Know Your Business or business verifications are central to the implementation of security protocols, as required by regulations across countries. Regulatory authorities such as FinCEN and FINMA were set up to deter cartels, drug dealers and money launderers, and to ensure that illegal means of funding does not enter into banking systems. Several regulatory acts have been introduced as part of the same agenda, to verify and authenticate customers before onboarding them.
As a step forward from customer identification, Know Your Business checks are aimed at preventing businesses from developing relationships with organizations and entities involved in money laundering and terrorist financing. Financial institutions, payment companies, and other merchants are required to register with their respective states in order to make it easier to track the nature of their business activities.
KYB Compliance Challenges Facing Businesses Worldwide
Rising compliance costs and overwhelming regulatory frameworks are presenting business owners with a number of challenges.
The EU’s 5th AML Directive, along with regulations like PSD2 and GDPR, layout guidelines for business verification standards and procedures in Europe and the UK. While these are being adopted by businesses to streamline due diligence and business verification requirements, there are limitations in implementation.
While carrying out KYB verifications, companies encounter problems in access to the right data, as well as specific expectations in compliance procedures. Information regarding company owners or changes in company structure is not usually made public. In some jurisdictions this may not be a regulatory requirement at all, making it all the more difficult to perform due checks. For smaller businesses, the challenge is even greater as micro-merchants have a less trackable transaction history.
In the US, the Customer Due Diligence (CDD) Final Rule, implemented in 2018, intends to implement uniformity and consistency. However, it still leaves some ambiguity in terms of its interpretation by financial institutions, dealers, brokers and commission merchants.
Firstly, while financial businesses are required to collect information on company owners, there is no mechanism in place to verify if that information is correct. Secondly, mandates for ongoing monitoring are also unclear as far as the frequency of updates on ownership information is concerned. In the absence of an automated verification solution, firms will find themselves under the burden of manually cross-checking information against commercial registers on a regular basis.
Additionally, firms also have to update contracts and official documents to incorporate CDD rules and obligations. This entails enhanced awareness of concerned legislation and increased operational capacity to implement it across the board.
Streamlining KYB Due Diligence
Due diligence requirements for financial institutions entail detailed probes into company structure and management, in order to keep tabs on Ultimate Beneficiary Owners (UBOs). This ensures that individuals looking for a legitimate cover for money gained through illegal means can be identified at the source. KYB checks are also performed against global watchlists, PEP and sanctions lists, and Adverse Media.
Conducting due diligence for firms involves screening that identifies suspicious activities and fraudulent sources of money. The eventual aim is to allow safe business transactions and streamlined workflows that lead to profitability and scalability in terms of customer onboarding.
KYB Providers: Finding the Right Grounds for Security
With a rise in the number of digital crimes carried out each year, AI-powered solutions for cybersecurity are developing streamlined compliance procedures. The right KYB solutions are key in addressing regulatory challenges, by automating tedious verification procedures and ensuring accurate results in real-time.
Background checks on business ownership and activities are performed as part of the identification process in the business search feature. Business filings provide verifiable information about company financials, including register reports and shareholder lists.
Keeping tabs on company management and structure is also part of KYB checks, for follow-up information on business dynamics and activities. Lastly, details on corporate structure reveal company subsidiaries, for an overview of the company’s networks and activities.
