About $800 billion to $2 trillion in funds are laundered around the globe every year, and these funds are often used for terrorist financing, arms deals, illegal drugs, and other criminal enterprises. For many U.S. businesses, anti-money laundering (AML) laws and Know Your Business (KYB) procedures are the first line of defense against unknowingly contributing to this serious problem.
What is KYB? It’s a process companies implement to verify the legitimacy and identity of business clients. KYB verification requires an examination of a business’s ownership, operations, and adherence to regulatory requirements—to confirm the business is not engaged in illegal activities such as money laundering or fraud.
To maintain KYB compliance, organizations must clearly understand the fundamentals of KYB, including when KYB checks should be conducted, the difference between simple and thorough KYB checks, and the varying levels of due diligence required for high-risk versus low-risk business engagements. Here’s what you need to know.
The fundamentals of KYB business verification
”KYB practices form part of the business onboarding flow in many industries. The practice has come a long way and is nowadays much more intuitive and automated, and the benefits are clear,” says Markaaz co-founder Fabi Hubschmid. “Yet there’s still ways to go.”
The primary objectives of KYB include:
- Preventing fraud
- Ensuring compliance with regulations
- Managing risk
- Maintaining transparency
- Fostering trust in business transactions
KYB compliance is critical for adhering to anti-money laundering and counter-terrorist financing (CTF) regulations, which are guided by international standards such as those set by the Financial Action Task Force (FATF) and federal, state, and local business registration and licensing requirements.
Key stages for KYB verification
To ensure ongoing compliance and risk management, organizations must perform KYB checks at several key points during the business relationship. Re-verifying at each stage can help proactively uncover potential red flags.
- Initial onboarding: Verifying a business during the onboarding process ensures you are engaging with a credible and compliant company from the start.
- Periodic reviews: Conducting reviews at regular intervals ensures that changes or updates in the business’s operations are captured and considered, allowing organizations to assess and re-verify compliance and risk status.
- Response to significant changes: Major company changes, such as mergers or acquisitions, changes in key executives, relocation to a new jurisdiction, or major shifts in business activities are all reasons to update and re-analyze KYB data.
- Trigger events: Negative news reports, alerts from regulatory bodies, or indications of financial instability are triggers that warrant re-verification.
“KYB checks are essential for any organization involved in substantial financial transactions or business partnerships. They play a crucial role in preventing fraud, ensuring regulatory compliance, and maintaining the integrity of business operations,” says Hubschmid. “Implementing thorough KYB processes helps companies safeguard their interests and build trustworthy business relationships.”
While KYB verification is often associated with financial institutions, several other business industries need to adhere to KYB compliance regulations. This includes (but is not limited to) payment processors and fintech companies, law firms and accountancy practices, real estate agencies, exporters and importers, pharma and healthcare providers, technology companies, cryptocurrency exchanges, and wallet services.
Simple vs. thorough KYB checks
The necessary level of KYB verification varies based on several factors, including risk levels, transaction size, and the complexity of the business structure. Generally, simple KYB business verification is sufficient for well-established businesses, low-risk industries, domestic partnerships, and smaller transactions. In this case, KYB checks involve basic steps to verify business details, such as confirming the business registration, checking the company’s reputation through reliable business directories, and verifying the identities of the principal owners and directors.
“International engagements and complex business structures necessitate a higher level of scrutiny. Thorough KYB verification, including detailed financial assessments and enhanced due diligence on beneficial owners, is vital,” explains Hubschmid. “Ongoing monitoring for suspicious activities ensures that businesses remain compliant and can confidently engage in high-value transactions. This mitigates risks associated with global operations.”
Industries such as finance, real estate, and pharmaceuticals often necessitate thorough KYB procedures due to the higher potential for money laundering and other financial crimes. Complex business structures with multiple layers of ownership also require detailed scrutiny to uncover the true beneficial owners and accurately assess the associated risks.
Evaluating business engagement risk levels
“Identifying and categorizing the risk level of business engagements is fundamental to effective KYB procedures,” notes Hubschmid. “This approach enables organizations to allocate resources efficiently, focusing more on high-risk areas while streamlining processes for lower-risk engagements, ensuring both thoroughness and operational efficiency.” By understanding and managing these risk levels, organizations can tailor their KYB efforts to the specific needs and challenges of each engagement.
Low-risk engagements
Low-risk engagements typically include businesses based in countries with strong regulatory frameworks and low levels of corruption. Companies operating in industries with strict regulatory oversight, such as banking or insurance, also typically pose minimal risk.
Companies with clear and straightforward ownership structures, where the identities of the beneficial owners are easily identifiable, have a lower likelihood of hidden agendas or illicit activities. In addition, companies with a long history of reliable operations and a solid reputation in their industry are less likely to be involved in fraudulent or illegal activities.
High-risk engagements
An engagement is often considered high-risk when it involves businesses based in countries known for high levels of corruption and weak regulatory oversight. Certain industries such as non-bank financial institutions, casinos, and high-value dealers including art galleries and auction houses often deal with large sums of money and can be easily manipulated for illicit purposes.
Startups or newly established companies, especially those without a proven track record, may also pose compliance issues. The lack of historical data makes it challenging to accurately assess their legitimacy and potential risks.
Best practices for effective KYB verification
“Creating KYB procedures is just the first step,” says Hubschmid. “It’s proper implementation that truly safeguards businesses from fraud and regulatory issues.”
By adopting the following best practices, companies can achieve effective compliance and risk management.
Ensure data accuracy and reliability
For enhanced precision, consider working with a business verification provider that uses advanced technology and matching capabilities. Regularly updating and verifying businesses ensures the data stays current, resulting in robust KYB procedures.
Maintain privacy and data protection standards
Ensure all business verification solutions comply with data protection laws. Also, take steps to minimize data collection. Gather only what is necessary and ensure it’s visible only to the parties that require access.
Implement internal policies to ensure secure data storage and transmission. In addition, don’t underestimate the importance of being transparent about your data practices. Make sure clients and partners understand how their information is used and the steps you’re taking to protect it.
Integrate KYB checks into business operations
Integrate KYB checks into your company’s broader compliance and risk management frameworks. Develop a risk-based approach to prioritize resources, and establish clear policies and procedures for consistency. Also, consider implementing regular training and awareness programs to keep staff vigilant.
Partner with Markaaz for your KYB compliance
Implementing KYB procedures is crucial for preventing fraud, managing risk, and ensuring compliance with regulatory standards. These procedures help businesses verify the legitimacy of their partners and maintain transparent operations. In addition, implementing checks during onboarding, as part of a periodic review process, and when significant changes or triggers occur helps organizations maintain compliance and mitigate risk.
Choosing the right business verification service provider can significantly improve your KYB results. Markaaz excels in providing comprehensive business data solutions. Our industry-leading database of 480 million business profiles, combined with our proprietary matching technology and daily updates, ensures you can verify even hard-to-identify businesses with exceptional accuracy.
Connect with our team to learn how Markaaz can streamline your KYB procedures and verification processes.
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