The Know Your Business goal is to identify the Ultimate Beneficial Owner of a company through stringent due diligence checks. The purpose of the KYB procedure is to prevent financial crimes. But KYB checks are difficult as they require meeting strict regulatory requirements.
Learn about the problems of KYB for banks and financial organisations in our article:
- What is KYB or Know Your Business and why is it important?
- Challenges of Know Your Business
- How does KYB help protect companies from fraud?
- How can automated processes help with KYB?
- The meaning of KYB in Europe
Know your Business is a crucial instrument in the fight against organised financial crime. It is a way to verify that the business you are dealing with, is legal and that they will not misuse your finances or the relationship you have. 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.
Having a better grasp of company risk is one of the benefits and reasons for 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 apply rules and triggers at a more detailed level because the data they're working with is updated regularly.
Definition of Know Your Business
KYB 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 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 requirements for KYB, which require financial institutions to keep their business clients' registration documents and licence documents on file and verify the identities of the managers and owners of the company.
What is the main goal of Know Your Business?
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. In practice, the goal of the KYB is executed through company due diligence on the business itself, monitoring their transactional behaviour, screening for sanctions and political exposure, and screening the company's media presence.
How does Know Your Business impact you?
How KYB impacts you depends on which side you are on. Are you a firm that is establishing new relationships with your business clients? Or are you the business client yourself who needs to be verified by the firm? Regardless of which stakeholder you are, not complying with KYB will put your business at risk of money laundering and terrorist funding. KYB's brand integrity and profitability could be at risk if proper KYB due diligence is not carried out, and penalties for non-compliance could be imposed.
No company wants to be found non-compliant with KYB as they do not want to be imposed with fines and eventual bankruptcy. However, KYB is intense and rigorous, and there are legitimate barriers preventing companies from complying with KYB. Learn from our article the challenges of KYB for banks and financial institutions:
- Siloed approach to information
- Complexities of KYB and the unwillingness to adapt
- KYB is time consuming and
- The cost of KYB
Siloed approach to information
The most significant challenge to attaining high-performing in-life monitoring is the existence of a 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 between 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.
Complexities of KYB and the unwillingness to adapt
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.
KYB is time consuming
The verification KYB process is automated by many banks that want to comply with AML requirements and secure their business clients. Numerous programmes 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 clients' information and continuously monitoring their further activities without causing any interruption to the services used by the clients 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.
Cost of KYB
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 has been gathered from Europe.
KYB reduces the risk of a financial institution becoming the unwitting victim of fraud because of the measures these firms take. The following are the ways in which KYB verification helps companies with fraud prevention:
- Legal compliance: Regulatory-compliant organisations can use KYB to identify if their business partners or suppliers pose money laundering and terrorism financing threats, engage in financial crime, or are subject to penalties or other adverse regulatory actions. Regulators, including the European Banking Authority require the identification and verification of firms and Ultimate Beneficial Owners. Corporations can help law enforcement by reporting suspicious conduct and sharing available information on clients or activities that are under investigation thanks to company verification. AML requirements might be violated if a customer fails to perform proper due diligence. This means that a corporation begins working with a corporate customer before conducting the proper due diligence procedures, putting them at risk of money laundering or terrorist funding.
- Preventing fraud: It is KYB's job to help organisations identify and remove fraudsters among their business partners. In this way, laundering, terrorist financing, and corruption can be reduced. A firm might easily become a victim of fraud. It's critical to be on the lookout for warning signs up front. For example, if there is no major credit history for the company, or the company's official records contain inaccuracies, or its ownership has changed, you may want to investigate those inconsistencies.
Institutions that require KYB procedures
KYB must be verified by all financial organisations that process money transactions, such as banks. In addition, organisations must thoroughly investigate and verify the financial and business information of their global partners. These measures help companies avoid document fraud and ensure that transactions are secure. To ensure compliance with current money laundering requirements, KYB procedures must be completed in full. Financial institutions that adhere to anti-money laundering (AML) legislation avoid fines and reputational damage. According to the 5th AML Directive, KYB procedures must be implemented and adhered to by the following organisations, corporations, and individuals dealing with money transfers:
- Credit and financial institutions
- Banks, online banks, payment institutions, and wallet providers
- Auditors, estate agents, asset management and managers, and external accountants
- Tax advisors, trusts, and notaries
- Cryptocurrency marketplaces and gambling services
- Trading service providers, including in the art sector and auction houses
It can be very hard to figure out how a company is set up because it may involve multiple businesses, countries, and legal systems. The traditional way to find out who owns a business, looking at the ownership structure and documents, and finding out who the beneficial owners are, takes a lot of time. Because of this, businesses that want to follow AML rules and keep their businesses safe use electronic identity verification (eIDV) to automate the process of verifying people's identities. Electronic authentication and other automated KYB checks make it easy for companies to meet KYB requirements.
To figure out who the final beneficiaries and shareholders are, data from state analyses, global corporate records, PEP, and sanctions databases are used. Also, businesses stay compatible because they are constantly watched and have automatic controls. Companies use APIs to get and check official business registration data as part of automated KYB verification. The API makes it easy to connect systems so that information can be quickly retrieved, shared with the right people, coordinated, and cases marked for manual review.
The bank information of third parties can be checked and verified on a regular basis to make sure they are linked to the company. Along with the business's authorisation code, automation can obtain valuable information for decision-making.
Europe is stricter regarding verification of financial businesses than any other jurisdiction. One or more of the wide-ranging issues that the financial industry has been grappling with for the past ten years were addressed by a range of regulations:
- Fourth, Fifth, and Sixth Anti-Money Laundering Directives: These regulations impose increased inspections, boost international cooperation, and strengthen criminal punishments to address the pervasive problem of money laundering. KYB's requirements are outlined in the European Union's 4th Anti-Money Laundering Directive. The 4th AML Directive mandates that reasonable measures be taken to identify the ultimate beneficial owner and to comprehend the customer's ownership and control structure
- Payments Services Directive: To promote customer-centric innovation, PSD2 was implemented to focus on preventing payment fraud and the misuse of digital financial tools
- Markets in Financial Instruments Directive: MiFID II was implemented for more financial investment activity transparency
- General Data Protection Regulation: GDPR was enacted as a response to public demand for more control over personal information
In order for banks and other financial institutions to be fully compliant, they must be able to identify and authenticate their customers based on the information they provide during the on-boarding process. This is how banks and other financial institutions keep track of what's going on with their customers' money. It's not just a matter of ensuring compliance; banks must also make sure that their customers aren't turned away and that they can get access to credit. Financial institutions face a number of challenges, including the wide range of acceptable documentary evidence; the cost of implementing verification systems; the length of time it takes to verify a client, even with automation; and the unwillingness to adapt to rapid changes in law and technology, as well as a dearth of consistent communication systems within the organisation as a whole. By automating the KYB verification process and the monitoring that comes after, the number of false cases and alarms can be cut down.
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.