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 process and its features to help you learn more about effective fraud prevention methods.
What is Know Your Business Verification?
Building business relationships is now more complicated than ever. Every sector is at risk, from Fintech, Gaming, and Healthcare to the Sharing Economy industry. As the digital sphere leaves more room for suspicious activities, some businesses choose a darker path. Laundering money through shell companies or financing terrorist activities is just the beginning.
Know Your Business, or KYB, is a process 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. 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 or 6th AML directives.
Why KYB is a Challenging Process
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:
- Time. To conduct a full KYB procedure manually takes hours for compliance officers. Since they need to research and investigate AML screening results, order reports and review additional documents, such as Credit reports or Government registry reports, compliance officers find checking all of the data points manually challenging.
- Client experience. As the manual KYB procedure takes hours, naturally, the same experience is applied for potential because they are part of the Know Your Business Verification process. If the queue is long, customers are forced to wait in line for days.
- 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.
Why is Know Your Business Verification Crucial?
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 getting fined millions of dollars. 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. As 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 stick to compliance regulations. Some of the key aspects explaining the benefits behind KYB are:
- It ensures safe Business-to-Business (B2B) relationships;
- Automated solutions remind compliance officers automatically to stick to required AML-related tasks. This way, KYB helps reduce human error;
- It guarantees compliance with the 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 is a number of 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:
- Complex, multi-step procedures with no guaranteed results;
- Human error and insufficient regulatory processes;
- Lack of scalability and automation;
- Unable to detect recurring fraud patterns.
Who Needs to Perform KYB?
At this point, not only banks but also other regulated entities need to conduct KYB checks. As per the 5th AML directive, various businesses fall under the regulations:
- Crypto markets;
- Tax advisors;
- Credit institutions;
- Gambling services;
- Asset managers;
- Estate agents;
- Credit institutions;
- Online payment services;
- Online banking;
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 as well as shell companies.
Want to find out more about who you’re partnering with? Try a free KYB demo.
How does KYB Help Spot the Red Flags?
It’s important to understand that fraud can find its way to any company. Automated 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 has constantly been changing.
- The entity’s documents aren’t properly 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. Their goal is to get away with the scheme without having to pay for the orders. Usually, the fraudsters then disappear with the goods and millions in their pockets before anyone notices their criminal activity.
Safer Business Relationships
Business Verification safeguards the mutual interests of both parties when it comes to 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. Apart from 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, as many of them try to hide their true nature, having complex structures. For this reason, operating without automated KYB solutions is an ongoing cause of concern for some compliance teams.
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 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.
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A Less Costly and Time-Consuming Process
Cutting human resources in a fast-paced business environment might be the most optimal way to increase productivity today. Automated tools that are powered by artificial intelligence (AI) 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. Today’s enterprises avoid losing capital contributions and operational delays by automating their 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.
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
The first security gaps in business relationships were discussed on a more serious level in 2016 when the US’ Financial Crimes Enforcement Network (FINCEN) presented the final CDD rule, which introduces KYB rules in Customer Due Diligence. Soon after, the EU introduced the 5th Anti-Money Laundering Directive (5AMLD). It focused on KYB policy, presenting stricter non-compliance punishments and helping companies detect whether their partners are:
- Involved in illicit activities or any type of financial crime;
- Showing any signs of terrorist financing or money laundering risks;
- 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.
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, which is one of the most stressful and error-prone parts of manual KYB. That’s why traditional checks involve 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, making sure that both compliance officers and IT specialists are involved.
- 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 need to screen multiple sanction lists and watchlists manually, making this procedure prone to human error, often leading to undesired results.
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iDenfy’s Guide to Effective Business Verification
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.
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 order and read the reports manually to plan further steps.
Fast and Accurate UBO Checks
Screening UBOs prevents money laundering and terrorist financing. KYC verification for UBOs (Ultimate Beneficial Owners) 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.
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.