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Know Your Business compliance requires companies to collect vital information about the partners associated with their business and validate their legitimacy.
Several business sectors have been hit hard by the infection that is online fraud. When it comes to protecting sensitive data, many companies are putting their digital transformation ahead of customer safety. With less transparency and more complex regulations, businesses opt to seek out new digital fraud prevention tools that will assist them in overcoming cybersecurity and compliance obstacles.
What is Know Your Business Verification?
A company’s validity and ownership structure can be verified using the Know Your Business standard. It’s a standard practice of due diligence to investigate a potential business partner for any illegal behavior.
Ultimate Beneficial Ownership (UBO) checks for the company are another part of KYB that might reveal who has a financial stake in the business. Companies can improve their regulatory compliance status by identifying UBOs.
Gaining trust through Know Your Business verification is accomplished by making sure of the following.
In other words, the other company you’re collaborating with is not a scam. With the help of KYB, businesses can make sure that the company they’re doing business with is not a fake that exists only on paper.
Those at the helm of the company are real people who have no connection to illegal financial activities like money laundering or funding for terrorism.
As a result, the 5th Anti-Money Laundering Directive (5AMLD) includes KYB verification methods as part of its mandatory requirements.
Know Your Business Verification Regulations
Know your business (KYB) is an emerging practice in the fight against fraud. Since the early 2000s, KYC compliance has helped protect businesses, but in the process, business relationships have taken a back seat. For a long time, this meant that dishonest people could use shell companies to avoid detection.
In response to this growing fraud in businesses, in 2016, the US Financial Crimes Enforcement Network (FinCEN) introduced new KYB regulations as part of its Customer Due Diligence (CDD) requirements. The regulations eradicated the security loophole.
That meant that from then on, business partnerships would be investigated just as thoroughly as individuals. Companies that partner with others use a standardized method to investigate and verify the legitimacy of the latter.
Who Needs to Conduct KYB Checks?
Companies in the banking industry or those involved in the cryptocurrency or financial technology industries that work with other businesses are subject to KYB regulations and must verify their legitimacy. The following additional groups, enterprises, and people are also affected by this rule:
Notaries
Tax advisors
Gambling services
Trusts
Asset managers
Credit institutions
Others
While it’s true that some large corporations are exempt from KYB requirements, it’s still important to remember that these checks can save a company’s good name and protect it from fraud.
Companies in the sharing economy and e-commerce hubs alike can all reap the rewards from Know Your Business verification. Performing KYB in unregulated industries has many advantages, including preventing the misappropriation of funds and exposing bad actors or shell companies.
Traditional Vs. KYB verification poses significant challenges for compliance officers due to the wide range of factors that must be considered.
Therefore, experts are needed in the KYB process to carry out AML screening, review supplementary reports and documentation, ensure KYC verifications, and guarantee compliance and accurate results.
There are three main challenges regarding manual KYB checks:
Time: Manually completing the entire Know Your Business (KYB) process takes compliance officers a significant amount of time. They must look into the outcomes of AML screenings, place orders for reports, and review supplementary materials like credit or government registry documents.
Client experience: The manual KYB procedure takes hours. Customers may have to wait in line for several days if demand is high.
Cost: There are numerous expenses involved with manual business verification procedures, starting with the working hours, potential client loss, and ending with penalties for fraudsters who are undetected.
Why Does Know Your Business Verification Matter?
Adhering to the law is important for staying safe and not losing money or your good name. In the event of a failure to comply with AML requirements, financial institutions like banks could be hit with fines in millions of dollars. Fenergo claimed that in 2021, non-compliance with AML and KYC rules resulted in $5.4 billion for the financial sector.
Despite the availability of technical solutions to aid compliance officers in cutting down on effort and reducing the likelihood of human error, the massive numbers indicate that many businesses still struggle to maintain efficient KYB practices. There are three main challenges regarding manual KYB checks:
