What is KYB and KYC? How does its compliance impact organizations?

Due to increasing regulatory reform and widespread money laundering and illicit activities, more businesses and compliance teams are becoming aware of the dangers that exist in not having strong KYC and KYB protocols in place at the outset of new customer relationships. 

 

However, most individuals fail to determine the comparative distinctions between KYC and KYB. To start, KYB (Know Your Business) compliance shares each one of the major requirements found in KYC (Know Your Customer) compliance. They both share the same core objective and that is to follow AML/CTF regulations to make financial interactions safe and protected.

 

Both of the verification checks are stringent and meet compliance guidelines and, at the same time, they share a unique distinction. The distinction between both is the target that is being analyzed or attributes of that person or organization’s identity . 

 

 

What Does KYB Mean?

 

 

Also known as Know Your Business, KYB compliance checks seek to identify the veracity of businesses, companies, organizations and, in extended due diligence, monitor their financial transactions over time. These stringent checks verify a  business’ attributes, ownership, and other identifiable information to protect organizations from falling victim to any type of financial fraud. KYB compliance includes business verification which is followed by the submission of the verification data and some monitoring stages that are very similar to the KYC compliance process. The verification information is checked against data pulled from public archives and automated AML databases.

 

What Does KYC Mean?

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Anti-money laundering compliance focuses on individuals who apply to open accounts at banks, financial institutions, or crypto-exchanges  to verify their financial backgrounds and past histories against any financial fraud/illicit activity to determine a risk score. These risk scores and profiles are extremely useful to banks and financial institutions and are meant to comply with stringent, and growing, AML legislation. 

 

The compliance and identity industries first focused on KYC, and as regulations increased, the industry pivoted to KYB and business attribute verification. KYC  digitization is more advanced than KYB. As technology and cloud computing became more prevalent, KYC became known as eKYC since its shift into the cloud and SaaS improved efficiency, lessened compliance costs, and took out the manual labor that used to slow down the verification process.

 

KYC To KYB: A Brief Background

 

Back before the introduction of KYB or KYC or their digitization, the financial fraud levels reached an epic proportion of total crime. According to the UN’s Office of Drugs and Crime, the global money-laundering rate was 2-5%, annually. There was no legitimate way to control individuals or businesses’ illegal financial interactions and major fraud cases despite the adoption of a few pieces of AML legislation.

 

In an effort to regulate and control financial crimes, the Bank Secrecy Act of 1970 introduced new AML guidelines, which were later incorporated into the 2001 USA Patriot Act. These guidelines were then embraced in 2003 and the term KYC was born. These guidelines were built to check the financial progression and transactions of individuals. They required financial institutions like banks to keep a diligent eye on all of their customers and follow specific  regulatory requirements. KYC compliance proved to be successful however it left a loophole.

 

This loophole aided businesses’ UBOs and corporate owners. Banks weren’t required to check and verify the partners and representatives of the businesses they worked for so this left a huge opportunity for fraud and illicit activities to go unnoticed. Therefore, this implied that businesses could protect the personal information of financial criminals associated with them and perform illicit exchanges and activities and go unpunished. A famous incident that required an update in KYC compliance laws was the Panama Papers Scandal, which in 2016 eventually led to the birth of KYB compliance.

 

KYB & KYC: What Is The Distinctive Factor?

 

KYB and KYC compliance both follow the same causes, that is to regulate financial transactions and keep an eye on any potential financial crimes. However, the factor that sets them apart is their target scope.

 

KYB: The regulatory guidelines in KYB compliance are followed by almost every industry as massive fraud and ponzi schemes have led to a crackdown on anonymous ownerships or shell corporations. KYB incorporates all business types and structures (S or C Corp), and is well-established throughout most industries including: virtual service providers, money service providers, online businesses, the health and wellness industry, non-profit associations, and especially financial institutions/banks.

 

Business and Ownership Verification

 

In the standard KYB compliance procedure, businesses and companies are required to verify themselves as legitimate businesses by providing their ownership information and incorporating documents. Financial activities are then verified along with the identities of the business’ unique beneficial owners or their representatives.

 

KYC: KYC compliance regulations require a more thorough verification of identity (depending on the new customers’ risk profile or geographical location). Banks are required to verify all new customers’ identities. Banks and financial institutions of all sizes have become huge proponents of eKYC regulations because it has led to the arrest and recovery of millions of dollars due to fraud and illicit activities.

 

Fundamental Requirements For KYB & KYC

 

Since KYB and KYC target different client types,data attributes that are verified are different. To register for verification, the core focus data remains the same, that is financial information and records.

