Financial crime is rife. As dishonest individuals, or bad actors as we know them, develop new ways of committing economically-motivated transgressions, businesses have to ensure they keep pace in fighting their crimes. Know Your Customer (KYC) and Know Your Business (KYB) checks are both regulatory requirements that ensure the legitimacy and verifiability of businesses and individual consumers.
Financial crime is a global issue that can span borders and regulatory environments. As a result, the need to verify the identities and activities of potential consumers as well as corporate customers is greater today than ever before. Such preventative measures need to be developed and put in place to combat the devastating impact that financial crime can have on businesses, consumers and the economy.
A lack of compliance not only impacts a business’ bottom line, public image and trust, but can also lead to criminal charges being brought against individuals in serious cases.
As fines for non-compliance hit record highs, it is a stark reminder of the importance of stringent regulation to protect both businesses and individuals from economic crime.
What is KYC?
Know Your Customer (also known as KYC) is an obligation that regulated businesses need to satisfy by verifying their customers before opening an account or processing a transaction such as a property purchase.
In a KYC check, customers typically have to supply proof of identity, proof of address and sometimes other pertinent information related to the situation at hand. For example, a solicitor processing a house sale may request bank statements proving the source of funds as part of the KYC checking process.
Additionally, individuals may be screened against sanctions lists, examined for any political exposure, CCJs or credit checks.
What are KYB checks?
A much more significant undertaking, Know Your Business (or, as it is commonly known, KYB), is the method enlisted by banks, financial institutions and corporate entities to get to know the businesses and corporate entities with whom they seek to do business. This mandatory process ensures that businesses adhere to anti-money laundering and due diligence requirements, verifying that everything involved in establishing a relationship with another company is above board and legitimate.
In addition to complying with anti-money laundering regulations, KYB checks protect a company’s interest before initiating a commercial relationship with another business. Companies need to be aware of any potential risks of doing business, such as corruption among owners, politically exposed persons (PEPs) or any questionable activity that raises suspicions of fraud, money laundering or other criminal pursuits.
How do KYC and KYB checks differ?
Whilst inherently similar in practice, the components of KYB checks are vastly different to those involved in KYC checks.
KYC checks tend to be basic checks carried out to verify individuals through key information which is personal to them such as address, date of birth and ID documents. Everyone opening a typical consumer bank account will undergo KYC checks to ensure their authenticity, allowing companies to assess how big a risk an individual may pose.
More thorough KYC checks also extend to checking credit reference agencies, whether an individual is a Politically Exposed Person (a PEP) or has any sanctions against them.
Conversely, KYB checks are inherently more complex, requiring deeper, richer information (that is not always available in the public domain) affiliated with the business in question from sources such as government registries, publicly available sources, databases or information provided by the business (company number, registered address etc).
KYB seeks to identify the veracity of businesses, delving into operational and structural set-up to verify that a company is authentic and not fraudulent.
What’s more, there is often a higher volume of checks associated with Know Your Business due to the nature of corporate structures, major shareholders, ultimate owners, directors, annual returns and financial statements, adverse media, and much more. Additionally, compliance teams may carry out standard KYC and due diligence checks of the directors, Ultimate Beneficial Owners (UBOs) or persons of significant control identified as part of KYB processes.
As a result, a KYB check on one business can incorporate dozens of individual checks of both the entity itself and its associated stakeholders.
KYC checks tend to occur at the beginning of a relationship between company and customer with ongoing checks periodically over time. This is so regulated businesses and financial institutions can stay abreast of any change in circumstance that may contribute to financial, reputational, or regulatory risk – and ensure compliance with regulation. Needless to say, the volume of checks carried out on individuals is often dramatically less in comparison to KYB checks.
We’ve put together a brief overview of the differences between KYC and KYB checks for you to download and refer to if you ever need a reminder of the key differences between these types of checks. Simply download a copy of the SlideShare below: