The Ultimate Guide to Know Your Business (KYB) and How it Relates to Know Your Customer (KYC)
We live in an increasingly globalized world where companies like yours can provide service, receive payments, send payouts, and more to consumers and corporate clients domestically and worldwide. While that's undoubtedly benefited businesses in countless ways, it's also created an ever-rising threat of fraud. One recent survey from the Association for Financial Professionals (AFP) found that a staggering 80 percent of organizations were victims of attempted or actual payment fraud activity in 2023. It's more important than ever for businesses to take action and protect the bottom line.
Many regulatory requirements exist to help mitigate fraud issues. Know Your Customer (KYC) requirements are one of the most well-known. However, KYC is only one of many due diligence requirements companies must meet. Know Your Business (KYB) measures can reduce the risk of fraud while building trust among corporate partners or clients.
In this guide, you'll learn more about KYB verification and its importance in protecting your business. We'll also explore how it relates to KYC and contributes to your larger fraud mitigation strategies.
Significance of Business Identity Verification
KYB procedures are all about business identification. But why is that important in today's business landscape? Business verification is a practice that's most commonly associated with financial institutions. By law, banks and the businesses that work with them must perform KYB checks to assess the level of financial risk associated with a company.
While most associate fraudulent activity with bad actors, cybercriminals, and lone-wolf fraudsters, criminals can also disguise themselves as companies to defraud businesses. Business identification closes once-exploited loopholes, putting corporations under the magnifying glass. This form of due diligence allows companies to assess risks and determine if they're forming partnerships with legal and legitimate companies.
Processes help to verify the identity of individuals associated with the company, including stakeholders, Ultimate Beneficial Owners (UBOs), and Persons of Significant Control (PSCs). Identification procedures can also unveil more information about corporate structure, regulatory status, business activities, etc.
All this information helps corporations protect the bottom line, ensuring they're not putting themselves at risk or doing business with potential criminals. It's a critical piece of the compliance and risk management puzzle, ultimately building trust and improving safety.
Understanding Know Your Business
Know Your Business (KYB) is a verification procedure that helps companies avoid doing business with criminals while reducing the risk of fraud. It's one of many due diligence requirements that companies must perform before forming partnerships or facilitating transactions with another business. Legally, banks, fintech companies, and other financial institutions must verify the legal status of business clients to comply with anti-money laundering (AML) regulations. It's important to consult legal experts to understand your company's unique regulatory requirements.
Like KYC verification, KYB checks are governed by the Bank Secrecy Act (BSA) of 1970 and the U.S. Patriot Act. The BSA requires financial institutions to help U.S. government agencies detect and prevent money laundering activity from drug traffickers. With the U.S. Patriot Act of 2001, anti-money laundering regulations became the norm to prevent terrorist financing.
KYB verification fixed a loophole with traditional KYC regulations that some criminals exploited. Because businesses didn't get the same due diligence as individual customers, criminals and terrorists could use shell companies to hide their identities and commit crimes under the guise of legitimate business activity. Introducing KYB processes tightened regulations and due diligence, putting every business and individual under the same scrutiny.
KYB processes have three primary objectives.
• Identify Beneficial Owners: Identifying the individuals who own or control a business is a big part of KYB checks. KYB procedures unveil who owns or controls a business companies want to engage with, allowing them to assess the risk of fraud, money laundering, and corruption.
• Assess Compliance with Current Regulations: Due diligence requirements ensure transparency in business transactions, keeping all parties safe. Federal law requires regulatory compliance with frameworks like AML requirements and the Patriot Act. KYB processes help ensure potential corporate partners fully comply with the law.
• Verify Business Legitimacy: Companies must verify that businesses are legitimate and legal. KYB checks dive into corporate structures, legal existence, operational status, and more to avoid inadvertently engaging in illegal activity.
