Since the late 1900s, KYC has helped create a safer financial system through customer verification. However, the initial framework focused mainly on individuals, leaving out businesses entirely.
Fraudsters exploited this loophole by using shell companies or legitimate businesses to hide, making it easier to launder money.
In 2006, the US watchdog Financial Crimes Enforcement Network (FINCEN) took a significant step to tackle this issue. It included parts of KYB regulations in the Enhanced Customer Due Diligence Requirements, aimed at weeding out illegitimate businesses.
Moving forward, we’ll explain what businesses must know about KYB, and how they can leverage it for seamless compliance.
Understanding KYB and Its Benefits
KYB requires you to play detective by identifying people who have significant control of the business. These ultimate beneficial owners (UBOs) must have over 25% ownership- a common standard that varies depending on the jurisdiction.
Similarly, the scope of KYB implementation may vary from business to business. This depends on several factors like the business’s size, and the resources available for KYB implementation
Let’s understand the significance of KYB protocols for your business:
1. Operational Efficiency
KYB leverages technology to automate the process of verifying business partners. This includes checking their background, ownership structure, and financial health.
For instance, let’s take a look at how Effectiv assisted BigCart with KYB compliance. The fintech company used the former’s KYB solution to automate their supplier pre-screening process. This saved them significant time and resources compared to their former manual approach.
KYB also continuously scans for changes in a partner’s risk profile. This could include changes in ownership, legal issues, or financial troubles. If any red flags are detected, KYB alerts you immediately.
2. Reputational Protection
Adhering to ‘Know Your Business’ compliance is like a badge of honor. It shows your commitment to ethical practices like data protection and others. In a world where your reputation can spread like wildfire, KYB ensures you’re seen in a good light. And distances your brand from any corrupt associations.
3. Global Market Access
KYB protocols help you partner with global businesses seamlessly. Countries have different financial rules, but KYB ensures you follow them all. It’s like a passport for doing business in various legal landscapes.
Additionally, effective KYB streamlines cross-border transactions by reducing delays or rejections due to non-compliance. This allows your business to operate efficiently and work on international opportunities.
4. Reduced Insurance Premiums
Robust KYB practices can lead to lower insurance premiums for businesses. This is because insurance companies assess a business’s risk profile before determining coverage costs. By showing a strong commitment to KYB compliance, businesses can mitigate risks. These risks include fraudulent activities, money laundering, and other financial crimes. And such risk profiles can lead to lower insurance premiums.
The Roadmap to Effective KYB Compliance
KYB is not a “set it and forget it” task. Businesses change, and new risks can emerge. And with this in mind, it’s important to continuously monitor who you’re doing business with. Being proactive will help you catch any changes in their structure, or risk profile that could later affect your relationship.
Things to keep in mind
Businesses must be mindful of privacy laws when collecting, storing, and processing information. Additionally, you need to ensure your KYB practices comply with the following laws:
- Bank Secrecy Act (BSA)
- General Data Protection
- Regulation (GDPR)
- California Consumer
- Privacy Act (CCPA)
- Virginia Consumer Data
- Protection Act
- New York Privacy Act
It’s also important to keep thorough records of your KYB checks. This includes the information you’ve gathered, the analysis performed, and the decisions made. Good documentation is also crucial for demonstrating compliance, and is an invaluable asset for future audits.
Getting started with KYB compliance
Once you’re familiar with the privacy laws, you can follow these steps to initiate KYB compliance:
1. Due Diligence
Start by gathering official documentation. You need to verify the company’s existence through public records. You must also have a clear understanding of the nature of the business’s activities. Common red flags include connections to risky countries or industries prone to money laundering. Once identified, you’ll need to dig deeper. This includes interviews with management, on-site visits, and thorough reviews of financial transactions.
2. Transaction Monitoring
Analyzing transaction patterns is a crucial aspect of KYB implementation. It involves scrutinizing financial activities to identify any anomalies or suspicious behavior. One red flag to watch out for is transactions that fall just below reporting thresholds. This could highlight an attempt to evade detection by breaking up large transactions into smaller bits.
Another warning sign is sudden spikes in activity. This could be a sign of money laundering or other illicit activities.
To effectively monitor transactions, businesses can leverage AI and ML technologies. These tools can analyze vast amounts of data in real-time. They also identify patterns that might be difficult for humans to detect. By tracking all transactions in one centralized platform, businesses can gain a comprehensive view of their partners’ financial activities.
3. Sanctions Screening & Adverse Media Monitoring
Regularly screen the lists from the Office of Foreign Assets Control (OFAC) to detect any direct or indirect associations. You can even screen sanction lists from the United Nations, and the European Union. This includes checking subsidiaries, affiliates, and senior management. Lastly, you must extend monitoring beyond traditional news outlets. Going through social media, blogs, and financial crime news services would give you a 360-degree perspective.
Streamlining KYB Onboarding with Technology
Initially, KYB processes were time-consuming. They involved a lot of paperwork and manual verification. Teams had to sift through vast amounts of data to identify the real owners of businesses. KYB providers like Effectiv have taken a step further by using advanced technologies like AI and ML.
These providers automate everything from A/B testing new onboarding strategies to seamless UBO verification. This automation streamlines the entire KYB process, making it faster, more accurate, and less daunting for businesses.
FAQs
What does KYB stand for?
KYB stands for Know Your Business. This is a due diligence process aimed at preventing financial fraud by verifying the legal status and ownership structure of businesses. This process is crucial for understanding who you’re doing business with, ensuring they are legitimate and legally compliant.
What is KYB registration?
KYB registration is the procedure businesses undergo to verify their legal and operational status. This includes the identification of their ultimate beneficial owners (UBOs) as well. It’s a foundational step for businesses to prove their legitimacy and establish trustworthiness in the global marketplace.
What are KYB requirements?
KYB requirements include a thorough collection and verification of a company’s documentation. These would be:
- Legal registration papers
- Details of the owners holding significant control
- Address proofs
Such measures aim to authenticate a business’s operations and compliance with anti-money laundering regulations.
What is the KYB verification process?
The KYB verification process entails detailed checks on a company’s registration information. Identifying and verifying the UBOs is also involved. Lastly, businesses will need to assess compliance and legal frameworks . Leveraging technology and global databases, this process ensures businesses meet international standards of operation and legality.
