Explore our guide to KYB (Know Your Business) for vital insights on verification, compliance, and risk assessment. Navigate KYB with ease and expertise.
For banks and financial institutions, onboarding a new enterprise customer involves asking more than a few questions: Who owns the company? Is it in good financial health? Are its permits and licenses up to date? Has the company ever been sanctioned by the government? Does the organization do business with high-risk entities or suppliers?
To get answers to these questions and others, organizations can conduct what is known as a Know Your Business (KYB) check. Similar to long-standing Know Your Customer (KYC) practices, KYB provides a framework for enabling organizations to gather and analyze critical information about who owns the business, its shareholders, and suppliers. This system helps companies identify high-risk or suspicious activity among their client base, including fraud, money laundering, terrorist affiliations, and more.
KYB isn’t just a good practice—in many cases, such as within the banking and fintech sectors, it is a matter of law. Failure to comply with relevant KYB regulations can lead to steep penalties, as well as a tarnished public reputation.
In this guide, we provide a comprehensive understanding of KYB, including its historical context, legal requirements, helpful tools and technologies, and practical steps for implementation.
Know Your Business (KYB) is a regulatory process and framework that businesses must adhere to when evaluating, onboarding, and serving enterprise clients.
Sometimes framed as an extension of the Know Your Customer (KYC) process, KYB is meant to ascertain key information about business clients or enterprise customers, including the company’s owners, executive team, shareholders, partners, suppliers, and other affiliations. It also assesses the organization's financial health and confirms that it is properly registered and in good standing in the countries and regions where it operates.
KYB is a critical step in the Anti-Money Laundering (AML) compliance process in that it is meant to uncover evidence that may indicate suspicious or illegal activity, including money laundering, fraud, corruption, or other types of financial crime.
Using the information gathered during the KYB process, organizations, including banks, fintechs, and insurance companies, can make well-informed decisions about the companies they do business with.
KYB is a defined set of processes that companies can follow to verify the legitimacy of other organizations and assess the risk of doing business with them. While the KYB process varies from industry to industry and region to region, most include the following elements:
KYC and KYB are similar in nature. Both:
However, there are some key differences between KYC and KYB. These include:
Focus on individual customers
Collects and assesses personal information about the customer
Subject to regulations such as the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT) Act of 2001
Focus on entities
Collects and assesses information related to the business, its owners, partners, suppliers and customers
Subject to regulations such as the Customer Due Diligence Final Rule (US) and Anti-Money Laundering Directive (EU)
In the next section, we’ll explore the connection between KYC and KYB from a legal and regulatory perspective in more detail.
KYC laws were first introduced in the U.S. in 2001 under the Patriot Act. This legislation aimed to detect and prevent terrorism by identifying suspicious or illegal financial activities.
However, KYC inadvertently created a significant loophole in that it did not apply to registered businesses. This not only created a blind spot with respect to companies engaged in nefarious activities, but also prompted individuals to form shell companies to obfuscate their identity, assets and activity.
To correct this issue, in 2016, the U.S. Financial Crimes Enforcement Network (FinCEN) introduced corresponding Know Your Business rules in the Customer Due Diligence Requirements for Financial Institutions (the CDD Final Rule). This legislation provided a standardized method for businesses to verify the legitimacy of other businesses.
While the CDD Final Rule is specific to the U.S., other regions have followed suit. For example, in the EU, regulators issued the Anti-Money Laundering Directive (AMLD), which aims to combat money laundering and terrorist financing. The AMLD is updated periodically to reflect new risks and strengthen requirements. For example, the anticipated Sixth Anti-Money Laundering Directive (6AMLD) will likely steepen the penalties for noncompliance.
KYB regulations vary by country and region. That said, KYB regulations apply to most organizations within the financial services sector, as well as others that have a high risk of fraud, money laundering, or financial crimes.
Organizations subjected to KYB regulations include but are not limited to:
Companies that fail to comply with KYB requirements may face a range of legal consequences and financial penalties. Though the specific outcomes vary from region to region and depend on the magnitude of the offense, some common ramifications include:
Here's a thorough example of steps for conducting a KYB check, including how to collect, verify, and analyze required information:
1. Understand KYB requirements: Familiarize yourself with the specific KYB requirements mandated by regulatory authorities in your jurisdiction. Determine the level of due diligence required based on the nature of your business and the risk associated with your customers or business partners.
2. Gather basic information: Collect basic information about the business entity, including its legal name, business address, registration number, and tax identification number (TIN). Obtain copies of official documents such as business licenses, registration certificates, articles of incorporation, and any relevant regulatory licenses or permits.
3. Identify beneficial owners: Identify the beneficial owners of the business entity, which typically include individuals who own or control a significant portion of the business. Obtain information about beneficial owners' identities, such as full names, dates of birth, residential addresses, national identification numbers, and percentage of ownership.
4. Verify business ownership and structure: Verify the legal ownership and structure of the business entity by cross-referencing information provided with official documents and public records. Confirm the business's legal status, ownership structure, and any changes in ownership or corporate structure over time.
5. Assess business operations: Understand the nature of the business operations, including its industry, products or services offered, geographic scope, and customer base. Evaluate the business's risk profile by considering factors such as its exposure to money laundering, terrorist financing, and other illicit activities.
6. Screen for sanctions and politically exposed persons (PEPs): Conduct screenings against relevant sanctions lists, watchlists, and databases to identify any individuals or entities associated with sanctioned countries, terrorist organizations, or criminal activities. Screen beneficial owners and key personnel for connections to politically exposed persons or individuals with a high-risk profile.