The Relationship between KYB and KYC
Know Your Customer (KYC) regulations are widespread. Many companies incorporate KYC checks into customer onboarding processes while performing additional verification procedures throughout the business relationship with an individual customer. KYC requirements are about identification verification. By gathering personally identifiable information, companies can verify the identity of individuals they serve or do business with, helping to prevent fraud, money laundering, terrorist financing, and more.
Know Your Business (KYB) regulations do much of the same thing, achieving the same goals. However, the differences lie in what companies must focus on when performing due diligence. KYC checks cover individuals. Meanwhile, KYB checks cover corporate customers, clients, or partners.
Some refer to KYB as "Corporate KYC," and that's a great way to look at it. The two processes are similar, and KYB has elements of KYC embedded in it. Like KYC verification, businesses typically perform KYB procedures when onboarding new corporate clients/partners. Full KYB compliance can be more complex due to the many factors and individuals involved, and you should consult legal experts to understand what your business must do to comply with regulations. However, proper KYB processes make a big difference in protecting your company.
KYB Processes and Protocols
Due diligence is paramount, helping your business avoid doing business with financial criminals while assessing potential risks. KYB procedures take time. It's a complex and delicate task, but completing the process is important to ensure compliance and strengthen business relationships. Because every business is different, KYB processes can vary based on the unique corporate entity and its distinct characteristics.
That said, there are several best practices and core components.
• Verification of Company Registration and Legal Existence: The first step in KYB verification is to review a company's registration and license. It involves gathering basic information about the business, including its name, registration number, entity type, etc.
• Assessment of Ownership Structure: KYB checks should also include an overall assessment of the company's ownership structure. It's important to understand who ultimately owns and controls the company.
• Identification of Beneficial Owners: KYB procedures involve digging deeper into the identities of beneficial owners. Businesses should verify identities, perform background checks, and look for potentially criminal or fraudulent activity.
• Assessment of Regulatory Compliance: Before conducting business with a corporate customer or partner, you must ensure the company complies with all relevant regulatory compliance. That includes federal, state, and industry-specific requirements.
• Evaluation of Business Activities: Understanding business activities provides more insight into what a corporation does. This part of KYB should dive into the company's products, services, customer location, areas of operation, etc.
• Blacklist Checks: Always run a list of beneficial owners against sanction lists. Blacklists identify individuals involved in illegal activities.
• Investigation of PEP and Adverse Media: Politically exposed persons (PEPs) may be more susceptible to fraud, corruption, blackmail, and more. Working with companies involved with PEPs could increase your company's risks.
Compliance with Global and Local regulations
In the United States, the Bank Secrecy Act (BSA) governs KYC requirements, which expanded its scope with the passing of the U.S. Patriot Act in 2001. In 2016, further changes occurred to include KYB procedures, requiring businesses to identify and verify beneficial owners involved with a legal entity.
KYB requirements vary by industry, and it's vital to consult with regulators and attorneys to understand what your business must do to stay compliant. Financial institutions and companies in regulated industries have strict regulatory requirements. Failure to perform KYB checks will result in serious repercussions, including penalties and possible criminal investigations. Noncompliance also often triggers additional regulatory scrutiny, exposing your business to audits, surveillance, and more.
Globally, KYB requirements vary by jurisdiction. The rules and regulations of the United States are different from those of other countries. Fortunately, most operate within a framework established by the Financial Action Task Force (FATF). This framework sets comprehensive standards, pushing a global effort to fight financial crimes.
Necessity for Businesses to Meet These Standards
Businesses must meet KYB standards for several reasons. The first is regulatory compliance. The United States government takes financial crimes and money laundering schemes seriously. They are serious issues that the government works hard to prevent. The same applies to other jurisdictions around the world.
For regulated industries, regulatory compliance isn't optional! Your business will face the consequences of noncompliance, leading to many legal ramifications that could harm your bottom line and reputation in the long term. It's not something you want to risk.
