KYB and KYC Verification: Why it Matters to Your Business

KYB and KYC Verification

Identity verification has long been a part of customer onboarding. The digitization of our society has not changed the need for ID card verification but altered how we perform identity verification and why we need it.

In the past, verification of business entities was managed in-house with lengthy physical background searches unless there was a pre-existing relationship. This opened the door to fraud and bias in the customer onboarding process. The move to digital did not do much to alter the current status quo. Customer onboarding remained in high focus, but Business to Business (B2B) still lagged.

The introduction of regulations and strict guidelines for due diligence made it easier for banks, financial institutions, and businesses to onboard customers while increasing protection for all parties.

Still, fraud increased, and customers’ and business’ data were still at risk. As the responsibility fell to organizations to comply and implement these guidelines, many still overlooked creating effective ID validation systems thus leaving gaps in the onboarding and compliance process.

 

Why KYC Verification Did not Work for B2B?

 

Know Your Customer (KYC) in the very name and policies focused on individual customers. This left businesses and other financial institutions to interpret how to treat their business clients. Too many times that meant lapse ID validation and almost non-existent B2B customer onboarding.

Customers and businesses alike paid for that lack of security protocols with increased money laundering activity, fraud, identity theft, malware, and virus attacks, hacked accounts, stolen data, and eventually money. Unless the customer was deemed high risk, global ID verification and document verification services were seen as unnecessary, and basic due diligence was the norm.

For complete customer due diligence, there were four crucial elements for KYC verification.

  • ID validation and document verification
  • Beneficial ownership identification and verification
  • Understanding the nature and purpose of customer relationships to develop a risk profile
  • Ongoing behavior monitoring and transaction screening for reporting suspicious transactions and digital identity management

These didn’t take into consideration organizational structure, who were the key decision-makers, and if they differed from the ever-changing signatories. Nor did it consider who had record access, cross-border payments, their existing customers and employees or suppliers.

Adapting the KYC acronym to Know Your Client was meant to be a more inclusive term to cover corporate entities. Sadly, many did not get the memo and B2B customer verification continued to be left up to organizations until regulators once again stepped in.

 

What KYB does that KYC Verification Cannot Do?

 

With 2% to 5% of the global GDP being laundered every year and an estimated 90% of money laundering activity remaining undetected, according to the United Nations (UN), it’s clear KYC verification alone can’t get the job done.

Financial institutions are the first to pay the price of the losing battle against money laundering and other financial crimes. In 2016, Financial Crimes Enforcement Network (FinCen) addressed the oversight of KYC and implemented Know Your Business (KYB) to provide the same Anti-Money Laundering (AML) policies and address Combatting the Financing of Terrorism (CFT) laws for businesses.

As KYB or the US Customer Due Diligence Requirements for Financial Institutions (CDD) or the EU’s 5th Anti Money Laundering Directive (5AMLD), was put in motion, it set about increasing fines for non-compliance.

Therefore, ensured some effort was made by all parties to design and execute a KYB verification process. The goal of KYB is to minimize the risk of money laundering and other fraudulent activities, identify Ultimate Beneficial Owners (UBO), and monitor and screen businesses against blacklists and grey lists.

Aside from the basic customer due diligence that is part of the requirements for KYB, businesses are required to provide:

  • Company name
  • Company address
  • Business registration number
  • Operational status
  • Incorporation date
  • Key management personnel

Requirements and policies may vary from institution to business. Some may require additional information in both the KYB and KYC verification processes. Additional Personally Identifiable Information (PII) may include names and addresses of board members and key decision-makers.

Some businesses can demand that your business be AML/CTF compliant before you do business with them. Depending on the nature of your business, Know Your Customer’s Customer (KYCC) requirements may come into play.

After Germany’s Wirecard scandal in 2020, banks and other financial institutions saw the reasoning behind KYCC, but the execution was another matter. Due to some business entities like payment providers having multiple businesses who in turn did business and had multiple customers, it was a nightmare to attempt KYCC without complete compliance of all entities. Listing all Fintech or consulting companies as high risk at the onset seems unfair, but that is just what happens when banks can’t identify who your business serves.

By backing KYCC with AML policies and automation, regulators and implementers were able to get a better handle on KYCC and prevent the creation of more dummy corporations and reduce the likelihood of mislabeling companies as ‘high risk’.

Ongoing monitoring is a requirement of KYC Verification, but for KYB ongoing monitoring appears to be reserved for high-risk entities. Then there is the ongoing issue of tracking down UBO’s which can drag out the corporate onboarding process for 2 to 3 months! These factors create frustration and despondency for financial institutions and their corporate clients.

 

The Importance of KYB For Financial Institutions

 

Banks and other financial institutions have always been the centralized hub through which all commerce takes place. They have a massive responsibility in implementing due diligence at every stage of the customer journey. In this digital era, a breach in that financial system can have global financial and security ramifications.

Money laundering and fraud are the least of the potential issues. Banks can become unwitting parties to financing human trafficking, illegal drugs, and global terror. Using enhanced due diligence methods in the KYB and KYC verification process can assist banks in KYCC and lessen the chance of onboarding non-compliant entities.

The finance industry knows well the war it is in. Having been the focus of constant cyberattacks, scandals, embezzlement, and fraud schemes, banks, and other financial institutions recognized the power of KYB and AML/KYC compliance. However, many Small and Medium Businesses (SMB’s) do not. Even some large corporations push aside AML/KYC compliance over the cost of customer onboarding.