 

For KYB

 

Since KYB targets businesses and organizations, its verification process requires information that includes a character report of the unique beneficial owner of the organization and that of all investors that hold a quarter share, each. The verification requirement includes:

 

●      Business Address

●      Recruitment Reports

●      Business Licence and Registration

●      Identification Documents of UBOs (directors and representatives)

 

For KYC

 

KYC focuses on individual customers of a bank that need to verify themselves by submitting identity and address records. These records solidify the financial character of the individual and help the bank to estimate the level of diligence they may require. The verification requirement includes:

 

●      A PAN (Permanent Account Number) card with a picture.

●      An ID card issued by the State.

●      Any Debit or Credit card issued by a bank.

●      A copy of utility bills such as electric bills with an address

●      Visa/Driver’s License with a digital picture.

 

KYB & KYC: The Digitization

 

After their introduction, KYC and KYB both had to go through several stages of experimentation by the financial institutions that employed them. They customized and altered the verification process to their needs but still, KYC and KYB remained labor extensive. To improve compliance, digitization was introduced to lessen manual labor and eliminate the chances of human error.

 

The digitization of KYB and KYC compliance includes the utilization of new advanced features such as Identity Verification, Virtual Verification, Online submission of verification records, Online Database, and AI-based Diligence. This digitization could undoubtedly forestall any slip-ups and improve the diligence procedure.

 

The progression in the digitization of KYB and KYC compliance is improving with each passing year as AI continues to get smarter. For instance, AI-based questionnaires aid in the process of business verification and take out the shortcomings and slip-ups that occur when registering new clients. The key elements of KYB and KYC compliance that have permanently been improved due to their digitization are:

 

AI KYB & KYC Registration

 

It is now customary for a renowned bank to employ an AI-based verification system that expands the proficiency of the registration process. It additionally decreases the expense that may involve hiring manual labor and cuts down the whole process and speeds things up.

 

This AI-based verification was first used for KYC compliance only, with the process requiring 25-30 days. Now, the same process is used for KYB compliance as well with the registration and verification procedure cut down to 5 minutes.

 

E-Archives For Business Registries

 

Before the digitization of KYC and KYB compliance, the records that were used to verify against the customers and businesses were physical and took up days to get through. Now banks utilize online archives that can store and protect the verification records of up to thousands of customers. This is an improvement that makes the compliance process faster and more efficient.

 

Advanced Due Diligence

 

The AI used for KYB and KYC diligence is sharp and precise, therefore improving the process of vigilance. This feature can monitor thousands of customers while efficiently providing information whenever the investigation officer looks it up by a couple of keywords. For instance, a business’s license number can be used to look up the database for that business.

 

Advanced diligence also includes microservices such as special APIs that can separate and check the information of a unique beneficial owner very quickly instead of taking days. These APIs are equipped for cross-referring to information across different data sets and public records that are filled in.

 

Virtual Identification For KYC & KYB

 

One of the more major reasons that are causing banks and financial institutions to employ digitized KYB and KYC compliance is the efficiency that they provide. What first required in-person registration, now takes a single virtual call to accomplish. The virtual identification process has also encouraged individuals to register since they are aware of the efficient process.

 

The whole process can be finished in only 2–3 minutes, depending on how fast the identification software is. This virtual identification process can permit authorities to save and check the authenticity of the information provided by the individual. This process has reduced the potential of human error and cut down the hiring costs for banks.

 

Key Takeaways

 

KYB and KYC guidelines are carried out to infiltrate any individual whether alone or related to a business that is indulging in illegal tax avoidance and money laundering activities, while a side benefit for KYB includes the verification of businesses as well.

 

Financial fraud continues to grow with each passing day, therefore it is necessary for banks to monitor their clients. While they target different scopes of individuals, KYB and KYC follow the same cause. Other than detecting extortion these compliances strive together to make financial interactions, all around the globe more safe and smooth, while diminishing the rate of financial crimes. 

 

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About IDMERIT

Headquartered in San Diego, California, IDMERIT provides an ecosystem of identity verification solutions designed to help its customers prevent fraud, meet regulatory compliance and deliver frictionless user experiences. The company is committed to the ongoing development and delivery of offerings that are more cost-effective and comprehensive than other solution providers. IDMERIT was funded by experts who have been sourcing data on personal and business identities across the globe for over a decade. This access to official and trusted data throughout the world has become increasingly important as companies find themselves completing transactions across borders as a standard course of business. www.idmerit.com

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.

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