7 essential elements of KYB checks

elements of KYB

Know Your Business (KYB) checks are a cornerstone of AML compliance for regulated firms in the UK. Compliance with KYB requirements is not only a regulatory obligation, but also a fundamental step in maintaining trust and confidence in the financial services industry. 

What are KYB checks?

KYB checks entail verifying the identity and legitimacy of business entities before 

entering into a commercial relationship with them. This process is crucial in mitigating the risk associated with money laundering, terrorist financing and other financial crimes. 

Failing to perform adequate KYB checks can expose businesses to regulatory penalties, legal consequences, reputational damage, and financial losses. 

As such, KYB checks play a vital role in safeguarding against financial crime risks, promoting transparency, and upholding the integrity of the global financial system. 

🔗  The importance of KYB checks: best practices for compliance

So, what are the essential elements of conducting comprehensive KYB checks? In this article, we take a look at 7 essential elements of these checks and how firms can navigate the complexities of KYB to ensure regulatory compliance. 

It is important to note that the level of scrutiny applied as part of your KYB process will vary from others depending on your firm’s specific industry, operations, jurisdiction, and appetite for risk. 

1. Verification of corporate structure: Understanding a company’s structure is essential for KYB checks, allowing compliance teams to verify key details such as company registration, corporate hierarchy, and ownership relationships.

Failing to verify the corporate structure of a business before onboarding them can lead to misunderstandings or assumptions around its ownership, control, and operations. Inaccurate and incomplete information about a company’s structure can hinder your risk assessment efforts, making it more difficult to implement suitable mitigation measures. 

This lack of clarity can increase the risk of firms onboarding individuals or entities that may be involved in illicit activities or who have undisclosed connections to sanctions individuals or entities, for example. 

2. Beneficial ownership identification: Identifying beneficial ownership is a critical step in conducting KYB checks, and compliance teams must identify the individuals who ultimately own or control a business entity. Not identifying beneficial owners can create opportunities for individuals to conceal their involvement in illicit activities such as money laundering, corruption, and other forms of financial crime. 

Without a clear understanding of who ultimately owns and controls a business entity, financial institutions may inadvertently facilitate activities involving illicit funds or individuals with nefarious intent. This lack of transparency not only exposes businesses to regulatory scrutiny and potential legal consequences, but also undermines broader efforts to combat financial crime. 

As such, conducting thorough beneficial ownership identification as part of KYB checks is essential to mitigate these risks and promote transparency in financial transactions. 

3. Taking a risk-based approach: Adopting a risk-based approach is fundamental when conducting KYB checks effectively. It’s important to take each KYB case on its own merits, assessing the level of risk posed by each business relationship and tailoring due diligence procedures accordingly. 

Without a comprehensive understanding of the specific risks posed by each business, firms are likely to conduct adequate assessments of the risks associated with certain business relationships and may find themselves overlooking higher-risk entities. 

Most regulators expect firms to tailor their due diligence based on the perceived level of risk, and failing to do so can lead to increased regulatory scrutiny, penalties, and reputational damage. 

4. PEPs and sanctions screening: Screening business entities against global sanctions lists and identifying any connections to Politically Exposed Persons (PEPs) is an important step in KYB checks. Thorough screening helps to prevent exposure to sanctioned entities or individuals with potential links to corruption or other illicit activities. 

PEPs pose an increased risk of corruption, bribery, and abuse of power due to their prominent public positions and, as a result, failing to identify a business’ connection to PEPs, or indeed sanctioned individuals, can increase the risk of financial crime, regulatory non-compliance, and reputational damage. 

Without PEP and sanctions screening, firms are more vulnerable to fraud and can facilitate fraudulent schemes, embezzlement, and bribery. 

🔗  What is a PEP & should you work with them?

5. Conduct Enhanced Due Diligence (EDD): In high-risk scenarios, compliance professionals may need to conduct EDD as part of KYB checks. This typically involves gathering additional information and scrutinising business relationships more rigorously to mitigate these heightened risks. 

Failing to conduct EDD when required exposes firms to increased risk of engaging with high-risk entities. What’s more, without conducting EDD, firms are reliant on standard due diligence procedures that are often insufficient in identifying and mitigating the risks associated with high-risk entities. 

6. Ongoing monitoring: KYB checks are not a one-time exercise, and it is important to monitor business relationships with robust processes in place to detect any changes to a business that may adversely impact their risk profile. Today, regulators expect firms to monitor their customers on an ongoing basis, and failing to comply with these requirements can lead to serious consequences. 

Without ongoing monitoring, firms may miss crucial signs indicating changes in ownership structure, financial activities, and associated risk, potentially allowing illicit activities to go undetected.

What’s more, a lack of ongoing monitoring increases the likelihood of inadvertently doing business with entities that are involved in illicit activities, with sanctioned individuals, or in high-risk jurisdictions. 

Effective monitoring allows firms to adjust their risk mitigation measures in response to any changes in a business’ profile, ensuring a proactive approach that protects their businesses from undue risk. 

7. Record-keeping and reporting: Maintaining records of KYB checks and related documentation is essential for regulatory compliance. Compliance teams must ensure strict record-keeping, audit trails, and where required, must promptly report any suspicious activities to relevant authorities. 

Inadequate record-keeping practices hinder the ability of firms to provide auditors and regulators with the necessary documentation to demonstrate adherence to AML regulations, potentially resulting in reputational damage and loss of customer trust. 

Moreover, without the presence of reporting and analysis, financial institutions are likely to miss out on valuable insights into their compliance performance and exposure to financial crime risks. Effective record-keeping and reporting not only facilitate regulatory compliance but also enable institutions to identify areas for improvement in their KYB onboarding processes.

Effective KYB checks are vital for compliance in regulated firms to mitigate the risks associated with financial crime. From identifying beneficial ownership to maintaining thorough records and conducting ongoing monitoring, each element of KYB plays a crucial role in preventing bad actors from infiltrating the financial systems.

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