Know Your Business (KYB) is a process that verifies the legal status of a business and its compliance with Anti-Money Laundering (AML) regulations. Regulated entities must perform KYB verification to protect their interests. This background check prevents forming ties with shell companies or any illegally operating organizations.
This process helps companies understand potential business partners and those with whom they want to start a business relationship. In the B2B field, this is very important, as companies need to do background checks on the other entity’s shareholders, company owners, directors, suppliers, or third-party vendors. So, while the Know Your Customer (KYC) (focused on individual customers, not business entities) concept is more known to the general public, KYB holds the same value and importance in the regulatory compliance field.
In brief:
- To ensure that they are working with legitimate businesses that operate within the law, financial institutions such as banks and fintechs must perform both KYC and KYB checks.
- While KYB and KYC involve verification processes, KYB requires an additional layer of complexity since it focuses on confirming the legitimacy of both the business and ultimate beneficial owners (UBOs).
So, knowing the true nature of a company is essential in preventing financial crimes such as terrorist financing and money laundering.
KYB, in particular, takes this step further by additionally requiring companies to establish UBOs. This layer of security enables businesses to determine who directly benefits from the company’s profits, making it harder for criminals to conceal their illegal funds.
What is Know Your Business?
The Know Your Business (KYB) process is designed to verify another company by confirming its legitimacy through multiple important data points. This often includes verifying the company’s registration number, license, physical address, shareholder information, source of funding, and so on. KYB is part of a bigger AML framework that aims to detect fraud and prevent illicit activities that can come with B2B relationships, such as money laundering using shell companies.
Why is KYB Verification Important?
Using KYB verification services is critical to detect fraudulent activity among corporate clients effectively and prevent partnering with non-compliant businesses or those that are too much of a risk based on your internal AML risk assessment. For example, it’s illegal to partner with a sanctioned entity. That’s why during KYB verification, businesses conduct AML screening, scanning various sanctions lists, among other procedures aimed at detecting crime, including ties to money laundering.
The key reasons why businesses implement KYB checks include:
- A proper process for identifying business owners, shareholders, or individuals attempting to conceal illicit funds through hidden corporate structures.
- A better way for understanding the legitimacy of another company, helping companies identify legitimate corporations and non-compliant or high-risk entities.
Since corporate clients are more complex to deal with than individual customers, KYB helps establish a more thorough understanding of the other company. A robust KYB system can detect red flags for money laundering and help regulated entities stay compliant by establishing timely suspicious activity reporting practices. Given the serious consequences of non-compliance, conducting thorough KYB checks should be a top priority.
Know Your Business (KYB) vs Know Your Customer (KYC)
Both processes, Know Your Business (KYB) and Know Your Customer (KYC) are similar but they target different areas. The main similarity is that both verification measures are a part of AML regulations, which aim to protect financial transactions and prevent money laundering. However, while KYC applies to individual clients, KYB is designed to verify companies and business entities.
Essentially, not only financial institutions but all business-to-business service providers must comply with KYB regulations.
Related: KYB vs KYC — What is the Difference?
How Do KYB Checks Help With Compliance?
KYB checks help firms assess the suitability of a business by answering the main question — if it’s worth (and safe) to start a new business relationship with that entity. Ultimately, KYB compliance is the process of doing your due diligence on another entity and finding the risks that can be linked with that business. For example, an entity’s ownership structure can be colorful in the sense that it consists of various persons of significant control. These include Politically Exposed Persons (PEPs) and Ultimate Beneficial Owners (UBOs), who are often automatically classified as high-risk customers. In KYB compliance, the company and its people need to be verified and assessed and then categorized based on their risk profiles.
If a company chooses to engage with a higher-risk client, it may need to adjust its approach and proceed with enhanced due diligence (EDD) measures. Additionally, ongoing due diligence and processes like ongoing monitoring in KYB compliance are vital to staying compliant and tracking any changes in a person’s risk profile. For example, an individual can become a PEP, or they can get sanctioned due to changes in the geopolitical environment.
