Money laundering is a constant problem around the world. Based on UNODC statistics, money laundering schemes cost the world 2% to 5% of its GDP. Because of this growing concern, companies have started to adopt security measures that can face this illegal act, such as the KYB process and due diligence analyses. The meaning of KYB is "Know Your Business". It is a complex concept that can provide a competitive advantage against other organizations when implemented accurately.
KYB Know your business is the process of verifying the legitimacy of any business you work with, potentially involving stakeholder organizations with which you form a relationship. This is performed by a bank, insurance company, or other regulated organizations, to protect interests and determine whether the company you are working with is a legal or shell company. The person who knows the business and organization can more easily build authenticity and protection from fraudulent or corrupt business practices.
Know Your Business KYB is seen as an extension of Know Your Customers, but the two should be distinct from each other. KYC is a verification standard used to verify the identity of customers, as well as monitor their background and profile. The main difference between the two is who they are dealing with; KYC deals with individuals, while KYB deals with businesses.
KYB is not only a necessity for banks but for many other businesses, organizations, and individuals; for example:
- Credit institutions
- Financial institutions
- Online banking
- Online payment services
- Services auditors
- Crypto marketplaces
- Trusts
- Notaries
- Gambling services
- Estate agents, etc.
Automated KYB checks
The process of KYB is rather complex. It requires companies to collect, analyze and manage a lot of data on the businesses they have relationships with. Choosing to do this manually can be complicated and time-consuming. This is why automated Know Your Business checks were created, with KYB solutions that'll speed up the process of accurately collecting, analyzing, and managing data.
The most common types of KYB checks include obtaining and verifying relevant business registration documents and information, such as the name, registration number, and address. KYB verification often involves checking the business against government sanctions and watch lists. This also includes identifying and verifying the business's UBOs (ultimate beneficial owners), meaning anyone who controls the company or owns at least 25% of the total shares.
Know Your Business KYB solution is much simpler when considering automated checks. Automated checks make it possible to streamline the process of collecting and verifying Know Your Business in-depth, then communicating that with the business being verified. For example, on top of real-time decision-making with automatic verifications and reports, you can conduct both KYB and KYC on the business's UBOs simultaneously while streamlining the process and ensuring the business will submit the correct documents.
KYB Due Diligence
Due Diligence checking is a term used to describe the investigation and review before making any purchasing decisions. Operational due diligence is important, whether it is to make any type of investment, merger, or acquisition with a company in question or start a business relationship with a client or partner. Anti-Money Laundering regulations have set out many ways businesses can protect themselves against potential money laundering activities. Conducting due diligence reviews and checks for new and existing customers is an essential part of this.
You might have also encountered the terms "legal audit" or "purchase audit," which are known to be due diligence synonyms, most commonly used in B2B environments and between companies where huge money investments or risky decisions are made.
Companies are legally obligated to verify business partners before entering into a contract or transaction. This is mandated by the Money Laundering Act, with the purpose of preventing illegal funds from entering the financial cycle. Companies that need to comply with these due diligence obligations involve financial service providers, notaries, auditors, and real estate agents.
In addition, it is also crucial to safeguard your company's reputation. Being involved with a company that is associated with money laundering or any other criminal activities can cause lasting damage to your reputation. This can also result in financial losses. Thus, it is vital to perform due diligence investigation and financial due diligence before entering into a business transaction with that company.
Types of due diligence in mergers and acquisitions:
- Financial due diligence – is crucial for the financial health of the business, taking into consideration both the historical and current financial performance to establish future forecasts of potential risks.
- Legal due diligence – is an important part of any transaction. It is an obligatory consideration before deciding to enter any acquisition or merger.
- Operational due diligence – is the process where the potential purchaser will review the functional aspects of a target company during acquisitions and mergers.
- Commercial due diligence – is the process through which the user will analyze a targeted company from a commercial perspective.
- Regulatory due diligence – is an audit of an organization's regulatory compliance status, together with its partners, agents, and suppliers.
- Environmental due diligence – is the process in which the environmental conditions and risks associated with a property will be evaluated.
Know your business requirements?
Once you learn what KYB is, it is essential to know more about what it requires. Although specific regulations will vary by jurisdiction, the general regulations require firms to perform suitable due diligence. This involves collecting and analyzing a range of data and information about the business with which you want to have a relationship. KYB business regulations might require to identify information such as:
- The company address.
- Identity of directors and owners.
- Registration documents.
- Licensing documents.
This will involve a range of official and private resources that can help conduct KYB business verifications. For example, the publicly available government records and registries, while establishing individuals' identities, can require collecting official materials, like driving licenses, bank statements, passports, and others.
Know Your Business requirements tend to require an evaluation of the risk level associated with certain business relationships. Because of this, Know Your Business checks should implement appropriate Anti-Money Laundering strategies involving the following procedures:
- Due diligence – companies need to perform suitable due diligence on all businesses with which they have relationships, which helps establish and verify UBOs.
- PEP screening – businesses exposed to political corruption often have an increased risk of money laundering. Because of this, firms should screen businesses to establish their PEP status.
- Sanctions screening – involves checking against the ever-changing watch list of individuals, organizations, businesses, and government agencies, to protect against illicit and fraudulent activities.
- Adverse media screening – firms need to monitor businesses for their involvement in negative or adverse news media stories that could indicate involvement in criminal activity.
- Transaction monitoring – refers to monitoring the transactions of your customers, including assessment of historical/current customer information and interactions, providing a clear picture of their activity.
Why is KYB needed?
For banks and financial institutions to function properly, KYB is an essential part of identifying risks associated with partnering up with other businesses. It is a vital part of compliance requirements, and failing to perform KYB activity properly can cause damage to your reputation and even cause issues with the law.
Working with businesses and corporate clients is much more complicated than dealing with individuals. A lot more investigation and decision-making are involved in thoroughly evaluating a UBO. Not to mention that often there will be more than one UBO. Thus it is important that banks perform due diligence on all UBOs; otherwise, there is room for illegal activities. By obtaining and verifying essential information about the companies, businesses, and individuals your company is planning to work with, you can rest assured that every business onboard is legitimate and not funding criminal activity.
Keep in mind that Know Your Business compliance is incredibly significant, as non-compliance can result in suspensions, hefty fines, sanctions, and in some cases, criminal proceedings. The solution Know Your Business can significantly benefit your company, allowing customers to know your business better, essentially enhancing your reputation.
Examining how organizations are set up and who are the individuals involved can effectively help minimize the risk of having your company inadvertently being a part of fraudulent or other criminal activities. This is not a one-stop shop; instead, it is an ongoing process that needs to be revisited depending on the level of risk involved.
Many businesses are fluid in nature, and within just a few hours, a lot can change, from altering minor administrative things, such as addresses, to more significant updates, such as new directors, adverse media, or having PEP involved in the business. This is why active monitoring is a crucial part of KYB, and it needs to be active throughout the entirety of the relationship with every organization.
Simply put, KYB is an essential part of combating financial crime and risk management. Financial crime is huge, and the numbers at stake are incredibly high. KYB can help find and address unwanted or disreputable clients before they can steal, scam, or launder funds.
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