What is Know Your Business (KYB)?

Strict compliance procedures are now essential for reducing financial risks and protecting company reputations across all industries. Know Your Business (KYB) is a crucial procedure for confirming business associates in order to stop financial crimes like tax evasion, money laundering, and financing terrorism.

What Is KYB (Know Your Business)? 

Confirming the identity, ownership, structure, and risk exposure of corporate clients or other business entities is known as KYB. KYB guarantees that companies aren't unintentionally doing business with dishonest, illegal, or sanctioned companies. 

Important Know Your Business Regulatory Bodies and Regulations 

The Financial Task Force (FATF) sets global AML/CFT frameworks for organizations and KYB requirements are usually contingent upon these frameworks, but they may vary depending on the jurisdiction as well. There are national regulators that adapt these recommendations into law. We have listed below the key examples. 

FinCEN (U.S.) – As of 2024, the Corporate Transparency Act requires companies to disclose UBOs to FinCEN’s national registry.

FCA (UK) – The Money Laundering Regulations 2017 enforce KYB in financial services and designated non-financial businesses.

EU (5AMLD & 6AMLD) – As we have mentioned in the introduction, EU expands scope to virtual asset service providers (VASPs) and requires cross-border information sharing.

AUSTRAC (Australia) – AUSTRAC mandates detailed KYB checks for all the reporting entities under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006.

MAS (Singapore) – The MAS Notice 626 requires customer due diligence for all corporate clients, which includes beneficial ownership verification.

FINTRAC (Canada) – Under FINTRAC, businesses must perform KYB as part of compliance with the Proceeds of Crime (Money Laundering) and Terrorist Financing Act. 

FIU (India) – India’s regulatory body enforces KYB measures through the Prevention of Money Laundering Act (PMLA), which requires businesses to verify corporate relationships and maintain appropriate records. 

HKMA (Hong Kong) – Guidelines on Anti-Money Laundering and Counter-Financing of Terrorism mandate effective KYB processes for financial institutions to identify and monitor corporate clients. 

Businesses must comprehend and abide by these jurisdiction-specific rules in order to reduce risks and improve transparency in their Know Your Business (KYB) procedures. 

Why Is KYB Important? 

Following KYB regulations is crucial for a number of reasons:

• Financial crime prevention, since KYB prevents businesses from unintentionally supporting financial crimes like money laundering, tax evasion, and financing terrorism. 
• Ultimate Beneficial Ownership (UBO) transparency, another one of the advantages of following KYB regulations, helps prevent hidden risks by identifying shell corporations and guaranteeing ownership clarity. 
• Regulatory compliance, this aspect of KYB adheres to international guidelines, including the FinCEN requirements, EU AML directives (AMLD6), and the FATF Recommendations. 
• Reputational integrity, since KYB enhances credibility by limiting exposure to hazardous alliances. 
• Penalty mitigation, because KYB prevents expensive regulatory fines brought on by non-compliance. 

Why Companies Require Know Your Business (KYB) Process?

Basic company registration checks can fall short in many scenarios and this is exactly where the KYB process comes into play. When interacting with a business, organizations can verify the legitimacy, ownership structure and operational integrity thanks to KYB. What makes it more efficient than basic checks is that it can identify Ultimate Beneficial Owners (UBOs) and uncover hidden risk factors such as shell companies, complex corporate structures and links to sanctioned entities. 

It is not sensible to view it as an optional process because the failure to conduct KYB can have severe repercussions. A fine example is that EU’s 5th and 6th Anti-Money Laundering Directives (5AMLD & 6AMLD), which legally require financial institutions and certain non-financial businesses to assess the legitimacy of their corporate clients. It should not be viewed as something that only prevents money laundering and terrorist financing because it plays a significant role in safeguarding corporate reputation and investor confidence as well. 

Who Needs to Perform KYB?

There is a long list of the organizations that need to perform KYB. Obviously the first one that comes to mind is financial institutions such as banks, payment providers and foreign exchange brokers due to their role in facilitating financial transactions and managing monetary assets. Another obvious one is virtual service providers like cryptocurrency exchanges and digital wallet providers, because they enable users to buy, sell and store virtual currencies. 

Even though professional service firms such as law firms, accounting firms and company formation agencies are not directly involved in monetary exchanges, they still offer specialized services, which creates the need for KYB. The fact that real estate agencies often handle high-value transactions, whether residential or commercial, makes them liable to perform KYB as well. Similar to real estate agents, high value goods dealers, which may range from fine art to luxury cars, are equally obligated to perform KYB. Lastly, crowdfunding and peer-to-peer (P2P) lending platforms must also perform KYB because they connect investors directly with projects or individuals in order to provide alternative methods of raising and distributing funds.

