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.
What is “KYB” (Know Your Business)?
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.
What are KYB Procedures?
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:
- Identification and verification: Confirm the legal name, address, and status of the organization via registration documents.
- Ownership structure: Identify the significant beneficial owner(s) (SBO) of the business. An SBO is an individual who owns or controls a significant percentage of the company’s shares or voting rights and who is most likely to benefit from the company’s success.
- Financial health and transaction monitoring: Assess the financial health and stability of the organization through financial statements and other documents. Review transactions to identify tell-tale signs of money laundering or fraud, such as unusual transaction frequencies, transactions in high-risk regions or balances and sums that fall just short of reporting thresholds.
- Reputation checks: Conduct media scans and review public records to identify any suspicious, unusual, or negative coverage.
- Sanctions checks: Review international databases and lists to confirm that the organization, its leaders, and UBOs are not subject to any sanctions.
- Compliance and risk assessment: Verify that the business complies with all relevant laws and regulations, specifically those related to financial crimes and money laundering.
- Review of political affiliations: Determinate the involvement of any politically exposed persons (PEP) within the company. A PEP is anyone affiliated with the organization who holds a public position or political office or is closely associated with someone who does. These affiliations could put the individual, and thus the organization, at a higher risk of fraud or corruption.
- Ongoing assessment: KYB is an ongoing process that requires continuous monitoring. The level of oversight for each company may vary depending on the risk scores and other assessment tools used by the organization at the time of onboarding.
KYB vs. KYC
KYC and KYB are similar in nature. Both:
- Provide a holistic risk assessment that helps the organization understand who it is engaging as a customer, whether that is an individual (KYC) or business (KYB);
- Are an essential component within an overarching regulatory compliance strategy, particularly as it relates to banking, finance, insurance and other sectors that are susceptible to fraud and corruption;
- Help support a company’s due diligence efforts and make well-informed decisions about who they serve as customers and in what capacity; and
- Prevent or lower the risk of fraud and other financial crimes.
However, there are some key differences between KYC and KYB. These include:
KYC
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
KYB
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.
Evolution of KYB Regulations
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.
Which Companies Need to Implement KYB?
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:
- Banks and financial institutions, including credit unions, investment firms
- Financial service providers, such as accountants, asset managers, and tax consultants
- Corporate service providers, including notaries and trust managers
- Insurance companies
- Payment service providers
- Cryptocurrency exchanges
- Law firms and legal service providers
- Real estate organizations, including brokers and developers
- Regulated industries, such as gambling and gaming
Legal Repercussions for KYB Non-Compliance
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:
- Fines and other financial penalties
- Suspension or revocation of licenses or permits
- Legal consequences, including criminal charges and/or civil lawsuits
- Reputational harm and tarnished image
- Increased oversight, such as more frequent audits and inspections or the presence of a government official on-site
- Exclusion from financial networks
- Loss of customers and/or new business opportunities
The KYB Process
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.
Technology in KYB
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:
- Screening watch lists and sanction lists
- Producing alerts to negative press coverage
- Leveraging blockchain technology to verify information via a tamper-resistant ledger
- Identifying trends and patterns over time that may indicate early signs of fraudulent activity
- Producing compliance reports and documentation
- Proactively adapting processes to meet changing regulatory needs
KYB Requirements in Various Industries
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.
KYB and AI-Powered Fraud Detection
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.
Frequently asked questions
Why is KYB important?
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.
What documents are needed to verify the legal status of a business entity?
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.
How often should KYB checks be conducted?
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.
What are the consequences of non-compliance with KYB regulations?
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.
How can businesses streamline their KYB processes?
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.
Where can businesses find guidance on conducting KYB checks?
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.
