Implementing an efficient Know Your Business process informs financial institutions on a company’s background, overall legitimacy, and whether or not they pose a risk to any future business relations.
Julia Ront, Founder and CEO of Vespia
July 5, 2024
Welcoming new corporate clients has its risks. This makes it crucial for financial institutions to start with the appropriate Know Your Business (KYB) verification processes.
Understanding an entity's background during onboarding can protect financial institutions from exposure to illicit and fraudulent activities. With the right KYB procedures implemented, you can ensure compliance with Anti-Money Laundering (AML) regulations and security for your business.
Discover the importance of implementing a KYB or corporate KYC, who needs it, and how to do it efficiently.
What is Know Your Business (KYB)?
Know Your Business (KYB) is the process of verifying the legitimacy of a business or entity before proceeding with any further transactions with them. It is a meticulous procedure for determining whether a potential business relationship is safe or too risky to proceed.
KYB verifications must review a company's submitted documents, such as its address, business registration, and source of funds. They are created to prevent money laundering, fraud, and other illegal activities that corporate customers might attempt. This effectively makes it crucial for financial institutions to ensure compliance with laws and regulations such as the AML and Counter-Terrorist Financing (CTF).
While regulatory compliance may vary depending on where in the world you are, it's important to take note of main regulatory requirements from enforcers such as:
- Financial Action Task Force (FATF)
- Financial Crimes Enforcement Network (FinCen)
- Europe's AML Directives
Who should implement KYB?
Financial institutions and businesses in regulated industries, such as insurance and law companies, should implement a thorough KYB process. Regulations require these types of businesses to verify the identity and legitimacy of the business entities they deal with to ensure compliance, avoid legal complications, and maintain their overall reputation and client trust.
Here's a better look at who needs to have KYB procedures in place.
Financial institutions
Financial institutions are the primary means for individuals and entities from different backgrounds to make multiple big and small transactions. This can expose businesses in this industry to risks if clients are not subjected to scrutiny. Those who fall under this category are:
- Banks, credit unions, and other depository institutions
- Investment firms and asset managers
- Payment service providers and digital wallet operators
- Cryptocurrency exchanges and blockchain-related businesses
Regulated businesses
Businesses in this category have regulatory requirements they need to comply with before they can operate for legal purposes.
- Insurance companies
- Money service businesses (MSBs) and money transfer operators
- Broker-dealers and security firms
Large corporations
Large corporations have significant resources, employees, and a bigger capital than others in their industry. This means their decisions can influence many and impact the market in which they operate. This includes the following:
- Companies included in high-value transactions like mergers and acquisitions
- Businesses with extensive supply chains and multiple third-party vendors.
Fintech companies
Financial technology companies marry the responsibility of financial institutions with more accessible services seen in the form of consumer applications. Due to the nature of their services, they are subject to regulatory and KYB compliance, similar to financial institutions. The types of businesses here are:
- Lending platforms
- Crowdfunding platforms
- Peer-to-peer payment platforms
Legal and professional services
Legal and professional businesses protect the interests of different individuals and entities. Verifying whether or not potential clients are legitimate businesses before entering into a formal business relationship ultimately protects the firms as well.
- Law firms, especially corporate law, mergers, and acquisitions
- Accounting firms and auditors
- Consulting firms providing financial and business advisory services
Compliance requirements in the KYB process
Compliance requirements in the Know Your Business (KYB) process are essential for ensuring that businesses adhere to local and international regulations, prevent financial crimes, and maintain the integrity of their operations. Let's dive into the non-negotiables of KYB compliance.
Customer due diligence (CDD)
As businesses welcome new clients, conducting the initial customer due diligence process is standard procedure. This allows you to pull all vital information on their background and determine whether or not it's necessary to escalate your screening program.
Document verification
Document verification is a requirement for anti-money laundering regulations. This process involves scanning company information against all existing business registries and licenses in your jurisdiction. The key to an effective document verification process is ensuring you collect essential data for verification.
