Know Your Customer (KYC) is a key part of Anti-Money Laundering regulations, especially today, where most transactions are digital. To comply, organisations are mandated to complete KYC before establishing a working relationship with an entity or individual. However, while conventional KYC processes focus on verifying individuals, corporate KYC verifies business entities.
Today, it is important that organisations verify legal entities to satisfy legal requirements before establishing a relationship. Here, we explored other reasons why corporate KYC is important today and how businesses can seamlessly perform it.
An Overview of Corporate KYC
Corporate KYC was established due to security gaps in business relationships. Business-to-business relationships, in their early days, were used to commit lots of fraud. The lack of standardised AML measures for them meant that there were several opportunities for criminals to explore.
The Financial Action Tasks Force (FATF) introduced regulations at different points over the last few decades to address this gap. Key events that spored the action include the 9/11 attack and the crackdown on drugs in the 80s. Overall, the FATF expanded its agenda to account for terrorism funding, protecting the global financial system from criminal use through business relationships.
Key elements for corporate KYC include:
Before these regulations, criminals simply set up shell companies to conceal their identity and masquerade as a legitimate business. This gives them leverage to transact with other legitimate organisations and access the financial system unrestricted. Fraudsters could launder money, finance terrorism and commit other crimes without leaving a trail behind.
Read more on the requirements for building an effective AML compliance Program for corporate KYC.
What is Corporate KYC?
Corporate KYC is the process of validating a business or corporate entity and its relevant beneficial owners to ensure regulatory compliance. Essentially, it is an organisation taking time to verify the legal details and the key operators in another business to ensure that the business is fully compliant with the law.
Corporate KYC verify other businesses rather than an individual and it is a key requirement for compliance. It is also referred to as Know Your Business (KYB) or business verification. A good example is the process of a business trying to open an account with a financial institution (e.g. a bank).
According to AML laws, the bank must verify key details about the business like its name, registration number, address, etc. Also, it should identify and verify the identity of businesses’s key stakeholders and Ultimate Beneficial Owners (UBOs). AML checks that should be run on them include watchlists, sanction lists, and Politically Exposed Persons (PEPs) screening.
Why is Corporate KYC Important?
Corporate KYC is important for understanding the business entity you wish to get into. It also helps them mitigate fraud risks by ensuring they only transact with legitimate entities. When business verification is performed during onboarding, the organisation can adequately put checks in place to protect themselves against the risks uncovered during KYC or opt not to onboard the legal entity at all.
Satisfying with these regulations also helps the organisation avoid regulatory penalties associated with noncompliance.
What are the Benefits of Corporate KYC to Businesses?
Corporate KYC majorly offers the following benefits to businesses:
1. Fraud Prevention
Running corporate KYC checks can help an organisation identify and mitigate fraud. The process of verifying the details of a business and running AML checks on its stakeholders and UBOs helps the organisation identify any criminal elements before any activity is conducted.
2. Prevents Penalties
The process ensures that the organisation is compliant with all regulatory requirements, therefore preventing associated penalties from regulatory authorities' noncompliance.
3. Brand Protection/ Reputational Damages
Not conducting corporate KYC checks can lead to money laundering facilitation. In no time will such news get out, affecting the overall brand reputation of the organisation. That can dissuade other customers from doing business with the organisation or even turn away investors.
4. Saves Cost
It may not appear so, but the financial repercussions of noncompliance with corporate KYC are far greater than the cost accrued in performing the process. An organisation not being compliant with corporate KYC could lead to financial penalties, which would cost more in the long run. It could also lead to a loss in deals resulting from the reputational damages.
5. Achieve Compliant
Ultimately, one of the benefits of corporate KYC is that it helps the organisation satisfy compliance requirements. This way, it can run smoothly in the jurisdiction without constraints from the governing authorities.
What Businesses Need to Conduct Corporate KYC Checks?
Corporate KYC laws are stipulated for organisations that establish business-to-business relationships. While the specific organisations affected may vary from one jurisdiction to another, it generally includes:
- Financial institutions
- Security brokers and dealers
- Crypto companies
- Fintechs
- Credit unions
- Asset management and mutual funds companies
What KYC Documents are Required for Corporate KYC?
The KYC documents generally required for corporate KYC include:
- Business incorporation certificate
- Tax identification document
- Key stakeholders and Ultimate Beneficial Owners (UBOs) information
- List of trustees
- Bank statements and income tax returns
However, note that some corporate KYC processes require more than these documents, depending on the kind and level of relationship.
Challenges Associated with Corporate KYC Processes and How to Navigate Them
The major challenge businesses face during corporate KYC is the large amount of documents/ information that needs to be collected and then verified. This makes it time-consuming especially when conducted manually.
Generally, the challenges businesses face include:
- Difficulties in collecting large volumes of information, especially when it's a huge organisation with several partners
- Verifying this information across multiple databases for accuracy and legitimacy
- Allocating resources to ensure all these are done effectively and efficiently
- It is simply time-consuming
- Keeping tabs on evolving compliance requirements
Performing Corporate KYC: Key Steps and Considerations
Here is a general overview of the key steps and considerations a business has to undergo when performing corporate KYC to reach a favourable decision:
Step 1: Collect the Company and Stakeholder Data
The very first step is to gather the right information from the company. This includes business name, address, incorporation certificate, List of trustees and other corporate KYC documents. With this information, the organisation can have an idea of whether the business is a shell company or not. It can also get a glimpse into the kind of ownership structure in place and who the beneficial owners are.
Step 2: Verify the Business Documents & Information
Of course, collecting and observing the data in step one is just speculation. The guaranteed way to ascertain the correctness of that data is to verify it across authority databases. The organisation should verify that the business is indeed legitimate and that all its stakeholders and UBOs are real people. AML checks should be run on UBOs too to ensure they are not on any sanction or watchlists. Politically Exposed Persons (PEPs) should also be carried out.
Step 3: Make a Decision
The major reason for steps one and two is to make an informed decision. Organisations need to evaluate the risks associated with transacting with such businesses from their findings in step two. On evaluating the risks, the company can then decide to purchase a business relationship if the risks are low or put processes in place before establishing the relationship if the risks are high. It could also simply decide not to proceed.
With the information collected from steps one and two, an organisation can also assess other factors like potential benefits, market penetration potentials and more.
Achieving Corporate KYC with Automation
Beyond doubt, corporate KYC processes can be laborious and complex because they require the collection and verification of so much information. If done manually, the process is time-consuming and resource-intensive, therefore, businesses need to explore technological solutions that automate the process.
With Smile ID’s Business Verification Solution, organisations can easily conduct Corporate KYC processes and onboard businesses faster. Our technology empowers you to collect customer information and verify them in minutes. You can also AML screen UBOs for PEPs, sanctions and watchlists all in one place.
Get started today - book a free demo to see how our solution can automate your process and save you time and resources.