Related: What is the Difference Between CDD and EDD?
The History of Know Your Business Compliance
AML compliance in the US goes back to the Bank Secrecy Act (BSA) of 1970. It includes tracking suspicious activity, scrutinizing foreign transactions, and reporting cash transactions over $10,000, which are regulations we observe today.
Fast-forward to 2001, when the world was shocked by the 9/11 events, we faced another significant AML compliance requirement with the Patriot Act. It obliges financial institutions to collect information on individuals holding or opening new financial accounts.
However, the Panama Papers scandal exposed the Patriot Act’s limitations. We learn that enhanced due diligence measures were ineffective in stopping the rogue offshore finance industry from using illegal funds. To address this issue, in 2016, the government introduced new requirements specifically for onboarding business customers, known as KYB.
Key Know Your Business Regulatory Bodies and Rules
KYB requirements are not universally standardized and may differ based on where you do business. Nonetheless, the main regulatory compliance requirements you can encounter include:
- Financial Crimes Enforcement Network (FinCEN)
- Financial Action Task Force (FATF)
- EU’s Anti-Money Laundering Directives
Related: Global KYB Compliance — Top 3 Challenges and Solutions
It’s worth noting that even though it’s not legally mandatory, companies operating in unregulated industries also conduct KYB checks for security reasons. So, to have a clearer understanding of KYB, it’s crucial to consider your specific use case rather than solely focusing on your industry as a whole.
What is Required to Verify a Company?
KYB regulatory requirements mandate that companies must assess the risk associated with their business relationships. This involves conducting due diligence to evaluate the level of customer risk, which helps companies understand the individuals or entities they are considering doing business with.
So it’s the company’s responsibility to verify the business and its beneficial owners, as well as ensure that neither the company nor the individuals are on any global watchlists or sanctions lists.
To achieve this goal, businesses should implement a proper KYB process that consists of the following steps:
1. Verification of Registration and Licensing
KYB should review business registration and licensing documents to confirm the company’s legitimacy and operational status. This includes checking official government databases and conducting document checks. In general, the company that’s being verified should also provide detailed information to simplify the KYB verification process.
2. Conducting Due Diligence
It’s the process of evaluating the level of risk associated with a potential business relationship. Unlike customer due diligence, which involves verifying a customer’s identity, due diligence for businesses entails determining the company’s UBOs. If the UBO poses a higher risk, the company should follow enhanced due diligence (EDD).
3. Verification of Ultimate Beneficial Owners (UBOs)
A thorough understanding of a company’s ownership structure is essential. All of the company’s UBOs must be verified through standard KYC checks. This helps identify the entity’s owners and detect fake or altered documents that might hide illegal or, sometimes, shady and hidden corporate structures.
4. Sanctions Screening
It’s the process of identifying and verifying if sanctions imposed by regulatory authorities prohibit the potential business relationship. During KYB, the process of screening sanctions lists is important, as it involves checking whether the company or its employees are listed on any sanctions lists.
Related: The Complete Sanctions Screening Guide
5. PEP Screening
It’s the process of assessing any potential risks related to individuals and their links to political corruption. That means that during KYB, regulated companies need to screen their business relationships to detect any involvement with politically exposed persons (PEPs). Businesses with a positive PEP status pose a higher level of risk due to the higher chances of being involved in financial crimes. PEPs are categorized into domestic and foreign PEPs, and, for example, foreign PEPs are treated as high-risk, which means they need to undergo EDD.
6. Adverse Media Check
Adverse media involves monitoring news sources and other media outlets to identify any negative information about the business. Examining relationships with suppliers, customers, and media coverage helps detect potential red flags; for example, links to crime or the entity’s director being involved in a corruption scandal in the past might help you rethink this potential partnership. So, checking negative news and monitoring multiple news outlets provides frequent updates in real-time, allowing companies to respond to adverse media coverage adequately.
