Know Your Business is a compliance practice that involves verifying the identities of businesses in order to understand their ownership structures, business operations, and potential risk factors. An extension of KYC regulations, KYB practices exist to protect businesses from partnering with front companies and unwittingly facilitating money laundering, terrorist financing, or other financial crimes.
Know Your Customer (KYC) regulations were created with the intent of verifying the real identities of customers of financial institutions (FIs), to combat money laundering and other financial crime. But regulators and legislators overlooked an important loophole when they created these regulations: while the identities of individuals were heavily scrutinized, the legitimacy of businesses were not.
As a result, financial criminals began using legitimate businesses and shell companies to launder money, finance terrorism, and hide their crimes in plain sight. This went on until 2016, when FinCEN introduced Know Your Business (KYB) regulations to help businesses tackle the issue.
Let’s take a look at the KYB process, and – specifically – how it differs from KYC.
In essence, KYB and KYC are very similar processes, but the biggest difference is in who – or in KYB’s case, what – the subject of verification is. While KYC focuses on verifying an individual’s identity when they attempt to open an account with a financial institution, KYB is designed to apply the same level of scrutiny to the business involved. This is to ensure that the business – as well as the people who run it – are real and trustworthy.
Despite their differences, both are legally required processes that aid in global AML efforts and protect financial institutions from being used to facilitate financial crime.
Step 1: Verification of business identity
The first step in KYB involves confirming that the business actually exists and that their financial activities are legal. This is done by reviewing official documents, such as incorporation certificates, business licenses, and tax registrations. It’s also important to collect any relevant details about its ownership structure.
Step 2: Identification of beneficial owners
Once the business has been verified, it’s time to make sure that the people running it are, too. This is done by identifying the beneficial owners of the business, who are defined as any individual who exercises substantial control over the company (whether directly or indirectly), or who owns or controls more than 25% of it.
After the beneficial owners have been identified, a KYC process will need to be conducted on them to confirm that they’re not on any government watchlists, aren’t politically exposed people, haven’t been the subject of adverse media, and aren’t engaged in any criminal or illicit activities.
If it’s determined that any of the beneficial owners increase the company’s risk factor, enhanced due diligence will need to take place to scrutinize their backgrounds even further.
Businesses should also implement transaction monitoring to keep an eye on the transactions their business partners are engaging in. Unusual transactional behaviors, such as the volume or size of their transactions or the countries in which they do business, could be red flags that they’re involved in money laundering or other financial crimes.
It helps keep financial institutions compliant: No business wants to deal with the fines, legal action, and reputational damage that result from KYB failures. Staying on top of KYB processes for all professional relationships will keep financial institutions on the right side of compliance law.
It aids in risk assessment and mitigation: KYB can actually be a good moment of reflection for organizations. It keeps financial institutions attuned to the risks associated with their customers by analyzing factors such as the nature of the business, its location, and its reputation. This analysis can also help financial institutions be more aware of other outside risks, outside of compliance, and take appropriate measures to mitigate them.
It reduces the amount of resources available to criminals: Compliance work is all about cutting off resources for criminals and deterring financial crime. When criminals are unable to use a FI to launder money, they lose the profit motivation behind much more heinous upstream crimes, such as human, weapons, or drug trafficking. Good compliance has a direct and positive impact on the victims of this criminal activity.
KYB is an essential compliance practice that helps financial institutions verify the identities of their partners, assess the risks associated with these relationships, and stay compliant with regulatory requirements.
Like some parts of the KYC process, KYB involves ongoing monitoring. Why? It’s important to stay up-to-date on any changes to the nature of the business, including suspicious activity, changes to organizational structure, and changes in ownership. In many cases, these events may require action to be taken, including the filing of a SAR.
By implementing KYB processes, businesses can protect themselves from potential legal and reputational risks and build trust with their customers, suppliers, and partners. Organizations should prioritize KYB in their compliance programs to ensure they are meeting regulatory requirements and mitigating potential risks associated with their business relationships.
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