Know Your Business (KYB) Verification for AML Compliance

The financial economy today largely thrives on business relationships as organisations move a high volume of funds transacting with each other. Unfortunately, criminals also take advantage of the system by creating legal entities to mask their transactions with illegal proceeds. Therefore, businesses involved must take extra precautions to protect their interests by performing Know Your Business (KYB) verification. 

Running KYB, also known as business verification helps prevent organisations from forming business relationships with illegal entities that may implicate them. Regulatory authorities mandate KYB verification to prevent businesses from facilitating financial crimes such as money laundering and terrorist financing.

This article covers Know Your Business (KYB) verification for AML compliance, discussing its importance, how organisations can achieve KYB compliance and other things to note.

What is Know Your Business (KYB)?

Know Your Business (KYB) or business verification refers to the process of verifying the legal standing of an entity before establishing a business relationship. This verification covers key business information including its name, address, stakeholders, partners, suppliers, consultants and more. This is to ascertain that the business is legally registered to transact business and assess that stakeholders and partners of the business do not pose unmanageable risks.

Why is KYB Important?

KYB was established long after KYC when regulators realised that criminals were taking advantage of business relationships since they were not subjected to the same scrutiny as individuals. This gave room for criminals to set up shell companies and conduct transactions with criminal proceeds without exposing their identities. 

Before KYB was made into law, business information wasn’t scrutinized and fraudsters could launder money or finance terrorism using the business as a shield. In 2016, FinCEN issued a new Customer Due Diligence directive mandating financial institutions to verify any business they work with. This includes verifying their legal registration, shareholders and ultimate beneficiaries for people risk assessment. 

Since the passing of this law, regulatory bodies around the world have adopted the same approach to their respective jurisdictions. Local requirements are generally less stringent than businesses looking to penetrate the global market. This is why businesses must approach KYB compliance with the right technological infrastructure that makes it easier for them to scale.

Which Businesses Need to Conduct KYB?

KYB is mandatory for all organisations that operate in regulated industries and transact with other businesses. This includes: 

• Banks and financial institutions
• Non-banking financial institutions
• Fintechs
• Crypto companies 
• Insurance companies
• Asset management companies
• Remittance companies, etc

What documents are required for KYB?

The specific documents required for KYB verification vary from one jurisdiction to another. However, they generally include legally obtained documents showing the key information: 

• Business name
• Legal address
• Registration number
• Tax information
• Incorporation documents displaying shareholders and their percentage of ownership
• Ultimate Beneficial Owners (UBOs)

Note that the information above is generally required during KYB verification and it could be more or less depending on regulatory law in the jurisdiction the business operates.

What's the difference between KYC and KYB?

KYC and KYB are very similar however, differ in the subject of the verification. KYC focuses on verifying information about an individual while KYB focuses on verifying information about a legal entity.  

In KYC basic customer information like their name, address, ID documents and more are verified to ascertain they are who they claim to be but for KYB, the business name, shareholders, UBOs, registration number and more are verified to ensure the business is legally registered and do not have criminals as beneficial owners.

How to Conduct KYB Verification

Here’s how to verify a business for KYB compliance:

Step 1: Collect and Verify the Business Information

The very first step in KYB compliance is to ensure that the business is legally registered. To achieve this, organisations should collect and verify the business’s basic information, including: 

• Business name and address
• Proof of incorporation
• Details on stakeholders and ownership structure 

Step 2: Verify the Beneficial Owners

After verifying that the business is legally registered, the next step is to identify and verify its ultimate beneficial owners. This is to properly assess the risk they pose as it directly extends to the business they own.

This process involves identifying stakeholders with a minimum of 25% or more in ownership shares or voting rights in the company. Those with up to 20% can also be verified. Verification should include running checks on their IDs to be sure they are who they claim to be and also AML checks to ensure they are not on any watch or sanction lists and adverse media/ Politically Exposed Persons (PEP) screening for risk assessment.

Running these checks allows you to adequately assess the risk associated with transacting with that legal entity and to spot criminals who may be hiding behind corporate structures.

Performing KYB Verification Through Automation

The KYB verification process requires a lot of information and different verifications, making it difficult to manually conduct the process. Therefore, the best way to achieve this is through software solutions that can run all the checks automatically and give the desired result. 

Smile ID solutions empower organisations to verify business information, obtain UBOs and run AML checks all in one place. Here’s how you can leverage Smile ID’s Business Verification solution for KYB compliance:

1. Check Business Information 

Make a Business Verification query using only the business registration number. The results will detail the business information and any available stakeholder and UBO information.

2. Verify UBOs and other Stakeholders 

Proceed to verify stakeholders from the result in step 1 against government databases or run a document verification on them using their official ID document.

3. Confirm Accurate Records 

Match the results to confirm the identity of the beneficial owner matches both the business and official identity records.

4. Run AML Checks

Finally, proceed to run AML checks on the UBOs against PEP, Sanctions, and watchlists. Our AML solution instantly screens users against: 

• 1100+ global and African sanctions
• PEP list of approximately 1.5 million individuals across four levels.
• Adverse media from 75,000+ reputable news sources with a minimum of 2 news sources from every country in the world.

Businesses can perform this via our no-code platform or API/ SDK integration. Book a free demo today to learn more.

Achieve KYB Compliance with Smile ID

Ultimately, KYB compliance is mandatory for organisations today as it is a key part of anti-money laundering (AML) and terrorist financing. It is important for all institutions that work with other legal entities in any capacity. Manually conducting the process is not ideal, therefore, organisations need to leverage the right solution to solve the problem.

Smile ID’s business verification solution empowers organisations to achieve this without breaking a sweat. It automatically handles the full process from collecting business information to running verification checks. The organisation can proceed to run AML checks on UBOs to complete the entire KYB process. 

Get started today, book a free demo to see how our solution can simplify your KYB process and save you time and resources.