to foster growth, even while requiring banks to conduct sufficient Know Your Customer (KYC) checks to ensure that accounts are not misused by criminals and terrorists. While elaborate KYC makes it difficult for launderers to use mule accounts to layer illicit proceeds, they also dissuade the common man from using formal banking.

In recent years, digital identification technology seemed to have solved the paradox, allowing for seamless, paperless onboarding while maintaining the integrity of the system. But as we stand in early 2026, this technological solution is getting disrupted by a new one: Generative AI. Artificial Intelligence presents both problems and solutions in the ever-fight between bankers and criminals. AI enables deepfakes, synthetic media that can convincingly mimic a person’s appearance, voice, and even micro-expressions. Deepfakes can be used to impersonate real individuals, including during a KYC check.

Criminals are now using these “digital masks” to bypass video-based KYC and biometric checks. A scammer no longer needs to find a real person willing to rent out their account to move money stolen from gullible victims. They can simply manufacture a synthetic persona, open a heap of accounts across various banks, and use them to move stolen funds before the system can even blink. A Horizon Scan on Artificial Intelligence and Deepfakes, published by the Financial Action Task Force (FATF) in December 2025, observes: “The risks from deepfakes are escalating rapidly… Today, anyone with a smartphone and an internet connection can generate convincing deepfakes within minutes.”

We have moved from times when forging an identity required a lab to a juncture when it requires a subscription to a basic AI app. The proliferation of mule accounts is a global challenge. In India, data from the Indian Cybercrime Coordination Centre (I4C) suggests that approximately 4,000 mule accounts are reported daily. The challenge is going to become even more acute due to the democratisation of deepfakes. While mule accounts provide cybercriminals with the infrastructure to steal victims’ money, they are also misused by organised crime groups, terrorists, and even hackers for laundering illicit funds. However, it would be a mistake to view AI solely as a criminal’s tool. If AI helps create deepfakes, it also provides banks with the markers to detect them. Banks must now transition from passive KYC to a more dynamic AI-driven due diligence.

This involves, for example, deploying advanced algorithms called “liveness checks” that can detect the subtle unnaturalness in AI-generated skin textures, eye-blink patterns, and movements that a deepfake cannot yet replicate. Moreover, AI allows banks to move beyond customer identity at the gate (i.e. when opening an account) to observing their behaviour in the hallway (i.e. when conducting transactions). By embedding AI into core banking functions, banks can identify anomalies in transaction patterns (such as a housewife suddenly receiving large funds, or an agri-business without GST registration making high-volume international transfers), marking them as suspected mules in real time.

The ease of digital banking cannot be sacrificed, yet the integrity of our financial borders is under siege by synthetic actors. The problem is created by AI, and the solution lies with AI. Banks that treat AI as a core operational layer, rather than a peripheral compliance tool, will be trusted and will thrive. As global leaders gather at Bharat Mandapam for the India-AI Impact Summit 2026 this week, the focus is shifting toward institutionalizing these defenses. T

he summit is anchored on seven thematic “Chakras” or working groups, of which the third on ‘Safe and Trusted AI’ is dedicated to creating a global framework for transparency and accountability. For AI to foster ‘Progress’ (one of the summit’s three Sutras), it must be ‘Safe’. There is need for more dialogue on the regulated use of AI by banks for customer due diligence.

(The writer is co-chair of the FATF’s working group on risks. Views are personal. AI has been used by the writer to conduct editorial review of this article.)

Stock market opens higher on positive momentum ahead of AI Summit

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Ministry of Skill Development and Entrepreneurship to participate in India AI Impact Summit-2026

The summit, regarded as one of the largest AI gatherings in the Global South, will bring together global leaders, policymakers, and technology innovators.

PM Modi to inaugurate AI Impact Expo on Monday

Prime Minister Narendra Modi will inaugurate India AI Impact Expo 2026 at Bharat Mandapam here on Monday.

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