Know Your Business is the mandatory method by which banks and financial institutions get to know their customers’ businesses to ensure everything is above board in order to minimise the risk of financial crime, money laundering or other fraudulent activity taking place.
The exact scale of financial crime that takes place in the United Kingdom every day is unknown. With estimated annual figures from several reputable sources ranging from tens to hundreds of billions of pounds, the global reputation of the UK’s financial markets is at risk of being marred by those involved in fraudulent or dishonest behaviour for the purposes of financial gain.
An estimated £88bn is laundered in the UK by criminals each year, with only the USA seeing more cash being cleaned annually (£216bn) by unscrupulous individuals.
Computerweekly.com, 2022
Financial crime is a serious, and ongoing, global problem that institutions find themselves at the centre of. And, for those in regulated industries, they must have safeguarding measures in place to protect both themselves and their clients as a result.
All regulated banks and financial institutions operating in the UK, as well as estate agents, accountants and solicitors must adhere to the rules set out in The Money Laundering Regulations 2017 and be monitored by a supervisory authority such as the Financial Conduct Authority (FCA).
Non-compliance can result in hefty fines, suspensions, sanctions, and, in some cases, criminal proceedings. As such, the task of ensuring and maintaining compliance is a significant motivation to avoid serious damage to a financial institution’s credibility and performance.
These stringent requirements can be satisfied via a process known as Know Your Business, or KYB for short.
A robust KYB process enables firms to examine the entities that they wish to onboard and help them to determine whether they are genuine or are being used for unlawful purposes.
These checks may be as straightforward as confirming identities, key directors and subsidiaries but, in some cases, extend to identifying any adverse media coverage, the emergence of Politically Exposed Persons (PEPs) and flagging sanctions, such as those placed on Russia following the country’s invasion of Ukraine.
The overarching goal of KYB is to allow organisations to vet and verify the entity they wish to onboard and do business with – entities which can span international borders, tax systems and regulatory environments.
Know Your Business checks often involve compliance teams manually searching company records, thumbing through case files, chasing down documents from Ultimate Beneficial Owners (UBOs), and verifying endless pages of company accounts and financial statements, which can be ultimately stretch the department’s resources.
Depending on the jurisdiction, there are often different requirements on how information can be collected for KYB checks and official registries from across the globe may be in varying states of comprehensiveness; ultimately making it increasingly difficult for compliance professionals to verify and onboard businesses quickly.
Fortunately, software can now help compliance teams to alleviate much of the heavy lifting associated with KYB checks, freeing them up to focus on more complex cases where their expertise is most needed. KYB software automates the verification of company entities, company directors and beneficial owners in-real time.
Armed with such software, compliance officers can make faster decisions and onboard customers in seconds, not days, so that they can continue to actively contribute to the ongoing growth and success of their business.
Why is KYB important?
By obtaining and verifying essential information about the companies they are dealing with, organisations can ensure that every business being onboarded is legitimate and not ultimately funding criminal activity of any kind.
Examining how organisations are set up and the individuals involved can help compliance teams to minimise the risk of their company inadvertently being party to fraud or any other criminal activity.
Importantly, KYB is not a one-stop shop. Rather, it is an ongoing process that must be revisited at defined intervals depending on the level of risk deemed applicable to each individual client once onboarded.
Many businesses are fluid in nature, and something can change in a matter of hours. From minor administrative changes such as a change of address to more significant updates such as new directors, adverse media or a Politically Exposed Person (PEP) becoming involved in a business, active monitoring must take place on an ongoing basis to ensure continued compliance with anti-money laundering regulations throughout the entirety of the relationship with every designated organisation.
Due to this ever-changing and increasingly complex regulatory landscape, remediation is a critical part of KYB. This process involves cleaning and updating the information gathered during the initial client onboarding phase and ensures that businesses remain compliant with all the latest regulation throughout the entire relationship.
A failure to spot suspicious activity, illicit beneficiaries, anomalous transactions, criminal stakeholders or terrorist financing can land a business in very hot water. Companies that don’t undertake sufficiently comprehensive KYB checks and monitoring not only open themselves up to fraud but hefty fines for failing to comply with legislation, and the subsequent reputational risk that fraud and fines can bring.
Only recently, HSBC was fined a staggering £91.3m by the Financial Conduct Authority (FCA) for failures in their transaction monitoring which was subsequently reduced to just shy of £64m due to HSBC’s decision to not dispute the FCA’s findings.
Financial fraud continues to grow every day; therefore, it is necessary for organisations to initially examine and closely monitor both prospective and ongoing business relationships in order to minimise the risk of falling foul of illegal activity.
Ultimately, these KYB checks, along with strict anti-money laundering legislation and international regulation, exist to make financial interactions all around the globe safer and smoother, while combatting the rate of financial crime.
