Similarly to Know Your Customer (KYC), Know Your Business (KYB) is a verification standard that confirms the legal validity of a business entity as well as its compliance status. Know Your Business or KYB, is carried out by regulated companies to protect themselves from doing business with illegal businesses that may come under money laundering or fraud scrutiny. Examples include financial institutions like banks or international traders and insurance companies.
An organisation looking to remain on the right side of compliance should know what's behind another organisation they hope to work with. This prevents financial crimes and fraudulent business practices like money laundering, and terror financing.
This article explains the definition of KYB, discussing why it is necessary in today’s business world and how it relates to KYC.
What is the Difference Between KYC and KYB?
KYC is a verification procedure that is used by regulated institutions to verify a customer’s identity for adequate risk management. It is often employed during onboarding and key activities like loan applications and high-volume transactions.
On the other hand, KYB is a verification process that is used by regulated institutions to verify another business’s legal standing, beneficial ownerships, AML compliance status and other regulations.
The major difference between KYC and KYB is the entity they deal with. KYC deals with individual customers, while KYB deals with businesses.
The Need for Know Your Business (KYB)
KYC has been around for decades as individuals were subjected to scrutiny to address the rising rate of money laundering and financial crimes. During this time, businesses were not subjected to the same verification, allowing criminals to exploit corporate organisations for criminal activities.
The rising rate of fraud necessitated the introduction of KYB measures to prevent criminal exploitation.
Most B2B companies need to perform due diligence to identify the businesses they work with and fight money laundering as well as other financial crimes. This protects them from being used as an accessory for money laundering and penalties from regulatory authorities.
KYB is often seen as an extension of KYC due to being relatively younger as it was introduced decades after KYC. Updates were made to the law through the 4th AML directive issued in 2017, one year after the US Financial Crimes Enforcement Network (FinCEN) added KYB to its Customer Due Diligence requirements for regulated institutions.
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Which Organisations Should Perform KYB?
Many get the primary notion that KYB is necessary for only banks and financial institutions. However, this is not true. According to the 5th AML directive, companies in the following industries are subject to the KYB regulation:
- Gambling and casino services
- Credit and loan institutions
- Online banking/ Fintechs
- Financial institutions
- Estate agents
- Tax advisors
- Cryptocurrency exchange platforms
- Trusts fund managers
- Asset managers
- Independent accountants
Although this list captures a majority of the industries, it goes beyond. In addition, companies in the unregulated space are also required to perform KYB checks although not mandated by law. This is because it helps enhance their reputation, protecting it from fraud and misuse of assets from intending criminals.
Top 5 Steps to Help Comply with Know Your Business Rules
Regulated institutions need to implement a robust process as part of their AML strategy to satisfy KYV requirements. These include:
1. Due Diligence:
Similarly to customer due diligence (CDD) where an organisation verifies the customer's identity, organisations are required to verify a business's legal standing by establishing its ultimate beneficial owner (UBO).
Doing this helps the organisation assess the level of risk involved. In a situation where the UBO of a business, poses a high level of risk, the organisation can then opt to perform enhanced due diligence (EDD) before establishing a relationship.
2. Adverse Media Screening:
Adverse media screening involves monitoring news pieces about a business written in the media. It is an effective way of receiving real-time updates as soon as a business’s reputation faces adversities in the media.
3. Sanction Screening:
This is simply monitoring the economic embargo imposed on a business by a regulatory body or government. An organisation should perform sanction checks on companies it wants to do business with as well as their employees.
4. PEP Screening:
Politically Exposed Persons (PEP) screening is a crucial part of an effective KYB system. It involves screening the business for relationships with politically exposed persons. This is because PEPs can expose a business to high risk, therefore, exposing other businesses with which they have a relationship.
5. Transaction Monitoring:
Transaction monitoring involves constantly monitoring and analysing a business’s transaction activities for potential fraud. Examples of transactions to keep an eye out for include large volumes of transactions made to high-risk countries, and transactions with PEPs as this may be a case of money laundering.
The digitisation of banking processes means that businesses need to leverage technologies to perform efficient KYB. Youverify offers intelligent tools to help institutions stay compliant with regulations, perform adequate risk assessments, and identify and mitigate them as they arise.