The common point of all of these sectors is that they all handle customer funds, facilitate financial transactions, or operate in a regulated sector. So if these apply to you, you must perform KYB as well. 

What Are KYB Checks?

KYB investigates a corporate client's legitimacy and risk factors through a number of methodical checks, such as:

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 the likelihood of financial crimes like money laundering and fraud. 
• Ensures adherence to national and international laws.

What are KYB Verification Documents?

First, a certificate of incorporation is needed because it officially confirms the legal existence of the entity and proves the company’s registration with the relevant authorities. The details of this certificate usually include company name, registration number, and date of incorporation. 

The memorandum & articles of association are also important. These basically define the company’s relationship with the outside world and detail the internal structure of the company. In other words, these come very useful in outlining the operational structure, purpose, and internal rules of the company.  The shareholder register is another critical document in ensuring transparency. With this register, all shareholders, from direct to indirect owners, can be identified with their names, contact information, and shareholdings of each owner.

An appropriate regulatory body has to grant a business permission to operate within its industry or jurisdiction, and in order to verify this, a Business License or Permit is also needed. It goes without saying that proof of registered address is also required, for confirming the physical address where the business is legally registered, which is usually provided through recent utility bills, bank statements, or other official correspondence.

Lastly, the UBO (Ultimate Beneficial Owner) identification documents. These usually consist of passport copies or national IDs for individuals that ultimately own or control the company, either through direct ownership or indirect influence. These documents ensure compliance with anti-money laundering laws and provide clarity on the entity’s true ownership. In high-risk sectors, a need for additional records may emerge, which can include audited financial statements or tax filings.

What are KYB Procedures?

The identity, legitimacy, and operations of business entities are confirmed by Know Your Business (KYB) procedures. 

Goal: 

• Create trust. 
• Verify adherence to rules. 
• Reduce the possibility of dishonest or illegal collaborations. 

Important steps in KYB procedures include:

• Gather and examine necessary paperwork, such as business registration certificates, evidence of ownership arrangements, and financial documents. 
• Determine who the Ultimate Beneficial Owners (UBOs) are. 
• Verify backgrounds for unfavourable media.
• Assess risk for activities like money laundering or illegal operations. 

KYB offers the following advantages: 

• Reduces financial, legal, and reputational risks. 
• Encourage a safe and legal business environment.

The Role of UBO (Ultimate Beneficial Owner) 

An individual or group of individuals who ultimately control or profit from a company is known as the UBO. A company must own or control 25% or more of it in order to qualify as a UBO.

Since concealing the true beneficiary is a common strategy for fraud, money laundering, and tax evasion, it is imperative to comprehend and validate UBO information. By making this data easily identifiable for regulatory purposes, KYB increases transparency; therefore, according to AML compliance protocols, failing to identify the correct UBO is a serious red flag.

KYB vs KYC: The Differences

The difference between KYC (Know Your Customer) and KYB lies in the fact that while KYC’s focus is on the verification of individual clients, the latter’s target are entities such as corporations, trusts and partnerships. Let’s delve deeper into these. 

It is reasonable to start with the depth of the verification. KYB (Know Your Business) ensures transparency and compliance thanks to its in-depth corporate registry checks, a thorough analysis of ownership structures, and identification of Ultimate Beneficial Owners (UBOs). When it comes to KYC (Know Your Customer), it confirms an individual’s identity by the validation of personal identity documents and residential addresses.

Secondly, risk assessment is another important metric to mention. KYB does more than basic checks. In order to assess the trustworthiness, it evaluates the operational legitimacy of a business, identifies sector-specific risks, and reviews the company’s compliance history. What KYC does is assess individual risk based on factors like transaction history, geographic location, and personal background.

Lastly, let’s elaborate on the documentation for each of these. As we have mentioned before, KYC’s requirements include personal identification documents, such as passports or driver’s licenses, and proof of address, like utility bills or bank statements. KYB’s approach is rather more complex. There are requirements such as business licenses, incorporation certificates, shareholder registers, and financial statements, in order to provide a comprehensive picture of a company's structure and operations.

Now that we have listed key differences between KYB and KYC, we must mention that they actually complement each other, especially in areas like B2B financial services. Using both ensures that both the individual signatories and the legal entity are trustworthy.

