What is Know Your Business (KYB)?

What Is KYB (Know Your Business)?

Sanction Scanner's Know Your Business (KYB) tool provides the confirmation of the legitimacy, ownership profile, and history of companies before establishing a new business relationship. With KYB, you can also assess the risk level and the legitimacy of a business in order to avoid financial crimes, shell companies, and fraud. In this post, we will cover all you need to know about KYB. 

Why Is KYB Important?

First of all, it comes as a requirement by regulators. So if a business doesn’t implement proper KYB, they are likely to face reputational damage and financial penalties. Regulators enforce it as a preventive measure against money laundering, terrorist financing, and other financial crimes. Even if it wasn’t obligatory, there are still numerous reasons to implement it such as identifying the Ultimate Beneficial Owners, protecting reputation, preventing fraud, and efficient risk management. KYB plays a crucial role in decision making process in the face of any partnership agreement by checking UBO, shareholders against sanctions to protect your organizations against reputational and financial loss.   

What Are KYB Checks?

As we have mentioned in the introduction, a KYB check refers to verifying legitimacy, trustworthiness, and compliance of a company. In these checks, there are several aspects to investigate. A KYB check often involves verifying business registration and UBO identification, checking sanctions lists, PEP and adverse media checks, verifying business licences and tax records, and risk scoring. 

The Role of UBO (Ultimate Beneficial Owner)

According to the FATF, UBO stands for the natural person(s) who ultimately owns or controls a customer and/or the natural person on whose behalf a transaction is being conducted. However, it also encompasses people who exercise ultimate effective control over a legal person or arrangement as well. Criminals often resort to transferring illicit funds through shell companies or offshore structures. During the KYB processes, UBO checks can uncover the real individuals behind such structures. 

Manual vs Automated KYB

Manual KYB stands for designated compliance officers collecting required documents and verifying them by hand, while automatic KYB refers to specialized software conducting the same procedures. Well, neither is better than the other because they both have their own advantages and disadvantages. That’s why we recommend a hybrid of the two. This way, you can achieve efficiency by setting up automation and letting your staff handle only the high-risk cases.

KYB vs. KYC: Key Differences

With both being a requirement, the main goal of both KYC and KYB is essentially the same, which consists of establishing and verifying the profile of your customers in order to prevent financial crime. 

However KYC is used for individuals, while KYB is used for businesses. This difference results in the need for different documents and tools. For example, KYC requires documents such as official ID, proof of address and biometric verification. On the other hand, KYB necessitates company registration and incorporation documents, ownership structure, etc. 

Global KYB Regulations You Should Know

Let’s start with the FATF, the global AML authority. Although it doesn’t explicitly state KYB as a requirement, it requires beneficial owner transparency for legal persons and legal arrangements guidance under Recommendations 24 and 25. 

On a smaller scale, regulations such as Europe’s AMLD regulations, the U.S FinCEN CDD Rule/CTA Act, and the UK’s Money Laundering Regulations 2017 also require identifying ultimate beneficial owners and verifying businesses. It is possible to extend the list with regulations such as Canada’s PCMLTFA guidance, Australia’s AUSTRAC AML/CTF Guidelines, India’s RBI KYC Master Direction, Singapore’s MAS AML/CFT Guidelines, and many more. 

Who Needs to Perform KYB?

Numerous industries must perform KYB, especially ones that face higher risks of financial crime such as financial institutions, fintechs, virtual asset service providers, regulated businesses, marketplaces, B2B service providers, real estate agents, luxury goods dealers, and crowdfunding platforms. 

However, the new tariffs will increase the need for KYB measures for several industries. According to Socure, consumer electronics, automative, textile, renewable energy, industrial equipment, and e-commerce are among the industries that will be affected the most. 

What Are KYB Requirements?

Know Your Business (KYB) regulations make sure that companies confirm the legitimacy and honesty of companies they do business with. 

Typically, KYB entails gathering and examining the following: 

• Registration documents 
• Ownership and business structure information 
• Financial operations 
• Compliance procedures 

Among the due diligence procedures are:

• Confirming registration paperwork 
• Finding the ultimate beneficial owners (UBOs) 
• Performing negative media checks 
• Evaluating the risks associated with anti-money laundering (AML) 

Advantages of meeting KYB requirements: 

• Reduces financial crimes
• Ensures adherence to national and international laws.

What are KYB Verification Documents?

When conducting KYB, there are numerous documents that you will need depending on the factors such as a company’s jurisdiction, inherent risks, and ownership structure. Let’s start with company registration and incorporation documents. For example, the FATF requires institutions to obtain a certificate of incorporation and provisions regulating the power to bind the legal person. In addition to these; business registration certificate, articles of association and business licence are also required. 

Next, the proof of existence and status. According to EU AMLD Directive, this part is especially crucial. You should always extract the information such as registration numbers, date, status, and registered office from official business registries. You may also include annual filings, corporate returns, tax identification number or VAT Certificates. So far, we have listed the business documents. Now, let’s see what you will need when it comes to verifying the hierarchy of businesses. You will need shareholders register, organizational chart that shows ownership layers, and beneficial ownership declaration. 

After determining these, we can finally mention what is needed for key persons. This step is more similar to Know Your Customer processes because you will be identifying and verifying individuals. You will need the identity documents of UBOs, proof of address, and sources of funds. However, we should also note that you may need to require additional documents for higher-risk cases such as business address proofs, bank account statements, and an even more detailed source of funds/wealth documentation. 

