As financial crime threats evolve, so does the importance of conducting Know Your Business (KYB) checks. In today’s business landscape, regulatory bodies expect compliance officers to conduct a comprehensive KYB check for each company they onboard to ensure compliance with regulations, and have processes in place to mitigate financial crime risks. This article highlights the importance of KYB checks and shares best practices for compliance officers to implement.
What is a KYB check?
KYB checks serve as the first line of defence for businesses against financial crime. It involves the process of verifying the details of a company, its directors, shareholders, and beneficial owners to ensure they are legitimate and do not pose any risks.
The purpose of a KYB check is to determine whether a business is authentic and not fraudulent by looking at its operational and structural setup, and evaluating this against your firm’s appetite for risk.
How does a KYB check differ from KYC checks?
KYB and KYC checks are similar in practice, but they involve very different components.
KYC checks require information to verify an individual’s personal information such as address, date of birth, and identification documents. For example, a KYC check is performed on anyone opening a consumer bank account in order to ensure their authenticity, allowing the bank to gauge their potential risk. Moreover, KYC checks can also include checking credit reference agencies, verifying whether the individual is a Politically Exposed Person (PEP) and whether sanctions are pending against him or her.
Every good AML or KYC process is underpinned by relevant laws, regulations and company policies.
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However, KYB checks are naturally more complicated due to the fact that they require additional, richer information (which is not always available in the public domain) associated with the business. This may be gathered from sources such as government registries, publicly available sources, databases, or information provided by the business (company number, registered address, etc.)
The importance of KYB checks
A robust KYB process helps compliance officers to prevent potential money laundering, terrorist financing, and other financial crimes. KYB checks are critical in several areas such as onboarding new clients, assessing risks, detecting red flags, and preventing reputational damage.
KYB checks help compliance officers to verify the legal existence of a business and assess the risks associated with the company, its industry, and country of origin.
Best practices for conducting a KYB check
Compliance officers need to follow a systematic approach to perform a successful KYB check. Below are some of the best practices to consider:
- Establish KYB policies and procedures: Create KYB policies and procedures that comply with the regulations of the jurisdiction the company operates in. Every company should have a standard set of KYB procedures and documentation requirements for onboarding businesses.
- Identify Beneficial Owners: Identifying the beneficial owners of the company is critical to determine the ownership structure of the business and the source of funds. Determine the ownership threshold in the relevant jurisdiction and document the beneficial owner’s details.
- Verify the business’ existence: Verify the legal existence of the business by obtaining the company’s registration details, director information, and other legal documents. Ensure that the business is legitimate and not a shell company.
- Screen for PEPs and sanctions: Of the directors identified, conduct identity and verification checks, and screen for the presence of any politically exposed or sanctioned individuals within the business that may pose a higher risk for corruption and bribery.
- Risk assessment: Perform a risk assessment on the business, its industry, and the jurisdiction it operates in. Evaluate potential financial crime risks associated with the company, such as money laundering, bribery, and corruption.
- Ongoing monitoring: Establish a system of continuous monitoring of the business to detect any changes in the ownership structure, transactions, or adverse media, which may contribute to a change in the risk profile of the business. Using an automated platform will broaden the range of watchlists and screening to ensure ongoing due diligence.
What information is needed for a KYB check?
The KYB process involves collecting and reviewing data that provides information about the business, its owners, and its financial activities. Here is some of the information that may be required for a KYB check.
Business registration information
At the start of any KYB check is information about a business’ registration. This will often include information about the structure of the business, its location, it’s shareholders and directors, and the nature of its operations. Often, this can include the certificate of incorporation, business licence, and any other relevant permits and certificates.
Articles of association
Articles of association is another set of important information that may be required for a KYB check. These outline the rules and regulations governing the business, including its purpose, how it will operate, structure, and ownership details.
Identification documents for business owners and shareholders
KYB checks may require additional identification documents from business owners, directors, and other key personnel. These documents may include passports, driving licences, and other government-issued identification cards. These documents are essential in verifying the identities of the people associated with the business.
Financial information
Financial statements and information on a company’s accounts can provide insights into the financial health of the business. This insight can help compliance teams to evaluate the stability of the business.
Business contracts and agreements
Finally, certain KYB checks may also require copies of the business’ contracts and agreements with its customers, suppliers, and other partners. These documents provide information about the nature of the business’ operations, its relationships with other businesses, and the risks associated with its activities.
5 tips for conducting KYB checks
To conduct effective KYB checks, there are several best practices that you should follow:
Start with the basics: When conducting KYB checks, it is important to begin with the basics. This means verifying the legal name of the business, its physical address, and any other relevant identifying information. This can be done by reviewing official documents such as business licences, registries, and other government records such as Companies House.
Use reliable data sources: It is important to use reliable data sources when conducting KYB checks. This means using reputable databases and information sources, such as government registries, to verify the information provided by the business.
Review Ultimate Beneficial Ownership: One important aspect of KYB checks is verifying the ultimate beneficial ownership of the business. This means identifying the individuals or entities that ultimately control the business, and ensuring that they are not involved in criminal activity.
Consider industry-specific risks: When conducting KYB checks, it is important to consider any industry-specific risks associated with the business. For example, if you are dealing with a business in the financial sector, you may need to conduct additional checks to ensure that they are not involved in money laundering or other financial crimes.
Monitor for changes: Finally, it is important to monitor your business partners on an ongoing basis for any changes that may affect their risk profile. This means regularly reviewing their information and conducting additional checks as needed to ensure that they remain in compliance with relevant regulations.
KYB checks are critical in preventing financial crime and ensuring compliance with regulations. As such, compliance officers must ensure that their businesses have a robust KYB process in place to mitigate financial crime risks and protect their business reputation.
Last updated: Thursday 16th November 2023
