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KYB Verification

26 September, 2023

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With technological advancements, scammers are also becoming smarter in bypassing verification solutions and wreaking havoc on businesses. The Cyber Security Breaches Survey conducted in the winter of 2022/23 shows that 11% of total businesses have fallen victim to cybercrime in the last 10 months, including 26% of medium-sized companies and 37% of large enterprises. The increasing frequency of cyberattacks stresses the need for robust KYB verification solutions to boost security. 

What is KYB Verification?

Know Your Business (KYB) is validating the legitimacy of any business your firm works with. This can be any stakeholder company you have a relationship with, from vendors to clients to consultants.

Performing a comprehensive KYB Process, business owners can be sure of two things: 

  1. The company they are working with is legitimate—not a shell business that just exists on paper —and is secure to do business with. 
  2. The individuals operating the firm are physical people, and they are not involved in any kind of illicit activities such as money laundering, terrorism financing, etc.

What is the Process for KYB?

A robust KYB process involves the following steps:

Step 1: Verify the business’s identity

Step 2: Identify and validate the company’s Ultimate Beneficial Owners (UBOs)

Step 3: Understand the purpose and nature of client relationships to establish a risk profile

Step 4:  Maintain updated customer data and perform ongoing monitoring

Which Businesses Need to Perform KYB? 

KYB verification is legally binding for all financial firms. The Customer Due Diligence (CDD) Rule mandates the following businesses to comply with KYB regulations:

  • Mutual funds
  • Commodities brokers
  • Futures commission merchants
  • Securities brokers or dealers
  • Banks
  • Fintechs
  • Other financial firms

Similarly, the EU’s 5th Anti-Money Laundering (AML) Directive requires the following to maintain KYB compliance: 

  • Gambling operators
  • Crypto marketplaces
  • Tax advisors
  • Asset managers
  • Auditors
  • Credit institutions 
  • Notaries
  • Other financial companies 

It is worth noting that although it is not legally binding, businesses operating in unregulated sectors also perform KYB verification for security purposes. 

KYB knowledgebase infograph 1

The Importance of Automated KYB Verification Checks

Firms must deploy a robust security solution to meet the challenges of KYB compliance without impacting customer experience. 

Here is how automated KYB verification checks are worth investing in:

  • Risk Mitigation: AI-powered KYB checks give businesses a risk scoring, highlighting the firms that pose a greater risk to do business with, mitigating the risk of data breaches, money laundering, and fraud. 
  • Compliance: Automated business verification solutions help firms maintain regulatory compliance and avoid heavy fines. The robust KYB solutions integrate with sanctions lists, compliance databases, and regulatory frameworks, ensuring that firms are consistently screened against relevant and latest information. 
  • Accuracy: Reducing the risk of human error, automated KYB checks validate data with greater accuracy, minimizing the chances of data entry mistakes. The robust business verification solution relies on artificial intelligence and machine learning techniques to help firms ensure reliable results and make wise decisions regarding remediation. 
  • Efficiency: AI-powered KYB solutions facilitate businesses in handling a larger volume of business data efficiently, ensuring faster customer onboarding and minimizing alert remediation time.
  • Scalability: Manually verifying businesses is overwhelming and time-consuming, especially when there are volumes of customer applications or during times of high demand. However, AI-powered KYB checks are scalable and have the capacity to handle piles of data without compromising accuracy and efficiency. Companies can easily adapt to fluctuating working demands, ensuring a consistent and smooth screening process. 

How to Fulfill Regulatory Requirements of Know Your Business? 

KYB regulatory obligations mandate firms to assess the risk level of the company they will do business with. It’s mandatory to verify the business and its UBOs and ensure that the company or the individuals are not on any global sanctions lists or watchlists.

To fulfil the regulatory requirements, businesses must implement an effective AML strategy encompassing the following processes:  

  • Due Diligence: It is conducted to evaluate the risk level of a potential business. Unlike Customer Due Diligence (CDD), which involves verifying a client’s identity, business due diligence entails identifying and verifying the UBOs of the company. If the UBOs pose a high risk, the business should conduct Enhanced Due Diligence (EDD). 
  • Sanctions Screening: This is the process of checking whether the firm you will do business with is sanctioned by the regulatory bodies, prohibiting you from entering into the potential relationship. 
  • Politically Exposed Persons (PEPs) Screening: This involves assessing potential risks related to corruption or political influence. This means that regulated firms monitor their business relationships to check any involvement with PEPs. Firms with a positive PEP status pose a high-risk level because of their potential for political corruption.
  • Adverse Media Check: This means staying current with the news and other media platforms to identify any negative information coverage about the potential business. 

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