Related: Keywords in Adverse Media — Search & Screening Challenges
Why Does KYB Matter?
Regulatory authorities have discussed over the years that there was a gap left in the compliance landscape, allowing criminals to use various business structures to launder funds more successfully. There was a contrast since, compared to KYC measures (which have been in place since the early 2000s), KYB is a relatively new tactic. Business relationships were subject to less scrutiny than individual ones, allowing criminals to create shell companies that existed just on paper or hide the true ownership structure of a company and use other individual names to launder funds.
Since business records were only briefly verified and assessed, fraudsters could commit fraud and engage in all sorts of illegal schemes without undergoing personal screening, similar to how it all went down in the infamous Panama Papers scandal, where non-compliance reached a new level. Thankfully, FinCEN introduced new beneficial ownership reporting rules and included KYB verification in its CDD Requirements. To this day, this is a very important milestone, as it helped to create standardized and global guidelines on how to verify not only customers but whole corporate entities more accurately.
What are KYB Procedures?
The CDD Rule does not provide specific instructions on how each organization should perform KYB checks. However, even though Know Your Business regulations vary by jurisdiction, general KYB procedures oblige businesses to follow a risk-based approach and perform due diligence.
That means KYB verification typically has three main components (similar to the principle of the three steps to KYC):
- Business verification. Verifying the business.
- UBO verification. Identifying the company’s ultimate beneficial owners (UBOs).
- Ongoing monitoring. Maintaining updated customer information and monitoring risk on an ongoing basis.
Information Required for KYB Checks
The KYB process entitles companies to comply with AML laws, including the mentioned CDD Rule. To ensure compliance, companies must collect and verify different data points, including:
- Name: the company’s legal name.
- Address: the company’s operating address. Remember that a business operating address might not match the registered address.
- Business registration status: the current legal standing of a business entity, indicating whether it’s authorized to conduct business activities.
- Licensing documentation: the verification of licenses and permits that a business entity requires to operate legally in a particular jurisdiction.
- Ultimate beneficial owners (UBOs): the identification and verification of shareholders who have 25% or more beneficial ownership in the company.
By implementing KYB requirements, companies can avoid conducting business with entities that are involved in:
- Money laundering
- Terrorist financing
- Sanctions lists
- Tax fraud
- Other related offenses
Regarding Know Your Business checks, it’s crucial to focus on two factors: proper due diligence and a suitable compliance program that will guarantee that you are not doing business with criminals.
Who Needs to Perform KYB?
Financial companies are required by law to conduct KYB verification. The Final CDD Rule states that the following businesses need to follow KYB compliance regulations:
- Commodities brokers
- Mutual funds
- Banks
- Fintechs
- Securities brokers or dealers
- Commodities brokers
- Futures commission merchants
- Other financial institutions
Similarly, according to the EU’s 5th AML directive, crypto marketplaces, gambling operators, tax advisors, auditors, asset managers, credit institutions, notaries, and other financial companies need to carry out KYB checks to maintain compliance. However, there are exceptions where this rule does not apply. For example, verifying the identities of beneficial owners in KYB isn’t required for businesses in regulated markets within the European Economic Area (EEA) or regulated non-EEA markets.
Keep in mind that even though you might not be a regulated business, KYB verification checks are still a good investment in your company’s internal AML risk assessment (or fraud prevention) program. That’s because all businesses need to determine risk factors: both internal and external (in this case, potential dangers linked to a new supplier, for example).
That’s why, even though industries like e-commerce have less strict corporate due diligence requirements, they still need to make sure that all partners or users on their marketplaces are legit and not selling illegal services or fake items. Otherwise, they’re risking major financial losses, especially due to risks like disputes and an increased chargeback rate, which can sometimes lead to the loss of a business license.
Manual vs Automated KYB
Many compliance officers agree that KYB checks can give you a headache, especially if you don’t automate any processes, such as verifying UBO identities or automatically screening sanctions lists. All processes in KYB verification require companies to collect, analyze, and manage large volumes of data.
