Know Your Business (KYB) is a critical step in the AML compliance process. It is an extension of the Know Your Customer (KYC) process. The main difference is that KYB focuses on the business's owners, shareholders, and suppliers before considering customers or consumers.
When the USA Patriot Act was enacted to prevent money laundering and terrorist financing, it overlooked the regulation of chamber regulators. Companies could not comply with this regulation, and it went unnoticed for several years. This loophole allowed financial criminals to take advantage of the system. In 2016, KYB was introduced to close this gap, and regulatory institutions worldwide incorporated it into their compliance structure.
KYB compliance is essential for companies to protect their interests before doing business with other companies. Companies need to know whether their income is being misused by corrupt business owners, shareholders, or money launderers. To do this, KYB applications verify whether the corporate businesses they are dealing with are legal entities or shell companies.
In addition to legal considerations, companies must know the Ultimate Beneficial Ownership (UBO) of the businesses they deal with. The UBO is the legal entity that benefits from the company's profits. Companies must conduct UBO checks and verification to determine the UBO structure of their potential customers. Shell companies are notorious for hiding billions of dollars of hidden funds to evade legal taxes, and these funds often end up in the hands of people with a strong tax burden. Doing business with these people can damage a company's reputation.
Therefore, KYB should review the UBO structure with Customer Due Diligence (CDD). This process ensures that companies are not dealing with businesses involved in illegal activities, and their profits are not being misused. Companies that fail to comply with KYB requirements face severe penalties, including fines of up to millions or billions of dollars and even imprisonment for more severe offenses.
What Are KYB Procedures?
KYB procedures are an essential part of compliance for companies involved in financial activities. This process involves collecting and verifying the identity of the company, its ownership structure, and its business activities. The procedures are put in place to comply with AML regulations and prevent any risks of money laundering or terrorist financing activities.
To comply with KYB procedures, companies must collect various documents and information. These include the registration documents, the address of the company, and license documents. Companies must also collect the identities of the managers and owners. These documents are obtained from reliable sources and verified to ensure their authenticity.
One crucial aspect of KYB is verifying the UBO of the company. The UBO is the legal entity that ultimately benefits from the company's activities. KYB procedures require companies to identify the UBO and obtain their identity documents. This helps prevent the use of shell companies and ensures that the company is not being used for illegal activities.
After verifying the identities and ownership structure, companies must continuously monitor the activities of their partners to ensure that they are not involved in any illegal activities. Companies must evaluate the risk profiles of their partners and identify any suspicious activity. This helps prevent the company from being used for money laundering or terrorist financing activities and reduces the risk of fraud in their accounts.
How to Automate KYB Compliance?
With the increasing need for businesses to comply with AML regulations and CFT, the process of verifying a business owner's identity, examining the ownership structure and documents, and determining the identities of the beneficial owners can be a time-consuming process. This is where automated KYB compliance comes in.
Automated KYB compliance uses electronic identity verification (eIDV) to automate the verification process, allowing companies to comply with AML regulations and protect their businesses. It provides easy access to KYB compliance with electronic authentication, making the process faster and more efficient.
To analyze the final beneficiaries and shareholders, automated KYB compliance uses state analyses, global corporate records, PEP, and Sanctions database data. Continuous monitoring and automatic controls ensure that businesses remain compliant. In this way, businesses can obtain and validate official commercial registration data using APIs. With the business authorization code, the digital KYB service can collect important information for the business.
Using automated KYB compliance not only saves time but also reduces the risk of human error. The system is designed to be more efficient, accurate, and reliable, ensuring that the business verification process is carried out smoothly. By automating the KYB compliance process, businesses can ensure that they are meeting the necessary regulatory requirements and protecting their businesses from financial crimes.
Who Need to Conduct KYB?
KYB procedures are required to be conducted by various institutions to comply with AML/CFT regulations. These institutions include not only financial institutions such as banks but also companies that engage in business transactions with other businesses. This includes suppliers, vendors, and partners.
For financial institutions, conducting KYB procedures is mandatory to ensure that they comply with AML regulations. Financial institutions are at high risk of being exploited for money laundering activities due to the nature of their business. By verifying the identities and ownership structures of their business partners, financial institutions can prevent money laundering and terrorist financing activities.
On the other hand, companies must conduct KYB procedures to protect themselves from fraudulent business transactions and ensure that they are not inadvertently engaging in money laundering activities. Conducting KYB procedures is also a requirement for companies to comply with AML regulations.
KYB procedures involve collecting and analyzing information such as registration documents, company address, license documents, and the identities of managers and owners. This information is verified using reliable sources, and companies must continuously monitor their partners' activities to ensure their risk profiles. The ultimate goal of KYB procedures is to identify and evaluate any suspicious activity, protect companies from being used for money laundering or terrorist activities, and avoid fraud in their accounts.
To make the KYB process more efficient, many institutions use electronic identity verification (eIDV) to automate the verification process. This helps speed up the process and ensures greater accuracy in verifying the identities of business partners.