7. Assess financial stability: Obtain financial statements, bank references, or other relevant financial documents to assess the business's financial stability and viability. Analyze financial indicators such as revenue, profitability, liquidity, and solvency to evaluate the business's financial health.
8. Evaluate compliance with Anti-Money Laundering (AML) regulations: Ensure that the business entity complies with applicable AML regulations and KYC requirements. Review the adequacy of the business's AML policies, procedures, and internal controls to detect and prevent money laundering and other financial crimes.
9. Document findings and decision-making process: Document the findings of the KYB check, including the information collected, verification results, risk assessment, and any remedial actions taken. Maintain records of the KYB process to demonstrate compliance with regulatory requirements and facilitate regulatory audits or inquiries.
10. Periodic review and monitoring: Establish a process for periodic review and monitoring of the business relationship to ensure ongoing compliance with KYB requirements. Monitor changes in the business's ownership, structure, operations, and risk profile that may warrant updates to the KYB information or additional due diligence.
11. Continuous compliance: Stay informed about regulatory developments and updates related to KYB requirements to ensure ongoing compliance with evolving regulations. Continuously assess and enhance your KYB processes and procedures to effectively mitigate risks and comply with regulatory obligations.
These steps show an example of how businesses can conduct thorough KYB checks to collect, verify, and analyze the required information, enabling them to mitigate risks, ensure compliance, and protect themselves from potential financial crimes and regulatory violations.
KYB is a complex process that requires companies to gather, analyze, and verify an incredible amount of information, often in the form of documents.
Manually reviewing documents such as licenses, registrations, permits, and financial records can be very time-consuming. What’s more, many corporate clients engaged in fraud or other illicit activities often have the means to alter, manipulate, or forge documentation.
In fact, according to Inscribe’s 2024 Document Fraud Report, 46% of fraudulent SMB loan applications include signs of first-party fraud. These changes are often invisible to the naked eye and thus impossible to detect without the assistance of an AI-enabled document review and verification tool.
Digital solutions can also be used to automate or enhance other aspects of the KYB process, such as:
Businesses across various industries, including financial institutions, payment processors, insurance companies, real estate agencies, and other regulated entities, are typically required to conduct KYB checks as part of their compliance obligations. KYB procedures are often tailored to specific sectors based on the unique risks and regulatory requirements associated with that particular industry.
For example, banks and financial services organizations are subject to enhanced due diligence (EDD) procedures for PEPs or organizations based in high-risk areas. Fintechs, on the other hand, face additional procedures for verifying the digital identity of their customers. The gambling industry also faces strict regulations to prevent money laundering.
A robust KYB program is an indispensable shield against legal and financial risks and a cornerstone for upholding trust and integrity in the business ecosystem. In an era where financial crimes, fraud, money laundering, and other illicit activities are more common than ever, organizations should formalize their defenses with an ongoing, comprehensive KYB process.
It’s important to remember that for many, such as banks and financial institutions, KYB is a matter of law—they simply must verify the identity, ownership, and activities of their business counterparts. Failure to comply with these standards can result in serious legal and financial repercussions that could jeopardize the company’s right to continue to do business.
For companies that want to automate the complex and time-consuming documentation review aspects of KYB, AI-enabled verification tools like Inscribe can help companies quickly and accurately gather, review and score documents provided by potential and current customers. This is a critical step in verifying the identity and viability for entities they choose to work with.
By partnering with a company like Inscribe, organizations can not only enhance their risk management strategies but also contribute to a more trustworthy and resilient business ecosystem. To learn more, reach out to request a demo with a member of our team.
KYB is important for businesses to comply with regulatory requirements, mitigate risks associated with financial crimes such as money laundering and terrorist financing, and protect themselves from potential legal and reputational risks.
Documents such as articles of incorporation, business licenses, registration certificates, partnership agreements, and regulatory licenses or permits are typically required to verify the legal status and structure of a business entity during a KYB check.
The frequency of KYB checks may vary depending on regulatory requirements, the risk profile of the business relationship, and internal risk management policies. Generally, KYB checks should be conducted periodically, with more frequent reviews for higher-risk relationships or significant changes in the business's ownership or operations.
Non-compliance with KYB regulations can result in regulatory fines, penalties, reputational damage, and legal consequences for businesses. Additionally, failure to conduct adequate KYB checks may expose businesses to financial crimes such as money laundering, which can have serious implications for their financial integrity and stability.
Businesses can streamline their KYB processes by leveraging technology solutions such as automated KYB verification solutions like Inscribe AI. Implementing robust internal policies and procedures, conducting regular training for staff, and staying informed about regulatory updates can also help enhance efficiency and effectiveness in KYB compliance.
Regulatory authorities, industry associations, and compliance consulting firms often provide guidance and resources on best practices for conducting KYB checks. Businesses can also refer to regulatory guidelines, industry standards, and relevant publications for comprehensive information on KYB compliance requirements.
Brianna Valleskey is the Head of Marketing at Inscribe AI. A former journalist and longtime B2B marketing leader, Brianna is the creator and host of Good Question, where she brings together experts at the intersection of fraud, fintech, and AI. She’s passionate about making technical topics accessible and inspiring the next generation of risk leaders, and was named 2022 Experimental Marketer of the Year and one of the 2023 Top 50 Woman in Content. Prior to Inscribe, she served in marketing and leadership roles at Sendoso, Benzinga, and LevelEleven.
Start your free trial to catch more fraud, faster.