The modern, technologically advanced world demands its’ inhabitants to follow an ever-increasing number of guidelines to prevent financial, governmental, and other institutions from disaster. Business verification is one of them. The digitization of our everyday lives sets the stage for more devious fraudulent activities than ever before. And even if it usually gets unnoticed by individual people, these activities have an immense impact on governments, organizations, and various institutions. Identity and business verification rules and regulations are set up to fight these issues. Still, at the end of the day, the responsibility falls at the hands of organizations to comply and implement them efficiently.
The Cost of Money Laundering
Individual cases of fraud are enough to mount up to a large sum over the year. For example, synthetic identity theft cost United States lenders up to $6 billion in 2016 alone. Large sum as it may be, it’s but a fraction of what various money laundering schemes add up to. Financial Crimes Enforcement Network (FinCEN) Files revealed that banks worldwide have contributed to moving more than $2 trillion in suspicious payments! United Nations Office on Drugs and Crime estimates a similar amount – according to them, 3 to 5 per cent of global GDP is lost to money laundering annually, which adds up to $800 billion – $2 trillion. In the context of the ever-widening gap between the rich and the poor, this reflects poorly on our institutions and further burdens citizens with taxes. At the same time, corporations exploit the gaps in security measures aiming to prevent money laundering schemes.
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The Burden of Responsibility
Financial institutions are always at the front lines in the war against fraud. Not only does money laundering affect the parties involved financially, but it is also a matter of national security throughout the world, as terrorist organizations are also relying on financial transactions. Therefore, the banking industry has a massive responsibility in implementing rules and financial institutions are always at the front lines in the war against fraud. Not only does money laundering affect the parties involved financially, but it is also a matter of national security throughout the world, as terrorist organizations are also relying on financial transactions. Therefore, banking industries have a massive responsibility in implementing rules and restrictions and reliably executing said policies, especially in business verification.
Knowing who your customer is and making sure that they are trustworthy is now becoming key in preventing fraudulent activities and strengthening securities. That is why know your customer (KYC) guidelines are implemented worldwide at an increasing rate each year. These guidelines require the professionals to make an effort to verify the identity and suitability of their clients and critically assess the risks involved with establishing a business relationship with them. Knowing who your partners and business are is arguably an even more significant issue. That’s why Know Your Business (KYB) guidelines are also implemented globally, and reliable business verification services are crucial in the process.
What is Know Your Business (KYB)?
Know Your Business (KYB) is a set of practices in business verification aimed at minimizing the risk of money laundering and other fraudulent activities. It’s an extension of Know Your Customer (KYC) guidelines and includes verification of the company’s data as well as its Ultimate Beneficial Owners (UBOs). Screening businesses against blacklists and grey lists is also part of the process to check if they were involved with any criminal activities.
Know Your Business Regulations
KYB is similar to KYC. Based on the latter, institutions ask the customers to provide their:
- Name
- Date of birth
- Address
- Telephone number
- Identity documents
- National ID number
The KYB Guidelines Require Businesses to Provide their:
- Company name
- Company address
- Business registration number
- Operational status
- Incorporation date
- Key management personnel
Regulations and policies adopted by various institutions may differ from one another and ask for additional information in both the KYC and the KYB processes.
Customer Due Diligence and Europe
In the EU, The European Parliament and The Council of The European Union set the KYB requirements in a Directive aiming to prevent using the Union’s financial system for money laundering and terrorist financing. It is directed to credit and financial institutions as well as other legal persons, exercising their professional activities. While it’s an extensive document, it can be summarized by the customer due diligence (CDD) measures:
- Identifying the customer and verifying the customer’s identity on the basis of documents, data or information obtained from a reliable and independent source;
- Identifying the beneficial owner and taking reasonable measures to verify that person’s identity so that the obliged entity is satisfied that it knows who the beneficial owner is, including, as regards legal persons, trusts, companies, foundations and similar legal arrangements, taking reasonable measures to understand the ownership and control structure of the customer;
- Assessing and, as appropriate, obtaining information on the purpose and intended nature of the business relationship;
- Conducting ongoing monitoring of the business relationship, including scrutiny of transactions undertaken throughout the course of that relationship to ensure that the transactions being conducted are consistent with the obliged entity’s knowledge of the customer, the business and risk profile, including where necessary the source of funds and ensuring that the documents, data or information held are kept up-to-date.
Under these rules, organizations and their employees can be held criminally liable due to negligence and irresponsibility in enabling the flow of illicit funds.
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Customer Due Diligence and the U.S.
In the U.S., the Department of The Treasury issued their own CDD requirements for financial institutions back in 2016. They believe that four critical elements of CDD should be adopted as explicit requirements in the anti-money laundering program:
- Customer identification and verification
- Beneficial ownership identification and verification
- Understanding the nature and purpose of customer relationships to develop a customer risk profile
- Ongoing monitoring for reporting suspicious transactions and, on a risk basis, maintaining and updating customer information.
“This division requires certain new and existing small corporations and limited liability companies to disclose information about their beneficial owners. A beneficial owner is an individual who (1) exercises substantial control over a corporation or limited liability company, (2) owns 25% or more of the interest in a corporation or limited liability company, or (3) receives substantial economic benefits from the assets of a corporation or limited liability company.”
Official document by the U.S. government issued a Corporate Transparency Act, 2019
The division also authorizes criminal penalties for either failing to provide said information or providing false/fraudulent information. It can result in a fine or prison term for up to three years.
Regulations Throughout the World
We have only reviewed the EU and U.S. regulations, but most responsible countries worldwide are issuing similar laws and regulations in the fight against fraud and money laundering. These and other upcoming measures are there for a reason and will help to ensure transparency in financial operations.
The Rules are There for a Reason
It is crucial for all institutions to follow the guidelines and take measures to prevent fraudulent activity – and not for legal reasons alone. To maintain the reputation and trust of their clients, companies should strive to establish partnerships only with trustworthy individuals and businesses.
While checking the validity and background of different businesses to assess the risks they bring with them and ascertain that they’re trustworthy may be a time-consuming and challenging task for individuals, automated systems can do this job just as, if not better. Powered by artificial intelligence, such systems can detect fraudulent information more quickly and more reliably than any human ever could.
Here at iDenfy, we pride ourselves on our capabilities to handle identity verification to the highest standard. Using our service, organizations can quickly and efficiently identify various business institutions and beneficial owners. Complying with KYB guidelines will prove to maintain a reputation of a responsible organization and minimize the risks of being involved with untrustworthy institutions. We provide and verify data intelligence for 250 million business entities in over 80 countries and offer an on-demand business verification service analyzes.
We believe that taking an extra step in the process of identity and business verification is critical for the betterment and security of our digital environment. Take this step together with iDenfy!
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