Despite their similarities, KYB (Know Your Business) and KYC (Know Your Customer) have different functions in compliance management:

Manual vs Automated KYB

Manual KYB verifies business entities through human-driven processes for the verification of business entities, which includes registry searches, document reviews, and cross-referencing information against sanctions databases. Undoubtedly, this is a thorough approach but it may take a lot of time, and it always carries a risk of human error. If you are wondering how this could occur, let’s give an example. Analysts may face delays and inaccuracies due to sifting through complex corporate structures or reviewing outdated records. On average, manual KYB of onboarding a high-risk corporate client can take weeks, thus, this can slow down business operations and frustrate potential clients.

This is not the case for Automated KYB. It leverages advanced technology to streamline the process. Also, it features API-driven integrations for global corporate registries so that businesses can instantly access up-to-date company information. Even if an organization has complex structures, AI-powered tools can enable accurate and efficient mapping of ultimate beneficial owners (UBOs). Additionally, automated KYB features real-time screening for sanctions and adverse media in order to identify compliance risks immediately. These automated workflows can drastically reduce onboarding times from weeks to mere minutes as well as enhancing accuracy, reducing human error, and providing ongoing monitoring.

For example, a fintech that onboards 500+ SMEs each month can cut compliance processing time by up to 70% using automated KYB without any compromise in the regulatory obligations.

To confirm business entities and guarantee regulatory compliance, Know Your Business (KYB) is crucial. Both manual and automated methods have advantages and disadvantages. Here's a brief analogy:

Challenges of Know Your Business

Implementation of KYB is certainly not without its challenges. There are several reasons for this, so let’s touch upon the primary ones.  Unfortunately, the corporate information is often not stored in a single location. It can be found across multiple jurisdictions and each with different regulations and levels of accessibility. This makes it difficult to gather and verify accurate data during KYB checks. 

Secondly, some companies may have layered or opaque offshore structures. This may make it considerably difficult to identify Ultimate Beneficial Owners (UBOs). Lack of advanced analytics and specialized tools can make the process of tracing ownership back to the source, a time-consuming and resource-intensive process.  It goes without saying that regulatory environments are very dynamic due to emerging risks, and thus there is a continuous need for governments and institutions to adapt to these. This makes it obligatory for businesses to regularly update their compliance policies, procedures, and system, so that they can remain aligned with the latest requirements. 

It is not very uncommon for screening systems to lack precision. This can generate excessive false positives during the KYB process, which increases the workload for compliance teams, since they need to manually review each case. This is a guaranteed way to face inefficiencies and delayed on boarding processes. Lastly, global side of KYB can result in its own challenges such as language barriers, differing legal frameworks and limited access to company registries in certain regions. Thus, cross-border scenarios can give a hard time to businesses in verifying the legitimacy. 

To overcome these challenges, a reliable combination of technology, specialized compliance expertise, and well-structured workflows is needed.

Best Practices for Efficient KYB Checks 

Efficient KYB check implementation is essential for striking a balance between thoroughness and flexibility. Take into account these tactics:

Use APIs to automate verification 

Simplify the verification procedure by incorporating APIs that establish direct connections with official commercial registries. Use APIs to standardise UBO (Ultimate Beneficial Ownership) data as well, which will cut down on processing times and eliminate human error.

Make Use of Real-Time Screening 

Use cutting-edge technologies that constantly check and filter companies and people against databases of politically exposed persons (PEPs), watchlists, and international sanctions lists. This lowers the risk of hanging around with high-risk people or organisations and guarantees that you stay in compliance in real time.

Models of Risk-Based Scoring 

Make use of AI-powered risk assessment tools; these models let you swiftly rank high-risk entities and give compliance teams useful information so they can better concentrate on important cases.

Produce Comprehensive Documentation 

Create and preserve well-organised audit trails that record every stage of the compliance lifecycle. In addition to improving internal reviews, these documents streamline regulatory audits and guarantee that you can produce proof of your compliance procedures when needed.

Create Ongoing Monitoring 

Put in place mechanisms that offer continuous oversight of modifications to a company's ownership, legal status, or regulatory exposure. This proactive strategy keeps you ahead of possible risks or fines and enables you to quickly adjust to changing compliance requirements.

How Sanction Scanner Enhances KYB Compliance 

With the following features, Sanction Scanner specialises in assisting businesses in efficiently managing KYB workflows:

Global Reach: You can confirm companies in more than 200 countries. 

UBO Transparency: You get real-time UBO identification and screening. 

Workflow Automation: For smooth KYB execution, Sanction Scanner helps you integrate with databases and registries. 

Constant Monitoring: To keep tabs on ownership, modifications to the law, and possible exposure to the blacklist. 

Audit-Readiness: You can easily comply with AML regulations by creating comprehensive risk reports. 

Using tools like Sanction Scanner ensures complete regulatory compliance while also improving the speed, accuracy, and scalability of KYB operations.