Furthermore, KYB verification protects your business. Even companies outside regulated industries can benefit from performing comprehensive KYB checks. Unfortunately, financial fraud runs rampant, costing businesses like yours billions. KYB processes play a vital role in fraud mitigation, helping your company avoid falling victim to criminal activity or inadvertently contributing to it. All it takes is one mistake. Taking the time to perform your due diligence significantly reduces your company's risks, safeguarding it from trouble.
Finally, businesses can use KYB checks to build trust. Performing these necessary procedures shows potential partners and corporate clients that your company commits to legal, safe, and reliable operation. It's a great way to forge strong business relationships, offering peace of mind for all parties.
What are the Differences?
KYC and KYB are two sides of the same coin. Both procedures protect your business but focus on two types of business relationships your company will form. As mentioned earlier, KYC focuses on individual customers. Meanwhile, KYB dives deeper into the corporations your company wants to do business with.
While similar, these procedures have distinct roles in protecting your business. KYC focuses on individual customers, while KYB delves deeper into potential corporate relationships.
During KYC checks, your main priority is to gather personally identifiable information that allows you to screen for sanctions, identify PEPs, monitor transactions for suspicious activity, and conduct thorough risk assessments. You're putting individuals under a magnifying glass, ensuring they're not involved with criminal activity.
KYB checks are more expansive. Not only are you looking at individuals, but you're also assessing the organization as a whole. During KYB verification, you must look into the company to ensure it's not a shell corporation. You must learn about the company's structure, assess business activity, and more. Then, the process shifts focus to the beneficial owners.
Business verification includes many of the same due diligence tasks as KYC processes, allowing you to learn more about stakeholders and owners. However, it has the added element of scrutinizing the corporation's activity and regulatory compliance.
What are the Benefits?
We can't understate the benefits of KYB procedures. The biggest advantage of due diligence is gaining a deeper understanding of the company you're working with. Fraud is a serious issue that plagues businesses worldwide. Financial crimes are widespread, and it's easier to fall victim to criminals than most realize.
KYB processes can significantly reduce your company's risk of fraud. Think of it as a moment of reflection for your business. You can stay up-to-date on your risks, analyze factors that make your company vulnerable, and scrutinize every potential business partnership. Risk assessment is paramount, and KYB procedures highlight all the possible issues with partners and corporate customers.
Implementation in Various Industries
All industries can benefit from extra vetting and due diligence. However, you will most likely see KYB procedures in regulated industries like finance, law, insurance, health care, etc.
In banking, KYB processes play a massive role in assessing the risk of providing business loans, payment support, and other financial services. The same applies to fintech companies. E-commerce companies can use KYB checks to ensure legitimate business operations, whether partnering with small retailers or supplies. Meanwhile, insurance companies can use the information they uncover to understand corporate policyholders and their risks.
Evolving Technologies in Business Identity Verification
Regulatory requirements like KYB are notorious for being complex, resource-intensive, and time-consuming. However, emerging technologies are flipping the script, making meeting due diligence requirements easier.
Automation and artificial intelligence are paving the way to more streamlined processes. Platforms like Dots can automate the collection of digital identification information, running data through sanction lists and verification processes without any manual input. The technology makes quick work of information verification, delivering information in real-time for fast decision-making. Not only are these technologies saving time and money, but they're also allowing businesses to work more efficiently while establishing faster workflows and better onboarding processes
Get Started With Dots Today
KYB procedures are important in today's business landscape. The risk of fraud is everywhere, and failing to do your due diligence can put your business in the crosshairs. KYB regulatory requirements exist to protect companies like yours. They mitigate your risks while playing a larger role in reducing financial crimes worldwide.
When you want to improve your company's approach to risk mitigation, turn to Dots. Dots is a unified payout platform that allows you to effortlessly send payments to corporate clients, suppliers, freelancers, and more. Our API has several powerful tools to safeguard your business. Take advantage of KYC features, built-in security tools for AML, BSA and OFLAC compliance, algorithmic fraud detection, identity verification, and more. Dots streamlines your company's approach to risk mitigation and fraud prevention, helping you stay compliant with all regulatory requirements while making it easier than ever to do your due diligence.
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