Top 3 Mistakes in KYB Compliance and How to Avoid Them

Know Your Business Verification is an integral process in the modern world, and plenty of challenges arise every day in the corporate and finance sectors. Therefore, it is now imperative to have certain regulations in the industry in order to maintain KYB compliance in the global business domain. For instance, the Financial Action Task Force (FATF) has issued 40 recommendations on money laundering and terrorism financing, encouraging enhanced due diligence to ensure a risk-based business verification approach. Similarly, the European Union’s 5th Anti-Money Laundering Directive (5AMLD) primarily focuses on ways to prevent money laundering and maintain transparency in the beneficial ownership structure of businesses.

However, despite these regulations at the international and regional level, some businesses make mistakes when it comes to KYB compliance. So, if you’re a business owner or a compliance officer, read this article to learn the top 3 mistakes in Know Your Business compliance that most businesses make and how you can avoid them.

What is KYB Compliance?

Verifying a company entity’s identification and validity before entering into any kind of commercial engagement or transaction is commonly referred to as KYB compliance, or Know Your Company compliance. This process is crucial for financial institutions, payment processors, and other businesses to ensure they are not unintentionally partnering with or providing services to fraudulent or high-risk companies.

Top 3 Mistakes Mistakes during KYB Compliance

A single mistake during the Know Your Business verification process can cost a business hefty fines, penalties, and a damaged reputation. However, the following are the most prominent and common mistakes many organizations make during KYB compliance:

• Company Verification in Only One Business Register

Almost every country usually possesses more than a single credible data source. For instance, a parent business registry is not the only data source that provides company details. In fact, it is also worth accessing other official sources of company information because even the national court registers can often have some data errors or even outdated information.

In Italy, verification of companies, except sole proprietorships, can be done through the Italian Business Register (Registro delle Imprese), maintained by the Chambers of Commerce. For thorough KYB compliance, it’s also advisable to check the VAT Information Exchange System (VIES) to confirm the company’s VAT status. 

Additionally, verifying the company’s current status with the Italian Revenue Agency (Agenzia delle Entrate) can provide further fiscal information, including tax identification numbers.

For bankruptcy-related KYB compliance, it’s important to check if the client or their company is listed in the Italian Register of Protests (Registro Informatico dei Protesti), which records protests of bills of exchange and other financial instruments. 

As part of comprehensive KYB compliance, identifying the ultimate beneficial owners of a company is crucial. In Italy, this information can be found in the Ultimate Beneficial Owner Register, which is part of the National Business Register system and managed by the Chambers of Commerce.

• Incomplete & Inaccurate Business Details 

Incomplete or inaccurate data collection is a fundamental flaw that undermines the entire KYB compliance process. When businesses fail to gather all necessary information or collect incorrect data, they expose themselves to significant risks. This pain point often arises due to outdated manual processes, reliance on disparate data sources, and insufficient verification methods. In addition, these shortcomings can sometimes lead companies to severe consequences, for instance, regulatory penalties, reputational loss, and more vulnerability to fraud and money laundering activities.

• Considering KYB Compliance as a Burden

Many companies view KYB compliance as a tedious task, just another checkbox to tick for legal requirements. It’s easy to see KYC and KYB compliance as redundant steps that add to your workload. But let’s shift our perspective and consider this process as an essential part of your risk management and growth strategy.

Compliance can sometimes feel like a hassle with extra paperwork and costs. However, dealing with an unreliable company because you skipped the client verification process can lead to more serious problems in the long run. Consider KYB compliance as a helpful gatekeeper. It enables your honest, reliable clients to access your services quickly while keeping out those who might cause harm.

How Can You Ensure KYB Compliance?

The Know Your Business regulations require companies globally to analyze risks associated with potential partners while initiating any sort of collaboration. However, businesses must have to follow this complete process in order to verify the legitimacy of any business.

• Business Due Diligence

The process of business due diligence involves for defining the degree of risk connected to a possible business partnership. Due diligence for corporations includes determining the company’s ultimate beneficial owners (UBOs), as opposed to customer due diligence, which comprises verifying a firm’s identification. 

• Sanctions Screening

It is an approach of figuring out and evaluating whether regulatory authorities’ restrictions forbid the possible commercial partnership. It means figuring out whether the business or any of its staff are on any penalty registers.

• Adverse Media Screening

Adverse media screening involves keeping an eye on news sites and other mediums to spot any unfavorable material about the company. By providing periodic information in real-time, this oversight enables businesses to quickly respond to negative media attention.

How The KYB Can Help?

Ensuring KYB compliance is a big deal for any business dealing with international transactions or partnerships. One of the immense mistakes most companies make is relying on just one business register. It’s like trusting one source for all your news. Risky, right? Another common pitfall is collecting incomplete or inaccurate business details. And let’s be honest, treating KYB compliance as just another box to check off can lead to serious problems down the line.

Real KYB compliance means doing your homework thoroughly. This includes business due diligence, sanctions screening, and checking for any adverse media. The KYB’s real-time database across 250+ jurisdictions allows your business to verify that your potential partners are legit, keeping you on the right side of regulations.

Contact the experts at The KYB to ensure compliance is a fundamental part of your business operations and set your company up for a transparent experience.