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A Comprehensive Guide to KYB Regulation in the USA

16 October, 2023

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In today’s era of finances and regulatory compliance, regulations like Know Your Customer (KYC) and Anti-Money Laundering (AML) are more popular than ever. However, these policies are insufficient since fraudsters use evolved technologies, causing losses of up to $35 Million in some instances. KYB regulations, therefore, hold considerable importance since financial crimes are not just limited to individuals. The integrity of economic systems depends on firms and financial institutions adhering to the Know Your Business (KYB) principles. This thorough guide delves into the history and complexity of KYB regulations in the United States and the main advantages of implementing KYB checks.

What is Know Your Business?

Financial institutions utilize a series of regulatory and due diligence procedures called KYB, or “Know Your Business,” to confirm the legitimacy of their company clients. Business verification ensures that these companies are genuine and not engaged in illegal activity.  

As part of the KYB process, financial institutions such as banks, FinTech companies, and other regulated enterprises collect and validate data of business organizations. This covers information about the organization’s structure, ownership, founding, and financial history. The purpose is to evaluate the risks associated with financial transactions with the company and determine its legitimacy.

History of KYB Verification

The Banking Secrecy Act (BSA), passed in 1970, is where Know Your Business (KYB) first emerged. U.S. banking institutions are required under the BSA to maintain meticulous records, file reports on all cash transactions over $10,000, and report suspicious behaviour. The BSA’s first goal was to make it challenging to launder illicit funds obtained from drug trafficking, which was a prominent subject during the War on Drugs.

The BSA established the foundation for various anti-money laundering (AML) rules, including Know Your Customer (KYC), that were included in the 2001 USA Patriot Act. Consumer money is not transferred to terrorist organizations because KYC mandates that financial institutions confirm that their clients are who they claim to be.

Further, Know Your Business closed a gap in KYC. Before KYB regulations, banks were not required to identify the recipients of the business clients they provided. In other words, fraudulent firms could conceal the identity of criminals and carry out illicit operations on their behalf. Today, KYB and KYC collaborate to advance transparency and expose any possible illegal conduct in businesses subject to regulation.

KYB Regulations in the USA

In the United States of America, KYB requirements are specified by various laws and regulations. However, these requirements differ by industry. Per the BSA (Bank Secretary Act) of 1970, financial institutions are directed primarily to prevent illicit financial crimes like money laundering. The act served as a basis for subsequent regulations and policies regarding business verification. Those guidelines instruct businesses and financial firms to carefully monitor transactions while necessitating the reporting of ongoing suspicious activities.

The USA PATRIOT ACT was also signed into US regulations due to the 9/11 incident. This act amended the BSA and mandated financial companies gather and authenticate individual identities before onboarding.

Further, in 2016, the Financial Crimes Enforcement Network (FinCEN) published regulations regarding Customer Due Diligence (CDD) for financial enterprises. The essential requirement of the regulatory policy was to identify and authenticate the status of beneficial owners while opening their accounts, also known as UBO (Ultimate Beneficial Owner) verification. Since the release of the Panama Papers, these CDD Rules have been considered a necessary action taken by the state to deal with challenges like corruption and money laundering.

Besides ensuring CDD regulatory compliance for the financial sector, all businesses should avoid dealing with companies and individuals mentioned in the Office of Foreign Assets Control (OFAC) sanction list.

The US’s online marketplaces also have KYB regulations published by the INFORM Consumers Act. This requires online and retail marketplaces to gather and confirm particular data about sellers that bring in revenue of $5,000 every year. This data includes sellers’ contact details, tax identification numbers, and bank account details.

The Risk of Non-Compliance with KYB Regulations

Businesses non-compliant with KYB regulations might face serious consequences in the US. Some primary risks include:

Legal Repercussions

Financial institutions that don’t assure KYB compliance risk serious criminal accusations, harsh fines, and perhaps legal investigations and punishments. Further, it may greatly impact your company’s stability and prestige.

Increased Risk  

At times, businesses and financial institutions accidentally participate in illegal financial activities like corruption as a result of incomplete KYB checks. Therefore, non-compliance with KYB standards poses a serious threat to companies because it increases the possibility of financial crime involvement.

Reduction in New Business Opportunities

Many respected businesses may decline to collaborate with a company if it cannot demonstrate its legitimacy through KYB checks. Growth may be hampered, and economic opportunities may be lost.

Regulatory Scrutiny

Non-compliance with KYB regulations often triggers specific regulatory investments, audits, and more surveillance, eventually leading to more functional challenges and legal problems.

Primary Benefits of KYB Check

While business verification looks burdensome at times, businesses in the US can enjoy certain benefits by following KYB regulations. Some major benefits are as follows:

Enhanced Reputation

Following KYB requirements allows businesses to build a strong reputation in the industry, indicating the organization’s dedication to ensuring transparency and practising business ethics.

Improved Security

KYB processes make businesses and financial institutions more secure in today’s financial ecosystem. Companies can effortlessly prevent crimes like corruption, tax evasion, and money laundering with Know Your Business (KYB).

Better Decision-Making

KYB information helps financial organizations make knowledgeable decisions regarding onboarding business clients, credit checks, and risk management.

Risk Mitigation

KYB checks help companies identify and evaluate the risks associated with doing business with specific commodities, reducing the possibility of financial upsets and legal concerns.

In A Nutshell

KYB regulations in the USA are critical to the country’s financial system’s integrity. Furthermore, KYB compliance is a legal obligation and a strategic advantage for businesses in the modern monetary landscape. The seven-step checklist of The KYB allows enterprises to effortlessly meet the KYB regulations and combat fiscal challenges, including money laundering, tax evasion, financial terrorism, and corruption. Adapt our Know Your Business (KYB) solutions and enhance your business security while making better decisions for the growth of your business.

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