Performing KYB checks manually is time-consuming because it often requires:
- Hiring an in-house compliance staff to support regulatory requirements.
- Screening multiple AML databases, such as watchlists, PEPs and sanctions lists to ensure accurate user risk profiles.
This includes even the tiniest data pieces, such as the company’s registration number, or more detailed assessments, such as document verification and looking up official documents from at least a few government registries to cross-check information and ensure that it’s legitimate. Depending on the use case, verifying the source of funds or a person’s residential address is also important and time-consuming.
In contrast, automated KYB processes can help streamline KYB compliance. While manual intervention is still needed, as it’s practically impossible to proceed with EDD without the touch of a compliance officer, automated KYB workflows simplify processes linked to complex company structures and industry-specific requirements. That’s because automated KYB platforms handle large data volumes, automatically triggering KYC checks for individuals and conducting general background checks on the business in the same dashboard. On top of that, they allow companies to customize their KYB processes, send tailored questionnaires to corporate clients when extra information is required, and conduct ongoing monitoring to receive real-time alerts regarding suspicious activity.
Related: 6 Steps to Conduct a Know Your Business (KYB) Verification Check
Benefits of KYB
By automating cumbersome KYB processes, companies can turn KYB compliance to an advantage that actually helps prevent fraud and categorize risks linked to both individuals and corporate entities faster. This is vital, as inadequate KYB verification can signal potential AML concerns, increasing the risks of money laundering. So, automating KYB speeds up corporate verification, reduces operation costs, and simplifies the work for in-house compliance officers, who are responsible for managing KYB data.
Other benefits that KYB checks provide include:
Better Risk Management
Automated KYB software can detect changes in a customer’s risk profile in real-time, alerting compliance officers to take action quicker. This makes reporting practices easier and also allows to detect document fraud or identity theft more accurately since automation screens and verifies data faster. On top of that, it’s a great way to cut costs and focus on high-priority compliance tasks and identify high-risk clients rather than treating all cases manually and the same.
Streamlined Verification Processes
AI-powered KYB solutions can automatically extract necessary information from national and international databases, streamlining document verification procedures, including more complex processes, such as cross-checking client data with different government databases. This is important as multiple documents need to be verified.
For example, KYB software can streamline the collection of general company information, such as Name, registered number, registered office, and principal place of business, including other details regarding the people behind it, for example, KYC verification for all of the board of directors. Besides, local and global regulations differ, and companies with cross-border operations must comply with all relevant countries, which is challenging without KYB automation.
Ensured Compliant Ongoing Monitoring
KYB compliance isn’t a one-and-done task. It requires re-assessing multiple documents and adapting to regulatory compliance changes, which evolve quickly (for example, sanctions lists). KYB also requires monitoring and reviewing transactions and updating due diligence information. This is important, as even the most low-risk clients can develop fraudulent tendencies over time, which means their risk profile might change, requiring extra verification checks.
How iDenfy’s KYB Software Can Enhance Your KYB Process
Historically, Know Your Business checks were known for their complexity, especially when discussing manual back-and-forth research and data collection struggles between multiple sources and third-party vendors.
Collecting information, verifying data, and examining beneficial owners lacked a unified system for integrating all these steps. As a result, manual KYB checks created potential errors, data inconsistencies, and lengthy manual processes.
Today, the situation has significantly improved. Modern KYB solutions are fully automated, allowing compliance officers to avoid difficult manual screening processes by streamlining their work through automation.
Despite that, compliance remains a difficult task for many companies, especially now that KYB applies not just to banks and financial institutions. So, if you want to meet regulatory KYB requirements without slowing down the efficiency of business onboarding, there’s only one solution, and it’s automated KYB.
If you’re looking for an accurate, fast, and user-friendly KYB verification solution, try out our free demo to check out how automated Business Verification works with iDenfy.
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