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From KYC to KYB: the key differences and best practices

Episode
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September 16, 2022

Compliance is no longer a burden and cost center, but instead the discipline is emerging as a competitive advantage for those that successfully integrate it into their product, service, and overall organization. Customers can be serviced better, faster and provided with the confidence that they are sourcing their product and service from a reputable partner who puts compliance first.

Know your customer (KYC) procedures are well known to companies that onboard named individuals (e.g. natural persons) as customers. But verifying businesses or corporate entities is by nature more complex – next to verifying the entity, also the people behind the entity must be verified, from the directors to the ultimate beneficial owners (UBO). To achieve this, a company must carry out know your business (KYB) processes.

Spot the difference: know your business and know your customer


KYB and KYC naturally, have much in common. Whereas the term KYC dates back to 2001 with origins in the USA Patriot Act, KYB has only just recently started emerging as its own discipline over the past six years. Both terms will be familiar to financial institutions, who must meet strict anti-money laundering regulations in any case.

While KYC procedures are largely understood to apply when the customer or consumer is a named individual, KYB applies specifically to cases where the customer is a business or corporate entity. KYB can be several degrees more complex than KYC as KYB includes not only the verification of an entity but also the people behind it, including both cross-border connections and the ultimate beneficial owner.

KYB can apply to financial institutions, gambling service providers, payment service providers, law firms and more – the exact type of entity who must conduct know your business checks depends on the anti-money laundering regulations of the jurisdictions they operate in.

Why KYB is important


Nearly all countries mandate that companies take steps to prevent financial crime. In the European Union, the fines for violating AMLs laws can account for up to 10% of an organization's global revenue, with those serving as directors personally liable. The EU’s Anti-Money Laundering Directives provide consistent regulations across EU member states, and the global Financial Action Task Force has developed anti-money laundering and counter-terrorism financing guidance.

KYB helps prevent financial crime because it plays an important role in revealing what sort of company you are doing business with – and whether they are in fact a legitimate business, sanctioned or managed by bad actors. A thorough KYB program also includes uncovering the company’s ultimate beneficial owner, important knowledge that can reveal the risks of doing business with that company.

As well as helping to achieve anti-money laundering compliance, KYB is used to reduce risk exposure of fraudulent transactions. Robust KYB checks can protect money from being funneled into illicit channels, especially important to consider as criminals continue to develop increasingly sophisticated fraud methods.

The UN estimates that money laundering alone costs 2% to 5% of global GDP, exceeding $1tr annually. According to PwC’s Global Economic Crime and Fraud Survey, nearly 70% of organizations experiencing fraud said that external parties, alone or in collusion with internal sources, caused the most disruption. KYB can help companies spot external bad actors before they have a chance to act. Customers also want to have the confidence that they or their business are working with reputable partners. This is where integrated Business KYC (KYB) becomes essential.

How to do better KYB: start with the right data


To comply with leading anti-money laundering regulations, companies must use data with a high level of veracity to fuel their KYB processes. This includes data and documents that are that are always up-to-date and time-stamped, that are unedited and a true-copy and finally, that are from recognized sources, such as government commercial registers, financial authorities and tax offices.

Static databases with aggregated entity information are not fit for this type of entity verification. Neither is self-reported data on a company. These sources should only be used as part of enhanced due diligence (EDD) procedures and for building a detailed client profile for risk analysis and classification.

To be fully effective, KYB must be integrated into workflows beyond just the compliance team. After adoption, automation will be the natural next step in building the most effective KYB practices.

Achieving perpetual KYB


To begin, it should be stated that perpetual KYB is in practice, no different than perpetual KYC. In both cases, the perpetual status is the common trait – what follows, KYB or KYC, simply changes which type of information is being continually monitored.

Many regulated companies have been implementing automated KYB processes over the past few years. Several have already begun to migrate to perpetual KYB, eliminating costly periodic review backlogs while also fulfilling the EU’s AMLD5 requirements. Effective KYB also demonstrates to prospective customers that a company takes financial crime seriously.

Conducting perpetual KYB is key to detecting risks as they happen. Periodic, or momentary snapshots of a company and the people behind the company, can lead to business-critical data gaps and endless compliance backlogs. This is where the ability to detect compliance risks as they occur becomes essential (this has also been a regulatory requirement in the European Union since January 2020).

Employing technology that allows teams to conduct KYB in real-time, including functions such as monitoring and alerting, enables them to stay constantly aware of vulnerabilities rather than waiting for the next pre-scheduled review. Advanced KYB platforms like Moody’s Analytics already offer the ability to deliver alerts that are triggered by any number of factors including a change in location or operating status. Many companies’ structures change often, so perpetual monitoring is more effective than periodic manual checks to stay on top of things.

A further advantage is that corporate customers can be onboarded faster, speeding up the time-to-first revenue significantly.

All your KYB needs in one place


No other provider can offer the coverage and quality of KYC and KYB services that Moody’s Analytics can. Partner with us today and begin unlocking significant efficiency gains in your existing compliance programs, starting with the transformation of your periodic reviews process to perpetual KYC and KYB.  

We can help you with everything from monitoring ownership and identifying ultimate beneficial owners to verifying your onboarding processes with the highest quality entity data on the market to checking adverse media related to shareholders, directors, and owners. With Moody’s Analytics, you don’t have to choose between world-class expertise and leading technology.  

For more information about Moody’s Analytics KYC solutions, please contact us to schedule a demo.

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