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Why must Banks Implement Know Your Business (KYB) in Business Onboarding?

09 October, 2023

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No wonder onboarding new clients and businesses is not about opening accounts and having signatures in today’s financial world. As the challenges grow with the rapidly expanding economic landscape, it is essential to know what kind of business your bank is dealing with before final onboarding. As per recent stats shared by the International Monetary Fund (IMF), the present rate of money laundering is 2-5% of global GDP, which is a massive amount. Therefore, implementing Know Your Business (KYB) has become more critical than ever to ensure security and compliance and prevent crimes like money laundering. Performing precise KYB checks is challenging; however, banks can collaborate with professional service providers to meet the KYB regulations. 

Know Your Business (KYB) service providers adopt advanced solutions to help banks ensure compliance with Anti-Money Laundering (AML) and Combating Financing of Terrorism (CFT) regulations. Furthermore, KYB verification systems are precise and straightforward, allowing banks to maintain their industry reputations. This article discusses the importance of the  KYB in banking, a brief of the verification, and its particular benefits.

The Need for KYB Regulations

While KYC has been in the industry for decades to prevent financial crimes, criminals now exploit the corporate sector to perform illicit financial activities. Hence, these rising challenges in the financial horizon necessitated new regulations to ensure transparent transactions in the business sector, and that’s where Know Your Business (KYB) comes in. 

The Financial Action Task Force (FATF) issued new guidelines to ensure AML and CFT compliance, including the KYB compliance section. It clarified that financial companies must identify and authenticate the identity of their business clients, including the details of their beneficial owners. The FATF further emphasized the need for constant monitoring of the transaction activities of respective businesses.

Furthermore, the EU’s 4th AML Directive also sets out the requirements for Know Your Business (KYB) regulations. These conditions require banks and financial companies to keep their business clients’ registration and license documents. It further instructs the financial firms to verify the identity of business owners and their managers during onboarding procedures.

What is KYB in Banking?

Know Your Business, or KYB is a crucial element of the broader term AML or CFT regulations. As the Know Your Customer KYC regulations allow businesses and financial institutions to verify their client’s identity, KYB helps institutions verify corporate firms, owners, beneficiaries, and managers. An in-depth KYB allows banks to rest confident that their money and relationships are safe if they take this precaution and confirm the legitimacy of the company they are doing business with.

A Precise Overview of the KYB Process

Corporate Due Diligence CDD has no standard set of regulations to follow during KYB compliance. However, the specialized officials at The KYB include the following primary steps to ensure smooth and precise business verification systems. Here’s a brief overview of our KYB process:

Collection of Documents

The initial Know Your Business KYB verification stage is document collection. All the necessary documents from the company are obtained in this step, including the incorporation date, current operational status, and evidence of address. However, banks can ask for further data, for instance, the information of shareholders, beneficiaries, and details of tax returns. 

Business Verification

After gathering documents, banks or financial firms get access to all the information business clients provide to carry out verification and risk assessment of given data. The real-time authentication of businesses is performed to ensure KYB compliance.

Risk Assessment

In this phase, an in-depth analysis of the businesses, such as geopolitical risks, foreign investments, and operational risk assessment, is performed. Furthermore, the KYB officials also conduct regulatory compliance assessments to ensure compliance with AML and PEP sanction lists.

UBO Identification

The KYB’s UBO identification allows banks to get the percentage of partnerships shared by business partners. Furthermore, it allows financial institutions to authenticate the source of earnings and funds of their business clients. With accurate identification of Ultimate Business Ownership (UBO), banks can effortlessly understand the complex business structures of their clients and make informed decisions.

Requirements for KYB Compliance

Despite implementing KYC verification for years on the identification of clients, similar checks were not applicable for businesses. However, money laundering started strengthening its roots in global economies. The United Nations says $800 Billion is laundered annually worldwide. Therefore, the Financial Crimes Enforcement Network (FinCEN) introduced strict Customer Due Diligence compliance regulations.

Compliance with Know Your Business regulations allows banks to execute businesses with the entities involved in the following illicit activities:

  • Money laundering
  • Sanction lists
  • Terrorist funding
  • Taxation fraud
  • And other illicit crimes

Benefits of KYB Verification in Banks

The banks and financial firms deal with a massive amount of money daily. In this regard, an efficient KYB verification system allows banks to implement a high-tech security system. Around 90% of money laundering cases go undetected every year. It indicates that most banks and financial companies don’t possess transparent systems for Know Your Business (KYB) verification. Nevertheless, digital KYB solutions offer the following benefits to the banking sector:

Minimizes the Time Requirement

With The KYB’s business verification systems, bank and financial companies can save much time previously spent on manual business authentication procedures. Furthermore, an instant identification verification system lowers the risk of identification fraud.

Reduces Fraud

Efficient digital onboarding with KYB verification systems allows banks to access more data sources. It helps them safeguard themselves from financial fraud and keep an active track of the financial transaction activities of businesses.

Ensures Security

Know Your Business (KYB) verification procedures involve the collection of sensitive documents. Nevertheless, the KYB’s automated procedure ensures the protection of all confidential information.

Also read: What is the Bank Secretary Act (BSA)?

To Sum Up

Compliance with Know Your Business (KYB) regulations is essential to prevent illicit financial crimes in the corporate world. As per Forbes, the financial firms were fined $2.7 Billion for non-compliance with AML and KYC regulations. The KYB’s seven-step checklist allows banks to effortlessly onboard new businesses while meeting challenges of financial crimes, including money laundering and terrorism financing. Build strong corporate ties with your clients using our specialized and streamlined KYB checks.

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