Assumptions within other industries end up putting banks at risk. One employer hired on his gut, thinking it is just an entry-level position with no need for invasive background checks. A few years later HR is promoting this employee to a key decision-making position assuming the background check was done before.

We all know Jim so well now. All it takes is a few parties to assume the others are doing their part while they only do basic customer due diligence without document or ID validation.

Protecting the financial industry begins with everyone within and outside the industry doing their part for AML/KYC compliance. Fines for non-compliance should not be the only reason companies seek KYC verification. It should be a moral and ethical responsibility for all companies, from SMBs to large corporations to invest in strenuous KYB and KYC verification services.

Making sure who you onboard are trustworthy is the key to preventing fraudulent activities and strengthening global security. That is why executing an effective KYB and KYC verification process is so important to financial institutions.

The KYB verification process requires business entities to enact global ID verification, behavior monitoring to assess the risk and sustainability of B2B customers and their clients before establishing a business relationship with them.

When businesses and banks conduct ongoing behavior monitoring, they ensure that transactions are consistent with their risk profile. Proper digital identity management ensures employee records, and other key information is secure and kept up to date.

Knowing the business partners and high-risk customers of a business keeps your company’s reputation clean and free from criminal negligence due to enabling the flow of illicit funds.

 

How to Make Automated KYB and KYC Verification the Norm in Your Business?

 

Developing your KYB and KYC verification process is a great start in achieving AML/KYC compliance. Sticking to the European Union (EU), UK, US, and other local and regional laws and regulations concerning AML/CFT compliance is a great way to ensure transparency in financial operations. Having ready access to the relevant global watch lists, spam lists and sanction lists helps with ongoing customer screening and risk assessment.

As noted, before, verification for business entities can be a time-consuming process and even ID card verification is not so simple without the right global ID verification system.

To ensure you meet AML/KYC compliance, your KYC verification system must have access to the right databases to be able to quickly validate ID and documents, check watchlists and assess risk. Most identity verification service providers can only provide ID validation for customers, but no means for behavior monitoring nor do they provide document verification services.

The drawback to the do-it-yourself approach when it comes to creating your own KYC verification system is data collection and digital identity management. Aside from using customer information to keep customers abreast of upcoming changes and events, businesses sometimes forget there are also regulations for data handling. Global Data Protection Regulation (GDPR) and California Consumer Privacy Act (CCPA) help consumers retain control over their data.

And now Japan has introduced its version of the GDPR, Act on Protection of Personal Information (APPI) that will have the same far-reaching implications for third-party data providers outside of Japan as the GDPR.

These data regulations and digital identity management should be part of the cost of customer onboarding, especially when dealing with global ID verification. Identity verification service providers also need to cater to mobile ID verification.

This is the one grey area that banks and financial institutions have problems: combining their existing customer onboarding process with mobile ID verification.

Automated customer onboarding systems powered by artificial intelligence can help

Bridge the gap for banks and businesses and deliver an automated KYC verification process that can detect fraudulent information faster than any human ever could. As part of B2B customer onboarding, KYB and KYCC should be done in sync and with flawless online ID verification.

 

IDMkyX As Part of Your KYB and KYC Verification Strategy

 

Knowing what to do and how to do it are two very different things and that’s the problem with most identity verification services providers. They claim they know what to do, but either does not know how to do it or do not have the capabilities to do it flawlessly.

At IDMERIT, we know how to create an automated customer onboarding system that checks all the boxes for enhanced due diligence and mobile ID verification ensuring AML/KYC compliance. Our document verification services will work smoothly in the background of your ID validation systems and assist in digital identity management.

Our behavior monitoring system uses biometric data to mitigate suspicious behavior.

Because of the internet, no matter how local your business is, we all end up interacting with someone in another country. That is why global ID verification is part of our online ID verification system.

Using device fingerprinting and IDMsocial, we can even identify bad actors who try to hide behind their screens and fake social media profiles. Our IDMkyX platform, can quickly and efficiently identify various business institutions, beneficial owners and handle automated KYC verification to the highest standard.

IDMtrust can be seamlessly integrated into your existing ID validation systems to assess a customer or business risk.

No matter customer, B2B, SMB, or a large corporation, IDMERIT’s IDMkyX platform has the global reach, technology, and digital identity management systems in place to give your business an automated KYC process that won’t go over the cost of customer onboarding.

Let us prove that we can verify anyone, anytime and anywhere.

Talk to IDMERIT today!

Tony Raval
Tony Raval

Tony Raval brings more than 15 years of leadership in data technology as the Founder and CEO of IDMERIT, headquartered in Carlsbad, California. He leads an executive team including top data tech veterans to execute on his passion of creating a global data universe generating true and trusted intelligence. IDMERIT’s competitive success has come from the company’s ability to perform cross-border transactions, for which Tony and his team have developed a meticulous process and progressive technology. The company was launched as the result of a highly effective engagement with a leading global financial institution, whereby the company was uniquely able to triangulate multiple elements to create a comprehensive, and yet, frictionless experience. Tony has provided data intelligence to companies such as Google, SalesForce, and HP as well as clients across financial, government and other sectors seeking a superior partner in compliance and mitigating risk. He holds a Master’s Degree in computer engineering and data sciences, is an active member of the Entrepreneurs Organization San Diego and dedicated mentor to new entrepreneurs in EO’s Accelerator Program, enjoys meditation and running, and he and his wife Sonal recently celebrated their three-year-old son's birthday.

Get Notified about Industry Updates
Loading