Know Your Business: The Essential Guide to Regulatory Compliance

In the financial services industry, Know Your Customer (KYC) is a well-known concept that requires businesses to verify the identity of their customers. However, there’s another crucial aspect called Know Your Business (KYB), which applies specifically to business accounts.

What is Know Your Business?

KYB regulations require companies in the financial services industry to verify the identity of business clients seeking to open accounts. This involves verifying new business clients’ credentials and identifying who ultimately owns or controls the business, known as the Ultimate Beneficial Owner (UBO). KYB checks aim to prevent terrorist organizations and criminal groups from using front companies to launder money.

Differences Between KYB and KYC

While both KYB and KYC share similarities in verifying customer identities, they differ in their application. KYB applies to business accounts, whereas KYC applies to individual accounts. Essentially, KYB is the business counterpart to KYC.

Why Is KYB Needed?

KYB regulations were introduced to address loopholes in Anti-Money Laundering (AML) laws that allowed terrorist and criminal organizations to funnel money through front companies. Current KYB laws aim to identify hidden owners behind business entities and confirm they’re not on official lists of sanctioned individuals or groups.

Who Needs to Perform KYB Checks?

Under US Treasury Department Financial Crimes Enforcement Network (FinCEN) Customer Due Diligence (CDD) requirements, financial institutions must follow KYB procedures. This includes:

• Banks
• Credit unions
• Security brokers and dealers
• Mutual funds
• Futures commissions merchants
• Introducing brokers in commodities

Jurisdictions outside the US may have additional entities in regulations, such as the EU. Special regulations may apply in certain industries, like casino gaming.

KYB Requirements

KYB regulations require financial institutions to:

1. Identify beneficial owners of business customers (technically known as legal entity customers)
2. Verify identities of beneficial owners

Required information is typically collected using a standard certification form or other means. Financial institutions may rely on beneficial information provided by customers unless there’s reason to doubt its veracity.

KYB Compliance and Best Practices

Implementing effective KYB procedures requires following best practices:

1. Use Customer Due Diligence Scoring
2. Run Sanctions Screenings
3. Conduct Politically Exposed Person (PEP) Screenings
4. Do Adverse Media Screenings
5. Follow Up With Ongoing Transaction Monitoring

Automating KYB and KYC data verification can help streamline compliance efforts, mitigate fraud and legal risk, and ensure effective identity verification.

By understanding KYB regulations and implementing effective procedures, financial institutions can maintain a strong compliance posture, reduce the risk of money laundering, and protect their reputation.