6 Steps to Conduct Know Your Business (KYB) Verification

1. Company Info Verification

The first step starts with collecting company data such as legal name, registration number, jurisdiction, registered address, incorporation documents etc. After collecting the relevant information, proceed to check official business registries, corporate registers, and similar government databases in order to confirm that the entity is valid and active. 

2. UBO Discovery

Now that you have completed the first step, it is time for identifying the UBO (Ultimate Beneficial Owner). This step has become especially important in recent years due to the changes in directives such as 4AMLD, 5AMLD, and the U.S. regulations. You should cross-check the information you have collected with legitimate sources to see the ownership structure of a company. Then, determine their total percentage of shares and check who mainly controls the business. 

3. PEP, Sanctions and Adverse Media Checks

After you have revealed the UBO(s), there are a few things you should check them against. What we try to achieve is to see if they possess any inherent risks or potential crime exposure. So, you must check them against sanctions lists (UN, EU, U.S., OFAC, etc.), Politically Exposed Persons lists, watchlists, and adverse media. 

4. Risk Scoring

The information you have gathered in the previous steps such as jurisdictional risks, industry, and complexity of structure will now help you to assign a risk score or category. For higher-risk businesses, you will benefit from performing enhanced due diligence, which must include additional measures like more frequent reviews, senior management approval, or additional documentation. 

5. Ongoing Monitoring

These assessments could change anytime, so you should continuously monitor these business relationships. For example, a person may come to a prominent role that will make them considered a Politically Exposed Person. Luckily, there are several solutions that can regularly track these changes. 

6. Record-Keeping

Several authorities expect you to keep the relevant documentation for at least 5 years. These full audit trails should include collected documents, sources, who did the verification, dates, and several other details. 

Best Practices for Efficient KYB Checks

1. API Integration

Using automated access to official registries and corporate databases can save you a considerable amount of time by accelerating verification across multiple jurisdictions. 

2. AI Risk Scoring

We consider this as an especially important step to reduce your workload. Why? Because AI and machine learning solutions will help your compliance teams to prioritize only higher-risk cases by assigning dynamic risk scores based on factors like jurisdiction, sector, ownership complexity, and transaction behavior. 

3. Audit Trails

There is no way to be sure of when you will need audit trails. So, you must maintain structured and audit-ready records of each KYB step. Since this is also a regulatory requirement, you must pay the utmost attention to keep full documentation ready.

4. Ongoing (Continuous) Monitoring and Real-Time Screening

There can always be possible changes in company status, ownership, sanctions or PEP status, which makes KYB not a one-time process. One must constantly remain vigilant and use alerts to catch red flags in real time, the solution is ongoing monitoring tool.

5. Train Staff Continuously

While leveraging cutting-edge software solutions can take you far, they are not enough for a flawless KYB workflow. This means that you should regularly train your compliance officers on red flags and escalation plans. Also, you should pay attention to maintaining a transparent internal data sharing between compliance and onboarding teams in order to avoid possible complications. 

Challenges of Know Your Business

Let’s start with one of the most obvious ones: Identifying complex ownership structures. This is mainly due to structures such as offshore ones, shell companies, nominee directors, or more layered businesses. Also, our clients often state they have a hard time regarding different aspects of data. For example, some data may turn out to be lower quality due to the reasons like not all corporate registries being accurate or up-to-date. 

Some other aspects of KYB that trouble businesses are inconsistent data formats and language barriers. So, all of these factors require businesses to fill in gaps. Furthermore, informational silos in institutions that are not shared equally may pose similar problems. This compartmentalized structure can immensely hinder an efficient workflow. 

In the same way, regulatory fragmentation is also a common burden for many institutions due to different countries imposing different rules and thresholds. For example, one jurisdiction may set the ownership threshold at 10%, while another requires at least 25%. Also, regulatory requirements like these are constantly changing, which makes it harder for institutions to stay up-to-date. So, a framework that worked before may not work a few months later due to the dynamic landscape of AML. 

Another common complaint coming from our clients is that KYC is time-consuming and costly. As we have mentioned before, gathering sufficient data is definitely not an easy task, especially if it is collected manually.

How Sanction Scanner Enhances KYB Compliance

Sanction Scanner can help your business with all of the challenges we have listed above. Our solutions are also flexible and easy-to-integrate via API and support several languages. First of all, our software can easily mitigate the risks of regulatory fragmentation and cross-border KYB thanks to our coverage, whichencompasses over 76,000,000 KYB records. Furthermore, this list is updated every 15 minutes and takes no longer than 150 ms to check a company. We should also note that we get data from official corporate databases.

Your business will also not get overburdened whether due to factors like time and cost, because we offer automated UBO detection that can identify beneficial owners automatically thanks to the advanced algorithms. 

At the same time, our integrated screening systems check these against sanctions lists, PEP lists, and adverse media in order to assess their risks and notify you if necessary. It will also save you from dealing with false positives to a considerable extent thanks to the advanced filtering that we use. We have also mentioned the importance of audit trails. Luckily, Sanction Scanner documents every necessary step regarding verification activities. So, you will remain audit ready in case these are needed. 

These are only a part of what we offer. To find out more, do not hesitate to contact us or request demo.