Know Your Business (KYB) Essentials for Regulatory Compliance
Know Your Business (KYB) is the B2B counterpart of Know Your Customer (KYC) identification verification procedures, and it’s equally important for compliance with Anti-Money Laundering (AML) regulations. If you’re in banking or another financial service industry, you are required to perform KYB checks.
This article will cover the essentials you need to know about KYB and how to do it. First, we’ll explain KYB and how it differs from KYC. Then we’ll look at who is required to perform KYB checks and what you need to do to comply with a KYB audit. Finally, we’ll offer five best practices to follow when developing your KYB procedures.
What Is KYB (Know Your Business)?
Know Your Business regulations require companies in the financial services industry to verify the identity of business clients seeking to open accounts. KYB checks seek to verify new business clients’ credentials and identify who ultimately owns or controls the business, known as the Ultimate Beneficial Owner (UBO).
KYB regulations were implemented in the US in 2016 to close loopholes in AML laws passed after the 2001 World Trade Center attack. KYB checks prevent terrorist organizations and criminal groups from using front companies to launder money.
Differences Between KYB and KYC (Know Your Customer)
Know Your Business and Know Your Customer share some similarities but are distinct. Both types of procedures seek to confirm the identity of new customers. But KYB applies to business accounts, while KYC applies to individual accounts. Essentially, KYB is the business counterpart to KYC.
Why Is KYB Needed?
KYB regulations were introduced because previous laws did not cover loopholes terrorist and criminal organizations were using to funnel money through front companies. Current KYB laws are designed to identify hidden owners behind business entities and confirm that they’re not on official lists of sanctioned individuals or groups.
Who Needs to Perform KYB Checks?
Under current US Treasury Department Financial Crimes Enforcement Network (FinCEN) Customer Due Diligence (CDD) requirements for financial institutions, KYB procedures must be followed by:
- Credit unions
- Security brokers and dealers
- Mutual funds
- Futures commissions merchants
- Introducing brokers in commodities
Jurisdictions outside the United States may include additional entities in regulations, such as the EU. Special regulations may apply in certain industries, such as casino gaming. Consult your legal advisor to determine which regulations apply to your business.
KYB (Know Your Business) Requirements
KYB regulations require financial institutions to:
- Identify the beneficial owners of business customers (technically known as legal entity customers)
- Verify the identities of beneficial owners
Required information is typically collected using a standard certification form, although some businesses may use other means. Financial institutions may rely on beneficial information provided by customers except when there is reason to doubt veracity. Customers may use copies of identity documents, a difference from KYC procedures. Organizations must maintain records of beneficial ownership information. General regulations generally are similar to those for the Customer Identification Program (CIP) regulations which govern KYC.
KYB Compliance and KYB Best Practices to Follow
When implementing KYB procedures, following best practices will help optimize effectiveness and ensure compliance. Here are five of the most important best practices to follow:
1. Use Customer Due Diligence Scoring
Once you’ve verified a customer’s identity, Customer Due Diligence regulations require a risk assessment. A risk assessment should consider factors such as what types of products and services the customer sells, what types of customers they sell to, and whether they are located in known havens for terrorism or money laundering.
The most accurate way to do a risk assessment is to create a scoring system that assigns a weight to different risk factors. Organizations can then automate routine risk assessment checks to save time. When the high risk is detected, you should follow up with Enhanced Due Diligence (EDD) procedures which employ additional scrutiny checks, including manual methods.
2. Run Sanctions Screenings
As part of CDD risk assessment, customers should be screened against official sanctions lists, such as the Treasury Department Office of Foreign Assets Control (OFAC) Sanctions List and similar lists published by other countries and international bodies such as the United Nations. Sanction screenings should be run on both business entities and their employees. The most efficient way to conduct sanctions screenings is to use a software service that checks current databases automatically.
3. Conduct Politically Exposed Person (PEP) Screenings
Another component of CDD risk assessment is checking lists of Politically Exposed Persons. These individuals are in politically sensitive positions that expose them to bribery and espionage recruitment risks. PEP checks can be run automatically by suitable software.
4. Do Adverse Media Screenings
Adverse media screenings search third-party sources such as newspapers to identify any negative information on businesses or associated individuals which might indicate a risk of money laundering. Due to the enormous amount of information available, the best way to do adverse media screenings is to use an automated search tool that uses artificial intelligence to sift through data.
5. Follow Up With Ongoing Transaction Monitoring
CDD regulations require financial institutions to follow up on KYB verification checks with ongoing transaction monitoring. These follow-ups should include procedures to identify and report suspicious transactions, such as large amounts, volumes, or frequencies of transactions. Financial providers also must check periodically to verify that customer data is still up-to-date and accurate.
Automate Your KYB and KYC Data Verification
Performing all the checks necessary to meet KYB and KYC compliance is challenging to do manually and often impossible. There are simply too many databases to check, too many things one could overlook, and insufficient personnel and time to cover them. You need automation for effective KYB and KYC compliance and to mitigate fraud and legal risk.
Incode’s Omni platform is designed to streamline identity verification by leveraging the power of artificial intelligence and biometric methods, such as facial recognition, to collect and verify required information quickly. Contact us today to get in touch with one of our specialists and find out how Incode can help you meet your KYB and KYC compliance obligations by securely and efficiently automated checks.