Know Your Business Verification: All You Need to Know

Online fraud is an epidemic that has infected various industries. Many businesses are going digital, leaving gaps in their security strategies. With less transparency and more complicated regulations, companies choose to search for new automated fraud prevention tools that would help overcome cybersecurity and compliance challenges.

If you’ve been following our blog, you’re already aware of an important term – Know Your Business (KYB). This process evolved from Know Your Customer (KYC) and has become a necessary part of organizations and their regulatory landscape.

This time, we’ll review the Know Your Business verification and its features to help you learn more about effective fraud prevention methods.

What is Know Your Business Verification?

Know Your Business is a verification standard that determines the legitimacy of the company and its ownership structure. It’s a due diligence procedure that reviews business activities to ensure that the partnering entities aren’t involved in illicit activities.

Additionally, KYB includes other processes, such as Ultimate Beneficial Ownership (UBO) checks for the company to find out who’s related to the company’s profits. By identifying UBOs, companies enhance their regulatory compliance position.

Know Your Business Verification brings confidence by ensuring that:

  • The other business you’re working with is real. KYB determines the authenticity of any company by checking if it’s not an illegitimate corporation that only exists on paper.
  • The people who run the company are physical individuals who aren’t involved in financial crimes, such as money laundering or terrorist financing.

All things considered, KYB verification methods are the basis of Anti-Money Laundering (AML) regulations and are a part of the mandatory requirements defined in the 5th Anti-Money Laundering Directive (5AMLD).

KYB Verification Regulations

KYB is a relatively new concept in the fraud prevention field. While KYC compliance has safeguarded companies since the early 2000s, business relationships were moved into the secondary picture. Until recently, that meant that criminals could get away with shell company schemes and hide their identities.

The US Financial Crimes Enforcement Network (FinCEN) presented new KYB regulations in 2016 within its Customer Due Diligence (CDD) requirements in response to the growing problem. The laws eliminated the security loophole.

That meant that now, business relationships were subject to the same scrutiny as individuals. Any business working with another company has a standardized method to review and determine if that enterprise itself is genuine.

Who Needs to Conduct KYB?

Financial institutions and businesses that partner with other companies, such as those operating in the Crypto or Fintech markets, must conduct Know Your Business Verification. Other organizations, businesses, and individuals are subject to this regulation are:

  • Notaries
  • Tax advisors
  • Gambling services
  • Trusts
  • Asset managers
  • Credit institutions
  • Others

Even though some corporate customers aren’t required to perform KYB verification, it’s important to remember that such checks help businesses save their reputation and prevent fraud.

For example, Know Your Business verification benefits different sharing economy companies and various e-commerce platforms. Performing KYB for non-regulated sectors prevents the misuse of assets and helps detect bad actors and shell companies.

How Does KYB Help Spot the Red Flags?

It’s important to understand that fraud can find its way to any company.

Know Your Business verification tools solve this issue by detecting various red flags during the company screening process, preventing the other entity from getting involved in shady criminal activity. Some of the most common signs of suspicious behavior are if:

  • The company doesn’t have a credit record.
  • The organization’s ownership structure constantly changes.
  • The entity’s documents aren’t structured; they include mistakes.
  • The office address differs from the company’s shipping address.

For example, a fraudster can find an organization that hasn’t been active in recent years.

Then the criminal can rename the company and start placing orders. They aim to get away with the scheme without paying for the orders. Usually, the fraudsters then disappear with the goods and millions in their pockets before anyone notices their criminal activity.

Manual KYB vs. Automated Know Your Business Verification

Know Your Business verification is complex because of the multiple components that compliance officers need to review and monitor.

As a result, the KYB process requires specialists to conduct AML screening, check additional reports and documentation, ensure KYC verifications, and at the same time, guarantee compliance and accurate results.