Some verification methods you'll need to look into are:
- Identity verification documents such as IDs and passports
- Address verification found in bills and bank statements
- Financial status verification from asset documentation
Verify the Ultimate Beneficial Owners (UBOs)
Aside from standard procedures seen in CDD, gaining a deeper understanding on an entity's background, specifically its members and most influential leaders can inform you on potential risks that goes on within the company. This is where UBO Verification tools come in. These solutions should be able to actively detect and flag any illegal activities from identified UBOs and kick off the EDD process.
UBO screening can help you understand business structures as well. An entity with a complicated business structure can indicate whether or not a business is legitimate or not. A good example would be a business with multiple layers of subsidiaries or offshore accounts that may not actually be necessary to run the business.
Enhanced due diligence (EDD)
Once a business is flagged as a high-risk customer, it's imperative to launch the Enhanced Due Diligence (EDD) process.
Because these high-risk customers are flagged for potential involvement in money laundering, terrorist financing, and illicit activities it's important that all relevant databases are checked thoroughly. This means undergoing the necessary screenings that check sanctions lists, global watchlists, and adverse media that the company is involved with will make all the difference in how you choose to move forward with a business.
A strong KYB solution will be able to cross-check the necessary databases to pull the most accurate results. This can effectively impact the next steps you take to mitigate risks the business may pose.
Automating the KYB checks
Automating KYB checks offers several significant benefits that enhance efficiency, accuracy, and compliance in the whole verification process. Here are just some of the many key reasons financial institutions and other relevant businesses should opt to automate KYB checks.
Increased efficiency
When you think of efficiency, time should be a key indicator of success. By choosing to use a KYB tool that automates the process, you can enhance the speed of your entire onboarding flow. In effect, clients can breeze through verifications to improve the overall business operations and improve customer satisfaction.
Additionally the amount of time actually saved processing large volumes of data with speed surpasses what a manual KYB check can do.
Improved accuracy
The best tools can validate data across multiple data sources simultaneously. Some can even have access to other local and international jurisdictions, enabling you to expand your services to a global audience.
Today, some of the advanced KYB solutions work with artificial intelligence and sophisticated technology to minimize error and create more accurate and consistent verification results. That means, fewer false positives and negatives to deal with.
Regulatory compliance
A good KYB verification tool should be able to take the stress out of ensuring compliance. Automated systems can consistently sift through all the necessary steps to meet regulatory requirements at any time, with any customer. This means there's a reduced chance of not meeting the standards and getting compliance fines and other issues.
It's also no secret that laws and regulations are subject to change. While keeping up with this can be overwhelming, automated tools are created to stay up-to-date, immediately reflecting the most recent regulatory changes to help keep you abreast evolving laws and industry standards you might have missed.
Enhanced risk management
Automation can also take the work out of comprehensive screening when there are many lists to check. This means sanctions lists, watch lists, PEP lists, and adverse media checks will be accounted for when you receive the final risk assessment from your KYB tool.
Once you've come to a final decision, automated system can also offer to continuously monitor business clients. This is especially helpful in monitoring their risk profile and getting real-time alerts for issues as they happen so you can make faster and more informed decisions during risk management.
Enhanced data security
Data is a valuable component of any business. It holds sensitive information that, when leaked, could cause chaos. Automating your KYB compliance should come with robust security measures that can safeguard every bit of data that is come across in the verification process so you can rest assured everything is accounted for.
Plus, automation can ensure you adhere to data protection laws and regulations that must be observed such as Europe's GDPR.
Improved reporting and documentation
The last but not the least of the benefits you get with an automated system is a detailed audit trail and report. This information is valuable for documentation needed in complying with regulatory audits and inspections. Additionally, the system should be able to provide easy access to all records of KYB verification your team has conducted.
Streamlining the business verification process
Implementing an effective KYB process is essential for many businesses. This includes fintech companies, banks, large corporations, and other regulated businesses. By thoroughly verifying the legitimacy of business entities and their beneficial owners, different types of organizations can protect themselves from exposure to illicit activities and ensure compliance with regulatory requirements such as AML and CTF laws.
While the entire KYB process may seem long and complicated, there are ways to streamline these tasks. One effective way is to use a KYB solution that can automate the entire process.
Vespia offers all the key features you need to reap the benefits of boosting efficiency, enhancing security, staying compliant, and more. Book a demo today and learn how we can help your business.
