Know Your Business goal is to identify the Ultimate Beneficial Owner of a company through stringent due diligence checks. The purpose of KYB procedure is to prevent financial crimes. But KYB checks are difficult as it requires to meet strict regulatory requirements.
The Know Your Business (KYB) process is similar to Know Your Customer (KYC), except it focuses on businesses rather than individuals. Like KYC, KYB verifies whether a company complies with the Anti Money Laundering regulations. KYB is done to confirm the legitimacy of a business and its structure to mitigate risk and create transparency. To ensure that their business clients are not committing any financial crimes, all financial institutions that make money transfers, such as banks and credit institutions, must implement KYB procedures to analyse and verify the business and its financial information.
KYB requires strict due diligence, partly to identify the actual beneficial owner or ultimate beneficial owner to ensure that the business is indeed legitimate. The 4th AML Directive sets out the requirement for KYB, which requires financial institutions to keep their business client's registration documents, license documents and verify the identities of the managers and owners of the company.
Financial institutions are held to a high level when it comes to understanding their corporate clients. Banks and financial services organisations, rightly or incorrectly, serve as gatekeepers. KYB is a crucial instrument in the fight against organised financial crime.
Having a better grasp of company risk is one of the benefits of KYB. It necessitates ongoing monitoring, which can lead to increased compliance. KYB also aids in the reduction of the volume of alerts that analysts must constantly handle, as well as the more efficient deployment of compliance resources to higher-value activities and investigations. It also helps compliance teams to apply rules and triggers at a more detailed level because the data they're working with is updated regularly.
Learn from our article the challenges of KYB for banks and financial institutions:
The most significant challenge to attaining high-performing in-life monitoring is the existence of siloed approach inside financial institutions, where not all information is shared equally amongst the staff within the banks. Sometimes, a compartmentalised approach is necessary to separate retail banking from corporate banking. However, in many circumstances, the siloed approach is merely a result of existing operating patterns, leaving KYB and risk management teams cut off from one another regarding sharing information. Technology, ironically, can sometimes strengthen the gap of information, with distinct tools and systems being used to manage KYB in areas like compliance and credit risk management. However, it can result in extremely fragmented processes that impede companies from developing a single customer view. This not only makes good risk management more difficult to achieve but it also stops businesses from discovering commercial opportunities with clients that might otherwise be exposed by a more comprehensive picture of customer data.
Financial services organisations have struggled to keep up with the complexity of KYB, such as the growing digitalisation of financial services and constant regulatory changes across worldwide jurisdictions. The adoption of RegTech to facilitate the automation of KYB processes has been gradual in some circumstances, but it has been slow. The hesitation to change and use new technologies may stem from a desire to avoid disrupting service and losing high-value corporate clients. It could also be a matter of trust. If you have a team of compliance professionals dedicated to extensive corporate customer due diligence, you can be more confident that nothing will slip through the cracks. As a result, some financial institutions rely on shared databases to match key executives to companies, but the process is laborious and far from perfect in the current operating climate.
The verification KYB process is automated by many banks that want to comply with AML requirements and secure their business clients. Numerous programs make KYB compliance with electronic authentication simple. However, KYB is still time demanding even with automation. This is because banks are constantly verifying their business client's information and continuously monitoring their further activities without causing any interruption to the services used by the client online. The ultimate beneficial owner is further subject to KYC and watchlist checks to confirm their identities and ensure they are not on any sanctions lists. Such things take time, and many banks struggle with balancing client satisfaction with compliance.
Thomson Reuters polled more than 430 AML compliance leaders in the United States to better understand how they are responding to regulatory disruption and other technical challenges. The inability to obtain Ultimate Beneficial Owner data was cited as the biggest challenge by 58% of the financial institutions. According to the poll, the average yearly spend on global customer due diligence and Know Your Business is about $48 million (almost 44 Million Euros), whereas banks claim to spend around $70 million (64 million Euros). Corporate clients' main pet peeves were excessive contact from the financial institutions, inconsistent demands, and security issues, while the financial institutions' biggest pet peeves were unwillingness to cooperate by the clients, inconsistent requests from regulators, and concerns about penalties for lack of compliance. No similar data had been gathered from Europe.
KYB is a vital part of risk management and of combating organised crime. The intensity of due diligence in corporate onboarding relates to the amount of money at stake. A robust KYB process, automated with RegTech and controlled by skilled professionals, is a key way to tackle this complex and knotty compliance challenge.
Last update: 22/03/2022
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