As FinTech and technological solutions continue to innovate, companies are under pressure to revise their business operations strategies. By forming new partnerships to complement their solution, companies are coping with these difficulties and taking advantage of the opportunities made available to them by complying with the rules and regulations. Subsequently, at any stage of the new corporate collaboration, does your company ever evaluate the underlying risk, considering the financial transactions involved?
What is Know-Your-Business (KYB)?
Similar to the widely known and standardised process of Know-Your-Customer (KYC), both share the same objectives. To which, is to make financial transactions safer and prevent the risk of fraud and money laundering (ML) activities. The difference between both processes, however, lies in the type of customers that the establishment is dealing with.
KYB is a mandatory ongoing verification process for companies such as financial institutions, payment service providers, and cryptocurrency marketplaces. Recognised as a critical component of due diligence and risk management, KYB is incorporated as part of the anti-money laundering (AML) regulations. Some advantages of KYB is that manual checks would require companies to sacrifice a significant amount of time and labour costs. Furthermore, companies may see the increased risk of human error as well. However, with technological advancement, KYB is now equipped with customer due diligence (CDD) procedures. KYB can now aid companies in efficiently and effortlessly automate the reviewing of the authenticity of an entity. Entities may consist of their suppliers or the firms that they are working with.
Why is KYB necessary for companies?
With new opportunities and development in the financial sector, risk exposure has heightened. To adapt, the regulatory response has been extended to include the necessary amendments. Yet, the prevalence of fraud and ML is still a persistent problem worldwide. These problems, therefore, have companies looking for measures to stay vigilant and protect the interest of both their users and themselves.
How does KYB work?
So, how does the KYB process work? The KYB process comprises three main elements – Onboarding, Ongoing Risk Assessment, and Transaction Monitoring.
Onboarding the entity and conducting an ongoing risk assessment, KYB works by automatically screening entities and their ultimate beneficial owners (UBOs). The screening will be compared against the global list. Here, the global list will include the sanctions list and politically exposed persons (PEP); watchlist; public record; and corporate or government registries. Besides, the complex and critical business information required for different screening processes can be obtained easily from end clients with customised digital onboarding forms. Following that, transaction monitoring will be conducted to assess the risk status of the business’ transaction activity. At the end of the screening, the KYB process will put together the risk assessments of various stakeholders and UBOs to come up with an accurate and holistic picture for your business’ relationships. The risk assessment will consist of the analysis of multiple layers and complex organisation structure, the graphical representation of shareholdings and the tracking of all risk review updates in one place.
In short, Regtank requires the end client to look over and check that they have proper and organised information before submission. This is to ensure the smooth processing of your business’ risk review in the following onboarding steps:
- Track the progress and manage the entire business onboarding status in real time
- Perform checks and approvals easily
- Ongoing updates and reviews of business information managed in real time
- Updates in critical shareholder information clearly informed
Essentially, these thorough background checks are mandatory as it ensures that the identity of the entity and its beneficiaries are not concealed, engaged with any illicit activities, or subjected to any sanctions locally or internationally. Examples of beneficiaries include the owners and directors of the entity. Other benefits include the acceleration and optimisation of companies’ workflow and processes.
What are the requirements of KYB?
To stay compliant with CDD rules, companies conducting the KYB process can note the following common types of information that they will need:
- Identities of the entity’s owners and directors
- Entity information, including the name, address, registration number, and licensing documentation
What are some of the impacts of neglecting the KYB check?
Some companies might neglect KYB checks because of the cost and complexity of KYB compared to KYC. However, failure to do so may lead to a dire impact, such as fines for non-compliance with regulations, fraud, reputational risk and even facilitation of syndicate crimes. For instances, human trafficking and malpractice of mishandling customer’s funds.
From the recent activities in the crypto space, the importance of KYB checks can be observed in the FTX collapse. In this collapse, Binance had pulled out of the deal to support FTX’s customers to provide liquidity and its acquisition plan. This is after conducting corporate due diligence on FTX and following the latest news report regarding the mishandling of customer funds. Had Binance continued its move to acquire FTX, the impact would have been beyond comprehension in the history of crypto space.
How can Regtank help?
Amid the financial crisis, there is a low supply of hiring professional risk and compliance officers, especially with the increased pressure from regulatory bodies. Attempting to find the balance of staying compliant in the most cost-effective way, companies can be on the lookout for third-party providers like Regtank.
The Regtank solution is designed and developed by following the Financial Action Task Force (FATF) guidelines. The solution enables companies to fulfil the latest regulatory obligations in multiple jurisdictions and keep up the fight against ML/FT activities with our innovative customisable risk engine. Adopting a risk-based approach, Regtank is constantly improving on the solution and is aligned with the Monetary Authority of Singapore’s (MAS)’s supervisory expectation on name screening practices.
The future of KYB and compliance
For any regulated company, KYB will be a part of an inevitable process of ongoing risk analysis and the fight against financial fraud and ML activities. According to a global survey conducted by Nasdaq, 76% of respondents mentioned that their company considers compliance standards to be highly important.
Consequently, we can see compliance is no longer a burden or a cost center, but an essential component of the company’s success and viewed as a competitive advantage when companies can successfully integrate it from their goods and services to the organisation.
Updated as at 15 February 2023.