There are three main challenges regarding manual KYB checks:

  1. Time. To conduct a full KYB procedure manually takes hours for compliance officers.  They need to research and investigate AML screening results, order reports and review additional documents, such as credit or government registry reports.
  2. Client experience. The manual KYB procedure takes hours. If the queue is long, customers need to wait in line for days.
  3. Cost. Starting from the working hours, potential client loss, and ending in penalties for undetected fraudsters – the expenses of manual Business verification procedures can be relentless.
What is Know Your Business Verification?

Why Does Know Your Business Verification Matter?

Staying compliant with the law is vital to prevent crime and the loss of funds or reputation. Banks and other financial institutions that fail to perform their AML duties risk receiving millions worth of fines. Fenergo reported that last year, non-compliance with AML and KYC regulations resulted in $5.4 billion for the financial sector.

Even though technological solutions are now here to help compliance officers minimize the workload and decrease the chances of human error, the enormous numbers show that many companies still struggle to maintain effective KYB procedures.

That said, we’ve now covered the basics. Let’s jump into the pros and cons of KYB and learn more about automated Business Verification solutions.

1. The Benefits of KYB

Opposite to KYC, Know Your Business Verification focuses on organizations instead of clients. The process ensures secure business relationships by preventing fraud and helping organizations comply with regulations. Some of the key aspects explaining the benefits behind KYB are:

  • It ensures safe B2B relationships.
  • Automated solutions automatically remind compliance officers to stick to their AML-related tasks. This way, KYB reduces human error.
  • KYB guarantees compliance with ever-changing regulations.
  • Know Your Business verification reduces operational costs.
  • KYB helps prevent fraud.

2. The Disadvantages of Manual KYB

Why do you need automated Know Your Business Verification? There are several reasons.

As businesses adapt to the demanding market and use efficient and cost-effective KYC solutions to onboard their customers, the same principle can be applied to automated KYB checks.

Manual due diligence can result in various issues:

  • Multi-step procedures with no guaranteed results.
  • Insufficient regulatory processes.
  • Lack of scalability and automation.
  • Faulty detection of recurring fraud patterns.
Want to find out more about who you’re partnering with? Try a free KYB demo.

KYB Guarantees Safer Business Relationships

Business Verification safeguards the mutual interests of both parties regarding business relationships. By verifying the company’s data, such as the Politically Exposed Person (PEP) list or the Ultimate Beneficial Owners (UBOs), the business ensures that the other company isn’t involved in any criminal activity.

Besides confidence and trust, reviewing any company before signing the partnership agreement is essential for security reasons. For instance, potential business partners might not have control over their vendors.

The Importance of Today’s Context

This is a crucial factor in today’s regulatory environment due to Russia’s invasion of Ukraine. Western companies that are tied to Russian entities struggle to manually identify all sanctioned entities.

Many of them try to hide their true nature by having complex company structures. For this reason, operating without automated KYB solutions is an ongoing concern for some compliance teams. 

The Importance of Today's Context

On top of that, while the associate might seem reliable, they may not prioritize the importance of compliance. This rapidly changing digital landscape requires a constant need to communicate and establish safe business practices. Know Your Business verification allows organizations to confirm any partner’s authenticity more easily.

As a matter of fact, automated tools turn lengthy manual operations into smooth and simple processes, modern KYB options also help increase sales. It’s an effective method to build a positive relationship between both parties and maintain a good market reputation.

Fraud detection and prevention service from market leaders. Schedule a free demo here.

How To Make KYB Effective?

Cutting human resources in a fast-paced business environment might be the most optimal way to increase productivity today. Evidently, AI-powered tools are less prone to human error, ultimately increasing productivity and lowering costs.

Furthermore, unexpected delays in manual KYB procedures can compromise business operations and negatively impact sales. For this reason, modern businesses strive to save their capital contributions and avoid operational delays by automating Know Your Business verification processes.

Removing the Possibility of Delays

For smoother communication between organizations, there shouldn’t be any delays regarding KYB or KYC operations. A remote identity verification process is less time-consuming than a traditional one. The same goes for Business Verification.

Traditionally, banks perform such operations on entities using manual methods. In this scenario, employees conduct multiple research analyses on various data points and registers. Afterward, they analyze and import the gathered data sets, which makes this a more efficient way of verifying an entity.

Removing the Possibility of Delays

KYB and Compliance with AML Regulations

You might already know about KYC compliance regulations, as the necessary AML laws defined this process a while ago. Despite that, the regulatory measures for KYB were established later, when the escalation of financial crime in business relationships became an even bigger issue.

After all, the motivation behind AML practices was to counter money laundering, tax evasion, and terrorist financing. As a result, now we also have KYB compliance, which is designed around companies and their interests.

KYB Rules in Customer Due Diligence

Following the 5AMLD, companies needed to focus more on KYB policy. The new regulations presented stricter non-compliance punishments, helping businesses detect whether their partners:

  • Involve financial crime in their agenda.
  • Show any signs of terrorist financing or money laundering risks.
  • Are Subject to adverse regulatory and other sanctions actions.

Above all, non-compliance can result in major penalties and, naturally, the loss of partners or customers. As a result, companies today tend to choose automatic Know Your Business verification solutions, which protect entities from many negative factors.

Compliance with AML Regulations

What is the Difference Between Manual and Automated KYB?

Performing KYB checks manually has been the well-known traditional option until the market introduced automated Know Your Business verification solutions.

Compared to AI-powered software, humans aren’t capable of researching, analyzing, and reviewing multiple databases so quickly. By comparison, these factors are the most stressful and error-prone parts of manual KYB. That’s why traditional checks take more time and labor costs because:

  • Compliance officers need to review registries and conduct research individually. This process takes hours, sometimes weeks.
  • Companies must create an in-house system, integrating compliance officers and IT specialists.
  • Small businesses need to start from scratch. This factor makes KYB even a more complicated process for entities that have a less defined history.
  • Compliance specialists must manually screen multiple sanction lists and watchlists, making this procedure prone to human error, often leading to undesired results.
Verify identities in less than 3 minutes. Schedule a free demo.

Automated Business Verification in the Digital Age

Manual KYB checks can’t outsmart automated, all-in-one Business Verification platforms. To help organizations simplify KYB processes, we’ve created a multi-functional KYB solution presenting multiple databases in one place and making life for compliance officers easier.

Our Know Your Business verification solution has built-in automation options. These automation possibilities, in other words, custom rules, allow organizations to create their own fully automated KYB flow by integrating customizations. For a better understanding, let’s go through some examples:

Efficient AML Checks

Let’s say that a financial institution needs to proceed with AML screening to review its B2B clients and shareholders. AML results can show different variations: Flags found Flags not found True positive False positive. If the client is suspicious and gets flagged, the company decides if they want to decline such a user or an entity.  Most importantly, automation allows the AML check for the company and its new clients to be conducted automatically.

Efficient AML Checks
Automatically Generated Reports

It’s becoming standard practice for companies to order Credit or Government registry reports. Such detailed reports help companies to find out if the entity that’s being screened is active or not. We have an option to customize this process as well.

The custom automation simplifies the procedure by automatically ordering and scanning the reports, then blocking or flagging the client based on the reports’ status results. In this case, compliance officers are no longer required to manually order and read the reports to plan further steps.

Automatically Generated Reports
Fast and Accurate UBO Checks

Screening UBOs prevents money laundering and terrorist financing. KYC verification for UBOs is crucial because the overall decisions of the Know Your Business verification depend on this process. If enabled, the automation allows blocking or flagging the clients’ UBOs that result in Mismatch or Fraud tags.

Fast and Accurate UBO Checks

Due to continuous monitoring, automated KYB mitigates risks within existing B2B relationships by constantly reviewing ongoing business processes. Our Business Verification platform solves compliance issues and minimizes human error, allowing businesses to onboard entities and customers more efficiently.

Contact us to learn more about the accurate and cost-effective Know Your Business verification services. 

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