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Is Your Business Safe? Unmask the Hidden Risk Through KYB Checks

05 March, 2024

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Money laundering is a societal cancer that fuels wars, drug trades, human trafficking, and corruption. Shockingly, bad actors launder 2-5% of the global GDP, amounting to a staggering $2 trillion. In this context, companies must verify with whom they are doing business. Know-Your-Business (KYB) checks go beyond providing basic information like names and addresses. They delve deep, conducting background attestation to confirm the business’s legitimacy. 

This article will dig deeper to explore adequate information on how to comply with KYB checks and explain the significant impact of verifying a business. 

Overview of KYB Checks

In 2016, the Panama Papers leaked 11.5 million shell company documents. The documents disclose the names of significant business owners who used these tax havens to cloak their illicit activities behind the bogus companies. 

Before this information, Know-Your-Customer (KYC) was compulsory for financial institutes, banks, and insurance organizations. It confirms the identity of customers before onboarding to combat individual financial crimes. This ensures they are legitimate and companies only serve the person obeying the law. 

However, the Panama Papers swept all the regulations and obliged new KYB checks to verify a business. The KYB is designed to overcome the loophole criminals use to hide their illegal activities behind financial institutions. Overall, to uphold the KYB derivatives, the company will collect information about the business and verify through various checks to ensure the business is legal. 

Hidden risks during business onboarding

KYB Requirements: To Complying with AML Regulations

We can divide AML compliance into various checks for efficient and accurate results. These steps assist companies in providing error-free results. This meticulous implementation verifies a business and satisfies regulatory bodies to avoid penalties from law enforcement agencies.

Understand the Regulations

Before verifying the partner business, studying the country’s policies is a must thing. Understanding the regulations according to the industry ensures a compliance process that avoids hefty fines. Particularly, if you are dealing in the international market, such as the MENA region, there are various regulations, including the complexity of free zones. Else, you have to overlook the latest obligations from the regulatory bodies such as the Bank Secrecy Act (BSA), Security Exchange Commission (SEC), Financial Conduct Authority (FCA), Financial Action Task Force (FATF), Patriot Act or Customer Due Diligence (CDD). 

Verify the Business Identity 

The next step is to verify the business identity to ensure it exists in the real world, not only on paper. This process can be divided into three approaches, starting from collecting essential documents such as business registration numbers, industry licenses, addresses, contact info, and financial statements. The next move is to attest these documents by verifying their security features and written data. Depending on the papers, security features can be fonts, signatures, borders, and other characteristics. The documents are cross-checked for data validation using the government’s and third parties’ original records. Lastly, the essential process is to delve into the corporate ownership structure to gain in-depth information about the company owners. 

Screen Against Watchlist Sanctions 

Once the business profile is verified, the next step is to screen this validated information against the watchlist sanctions lists. The government and law enforcement agencies created these sanctions databases to provide accurate information about financial criminals. There are various watchlists for companies, such as PEPs, SIEs, AML/CFT, adverse media, etc. Screening against these ensures the owner and the company are not involved in illicit activities. Companies that lack screening and neglect this process can face severe fines from the regulatory bodies. These fines not only cause revenue loss but also damage organizations’ reputations.  

Confirm the UBOs

Ultimate Beneficial Owners (UBOs) are the people who own 10-25% of the company’s interest. They have direct or indirect control over the business’s decisions. KYB compliance checks the business owners through the individual’s KYC on them. It ensures owners’ identity, including screening them against the watchlist databases or document verification. This will separate the corrupt owners and legitimate partners. Furthermore, UBO verification prevents the financial system from having bad actors enter the procedure to conduct illicit activities. This is essential to ensure the company and its owners are not listed in the watchlist sanctions for any fraudulent action. 

Validate Ownership Structure 

Every business has shareholders who legally control the company’s decisions. For AML compliance, companies must ensure they validate the ownership structure by conducting KYC of individual UBOs. The company changes its ownership framework constantly. The onboarding company has to monitor these changes and ensure the ownership structure of the partner business has not changed. The confirmation of these owners validates the confirmation of the new shareholders and notifies bad actors in the structure. 

Centralized the Reports 

After verifying the business, the last major step is visualizing the ownership framework. Companies can implement an electronic repository system (EDMS) to store the ownership structure in a secure database. This allows the companies to store data in any format and visualize versions to audit details. Company representatives can also create a report template, including the UBO’s names, percentage owned, voting rights, and relevant data about them. Moreover, they should regularly monitor the ownership structure updates to reflect the company ownership changes.

Know-Your-Business Checklist

Companies must comply with the Know Your Business check to verify the partner business. These checks vary from the national and law enforcement agencies’ policies. However, primarily given below are the KYB checklists, which companies must uphold:

  • Collect identity verification documents from the company, such as the license, registration number, business address, contact information, industry permits, and other papers, depending on their working sector.
  • Validate papers collected from the partner business to ensure they submitted the original records. Attest security features such as fonts, signatures, borders, etc. Additionally, cross-check written data against the government and registration bodies of the sector. 
  • Screen the partner business data against the watchlist sanctions lists to ensure they are not involved in illicit activities. The company must verify the legitimacy by parallel meeting the data from the sanctions list, including adverse media, AML/CFT, PEPs, SIEs, or FBI databases. 

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Automate KYB Checks to Disclose Hidden Financial Crimes 

A significant amount of money is laundered from the UK, with criminals adding an estimated £88bn to the global financial system. Money laundering and terrorist financing are linked worldwide due to undetectable trade through various financial services. The center of all these scams is companies not complying with the Know-Your-Business and loopholes in detecting suspicious activities. 

Relying on traditional techniques for business verification is a primary cause of these neglections. This makes companies’ monitoring systems vulnerable and assists scammers in cleaning up their black money. Technology is key for financial institutes and other money laundering vulnerable companies to comply with various laws efficiently through adequate KYB checks.

The KYB offers primary data from 250+ countries and states, including 301M companies’ information stored formerly for accurate results. It also bolsters the strength of the companies by verifying company onset through due diligence and risk assessment. Additional benefits include remote business information collection and perpetual compliance audits, which will send jurisdiction revamps instant alerts. With all of these features, KYB guarantees 100% accurate results and centralizes the report to create transparency in complex ownership structures.

Get in touch with our amazing team for any kind of assistance.

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