KYB and why it’s essential for corporate onboarding

Operating any financial services company requires near-constant risk analysis to ensure everything is “above board”, and your company does not fall foul of corporate regulations. Financial institutions and banks are particularly susceptible to being targeted by criminals and the sector is – rightly – closely regulated.

Financial institutions are required to perform stringent due diligence on corporate customers, partly to identify who is actually in charge of the firm. This is part of the compliance process known as Know Your Business (KYB) and, in part, it relates to identifying and understanding the Ultimate Beneficial Owner (UBO) of a firm to ensure it is legitimate and isn’t a front for money laundering or other types of financial crime.

Due to the complex nature of financial institutions and corporate onboarding, and the risk of crimes like money laundering, there are a lot of checks and balances needed to meet compliance standards and regulation in different jurisdictions.

What is KYB?

First off, let’s start with the basics…KYB, or Know Your Business, outlines the process a financial institution must go through to verify the legitimacy of a corporate client. That’s partly done by validating the ownership structure and identities of the businesses owner(s). It is a form of risk mitigation for financial services companies, as understanding the organisation and ownership structure of a corporate client creates transparency, trust and avoids issues related to financial crimes like money laundering.

The financial services landscape continues to shift towards a digital state and the regulatory demands on financial institutions continue to develop on a global scale, there are complex challenges when it comes to completing KYB processes. The owner of a firm could sit outside the published organisation structure; they could live anywhere in the world; they could have interests in different types of company, which is why financial institutions and banks have to work hard to identify the legitimate beneficiaries of a business – known as the UBO.

The world of finance is no stranger to criminal intent, and it can often turn into a game of cat-and-mouse for banks trying to manage fraudsters. Names like Steven Hoffenberg and Bernie Madoff are synonymous with Pyramid Schemes and hoodwinking financial institutions. KYB looks to find and address unwanted or disreputable clients before they can scam, steal or launder funds.

It is no surprise that financial institutions are held to a high standard in terms of knowing who they are dealing with – financial crime is big business and the numbers at stake are mind-blowing. Rightly or wrongly, banks and financial services firms essentially act as gatekeepers – whether they let criminals in or keep them at bay. KYB is a key tool in the armoury to detect organised crime and nefarious activity so it can be dealt with quickly.

What does UBO mean?

As mentioned, UBO stands for Ultimate Beneficial Owner, and it defines the legal entity or individual that financial institutions will be doing business with. This is a cornerstone of KYB and is essential to understanding what financial transactions are going where and who ends up profiting from them.

Finding and mapping UBOs is part of Customer Due Diligence (CDD), whereby financial institutions perform a risk assessment on their corporate client. In the process of CDD, the financial institution will carry out investigations and different data checks to identify the UBO(s) and verify they are a legitimate person or persons to have as a customer.

KYB – essential to financial institutions

For financial institutions and banks to function properly, KYB is an integral part of identifying risks associated with corporate clients. It is also a key part of their compliance requirements within a tightly regulated sector – failing to perform KYB activity properly could land a firm in a lot of legal hot water.

By its nature, working with businesses or corporate clients is more complicated than dealing with an individual. There is a lot more digging, investigation, difficultly, and decision-making involved in thoroughly vetting a UBO. Just to add to that, in most instances there will be more than one UBO. It is vital banks perform due diligence on any and all UBOs they will be working with, otherwise the door is left open for illegal activities.

Due to the complexity of KYB; rapid digitalisation of financial services; the adaptation of criminals; and ongoing changes in regulation across global jurisdictions, financial services businesses have found it hard to keep pace. In some cases, adoption of RegTech to support automation of KYB processes has been slow. Caution when it comes to change and using new technology might be explained by not wanting to disrupt service and risk losing high-value corporate customers. Or it might be a trust issue – if you have a team of compliance professionals dedicated to thorough corporate customer due diligence, you’re more sure nothing will slip through the net. This means some financial institutions still rely on shared databases that can match up key executives to a company, but it’s slow going and far from foolproof as a solution in the current operating environment.

The human automation hybrid

The reality for banks and financial institutions is they need to perform CDD at pace in a global and digital world, so RegTech is the only sensible option. But, compliance people will always be needed in KYB for reviewing documentation and assessing discrepancies around income sources, bank records and other assets in a portfolio. That’s where the human automation hybrid adds value – using automation to untangle the complexity of KYB, to perform data checks and prompt workflows, while bringing in compliance people for judgement calls and decision-making.

An automated KYB process can make use of global datasets and populate new records for corporate clients, as well as information pertaining to UBOs. The deep dive into individual UBOs, including whether clients are Politically Exposed Persons (PEP), screening for adverse media, and other background checks, can be automated – saving time and creating a reliable picture of the corporate structure.

KYB is a vital part of risk management and of combating organised crime. The intensity of due diligence in corporate onboarding relates to the amount of money at stake. A robust KYB process, automated with RegTech and controlled by skilled professionals, is a key way to tackle this complex and knotty compliance challenge.

Get in touch

If you are onboarding or monitoring corporate clients, PassFort can help you streamline your KYB activity. They are there to help with a range of SaaS solutions to simplify the process, provide access to data, automate CDD and bring in your compliance team when judgement and decision-making are needed. Get in touch today to arrange a chat and to find out more about PassFort.

Lavanya Rathnam

Lavanya Rathnam is an experienced technology, finance, and compliance writer. She combines her keen understanding of regulatory frameworks and industry best practices with exemplary writing skills to communicate complex concepts of Governance, Risk, and Compliance (GRC) in clear and accessible language. Lavanya specializes in creating informative and engaging content that educates and empowers readers to make informed decisions. She also works with different companies in the Web 3.0, blockchain, fintech, and EV industries to assess their products’ compliance with evolving regulations and standards.

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