How KYB regulations shape the future of banking and FinTech

June 4, 2024

Know Your Business (KYB) is a crucial process for verifying business entities during the onboarding phase, aimed at understanding risk factors, financial health, creditworthiness, and beneficial ownership.

FullCircl highlights, in a recent report, that KYB enables regulated entities to gain a comprehensive view of their corporate clients, thereby mitigating risks when establishing business relationships.

The KYB Process

KYB involves collecting fundamental information from businesses, such as their name, registration number, incorporation date, and address. This data is then verified against various sources to evaluate the company’s financial performance and ownership structure, ensuring that risks of money laundering or fraud are minimized.

To streamline this process and enhance compliance, businesses often turn to KYB software. These tools automatically aggregate data from multiple trusted sources, improving both efficiency and regulatory adherence.

Importance of KYB for Banks and FinTechs

KYB checks are indispensable for banks and FinTech companies when dealing with corporate clients. Here’s why:

Regulatory Compliance: KYB helps institutions comply with Counter Terrorist Financing (CTF) and Anti-Money Laundering (AML) regulations. Authorities mandate thorough business verifications to prevent illegal activities and ensure due diligence is maintained.
Risk Management: By identifying and verifying business entities, banks and FinTechs can manage risks effectively, ensuring they are not inadvertently supporting fraudulent or high-risk businesses.
Reputation Protection: Working with unverified or dubious businesses can damage a financial institution’s reputation. KYB processes help safeguard against such risks by ensuring all corporate clients are legitimate.
Enhanced Trust: For FinTechs, robust KYB processes are vital for building credibility and trust among customers and partners, crucial for long-term business relationships.

Key KYB Regulations

Financial institutions must adhere to various KYB regulations to identify risks and operate legally. Key regulations include:

Anti-Money Laundering (AML): Regulations like the 6th Anti-Money Laundering Directive (6AMLD) and the USA Patriot Act require verification of business clients’ identities, including directors and key shareholders, to prevent financial crimes.
Counter-Terrorist Financing (CTF): Recommendations from the Financial Action Task Force (FATF) mandate identifying and preventing funding for terrorist activities. This includes screening for Politically Exposed Persons (PEPs), sanctions, adverse media, watchlists, and monitoring transactions for suspicious activities.
Customer Due Diligence (CDD): Regulations such as the Bank Secrecy Act (BSA) in the US and 6AMLD in the EU require assessing the risks associated with business clients by verifying their identities and understanding their financial behaviors. Enhanced Due Diligence (EDD) is applied to higher-risk clients.
Beneficial Ownership: KYB regulations often require verification of Ultimate Beneficial Owners (UBOs) of corporate clients. Identifying and verifying UBOs can be complex, leading many institutions to use advanced KYB software.
Data Privacy Laws: It is crucial for banks and FinTechs to handle personal and business data securely and responsibly during KYB processes, complying with GDPR and CCPA regulations.

Performing KYB Checks

Conducting KYB checks involves understanding relevant regulations and collecting identifiable information such as business name, address, incorporation date, and registration number. Initially gathering this data reduces the time needed for further investigation.

Using KYB software, such as FullCircl, can make the process more efficient. These tools generate automatic reports covering business information, financial records, credit, beneficial ownership, and company structure, allowing banks and FinTechs to make informed decisions swiftly.

Manual screening, although more time-consuming, can be a cost-effective method for KYB checks. It involves human input to gather and verify data from various sources, building a detailed report on the business. While less efficient, it offers greater control over the research process.

The choice between manual and software-based KYB checks depends on the institution’s circumstances. Larger banks with established compliance teams might prefer manual KYB, while smaller FinTechs or banks undergoing digital transformation may opt for KYB software.

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