Why Know Your Business (KYB) Matters in Finance and Banking

Today, money flows at a quicker pace than ever, and business organizations are becoming more intricate. Banks, lenders, and financial institutions need to be certain that the companies or entities they deal with are legitimate by ascertaining their ownership structure, legal existence, and business purpose.

Failing to verify the legitimacy of companies exposes financial institutions to risks such as fraud, defaults, regulatory penalties, and damage to their reputation. Implementing Know Your Business (KYB) helps address these challenges by providing clarity, fostering trust, and delivering actionable insights into any company or financial institution.

What is KYB in Banking?

KYB, or Know Your Business, refers to the process of verifying the identities, ownership, and legitimacy of a company before establishing any financial relationships. Unlike KYC (Know Your Customer), which focuses on individual clients, KYB looks closely at the organization as a whole.

• Corporate structure and legal registration.
• Ultimate beneficial owners (UBOs) and persons of significant control (PSCs).
• Financial condition and creditworthiness.
• Exposure to sanctions, politically exposed persons (PEPs), and bad news.

KYB enables the financial institutions to make decisions based on evidence, as opposed to assumptions, so that they can only deal with reputable businesses.

Why KYB Is Essential for Financial Services

KYB provides financial institutions with a way to address risk, make well-informed decisions, and keep their systems stable. Its advantages are in a variety of functions:

1. Risk Mitigation: Detecting fraudulent or risky businesses prior to opening accounts or issuing loans eliminates or limits any possible loss.
2. Better Credit Decision-Making: Lenders are able to price risk correctly and ensure a healthy portfolio because they understand ownership and financial stability.
3. Trust and Reputation: Banks prove that they have performed due diligence to the regulators, partners, and clients by verifying businesses.
4. Operational Efficiency: The organized KYB process saves time on the manual checks and will decrease the number of onboarding mistakes.

Regulatory Frameworks Governing KYB in Banking

To manage financial risk, businesses must comply with the Know Your Business regulations. For this, they must verify corporate entities, identify ultimate beneficial owners (UBOs), and conduct due diligence to reduce the risk of potential financial crime.

However, implementing a comprehensive KYB procedure isn’t straightforward due to the requirements that vary in different jurisdictions, which make it challenging for firms that operate across borders.

It is important to stay up-to-date with changing regulations to avoid penalties, reduce risks, and keep trust in the financial system. Know Your Business (KYB) compliance follows both international standards and national laws that help prevent money laundering, stop terrorist financing, and fight corporate fraud.

EU & UK AML Laws:

The latest AML framework in the EU, known as AMLD6, requires banks to verify the identities of businesses, identify Ultimate Beneficial Owners (UBOs), and implement risk-based continuous monitoring practices. In the UK, the Financial Conduct Authority has introduced Know Your Business (KYB) requirements as part of the Money Laundering Regulations.

U.S. FinCEN Rules:

The Financial Crimes Enforcement Network under the Bank Secrecy Act and Corporate Transparency Act makes businesses disclose beneficial ownership and asks banks to check corporate customers and evaluate ownership structures.

FATF Recommendations:

The Financial Action Task Force sets international standards for checking customers, revealing who truly owns businesses, and implementing risk-based controls for Know Your Business (KYB). Countries then use these standards in their own laws and regulations.

Local Banking Regulations:

Some countries have detailed rules for Know Your Business (KYB) processes. These rules explain how banks should onboard businesses, conduct due diligence, report suspicious activities, and keep compliance records.

AUSTRAC (Australia):

Imposes rigorous KYB requirements on financial institutions, such as checking corporate entities and requiring suspicious activity reporting.

Collectively, these frameworks help banks to check who they are transacting business with, the ownership arrangement, and the risk mitigation of financial crimes.

Common KYB Challenges in Banking

The effective implementation of the KYB is not easy. Banks have to move with the changing regulations, manage the intricate corporate hierarchies, and simplify the process of onboarding businesses, all without compromising the high standards of due diligence.

Financial institutions face several main challenges in the KYB (Know Your Business) process, including the following:

Confirming Complex Corporate Structures

The process of finding Ultimate Beneficial Owners (UBOs) in multi-layered organizations or cross-border organizations is time-consuming. Companies need to sort out complex ownership structures to identify real controllers and unearth concealed risks when taking onboard.

Scattered and Disjointed Data Sources

Scattered and disjointed data sources make KYB in banking challenging. It is because information about a business is usually spread across company registries, tax databases, and ownership records. Banks can’t get everything in one place, and different systems often have different formats or outdated information. This makes it tricky to match details correctly, which slows down verification and increases the chance of mistakes.

Moreover, it may also raise the risk of fraud, since missing or inconsistent data can let suspicious companies slip through. Overall, fragmented data makes KYB slower, costlier, and less reliable.

Absence of an All-in-one KYB Solution

Most of the institutions rely on different tools to verify their businesses, UBOs, sanctions screening, and risk assessment. Such a disjointed technology stack places operations silos in place, adds to costs, and complicates the ability to maintain a single perspective on corporate risk.

Lacking a comprehensive KYB solution complicates the onboarding process for banks, requiring them to gather business information from various sources instead of one platform. This results in slower verification, more errors, and greater difficulty in detecting fraud. Without unified KYB software, due diligence becomes lengthier, more costly, and less reliable.

Resource-Intensive Processes

The manual KYB checks are time-consuming and require a lot of human resources, and have the likelihood of error. These processes are hard to scale as the volume of onboarding grows without affecting accuracy.

KYB Best Practices for Finance and Banking

The following best practices can help financial institutions enhance KYB processes:

1. Confirm Ownership and Control:Establish the correct identity of ultimate beneficial owners (UBOs) and persons of significant control (PSCs)  to understand real ownership of the business.
2. Verify with trustworthy Data Sources:consistently validate cross-check registries, credit reports, sanctions lists, adverse media, and regulatory enforcement lists.
3. Apply Continuous monitoring: Measure the change of either ownership, financial health, or risk exposure.
4. Automate Where Necessary: Use digitization to simplify the onboarding process and minimize mistakes.
5. Educate and Train Staff on Risk-Based Approaches: The teams designated for managing due diligence should know how to assess businesses beyond documentation.

How The KYB Supports Compliance in Banking and Finance

Banks must carry out due diligence as part of their Know Your Business (KYB) process for corporate clients. This helps prevent criminals from using shell companies for money laundering, terrorist funding, and other types of fraud. As fraud methods change and regulations become stricter, banks and businesses need straightforward KYB solutions that ensure compliance while making onboarding easy.

At The KYB, we provide a complete solution that meets verification needs for anti-money laundering (AML) and KYB compliance. With access to over 300 data sources, we provide extensive coverage across different regions, helping you comply with international regulations. Book a demo today or talk to our expert to discover more.