Know Your Business – or KYB – is a Know Your Customer (KYC) process that is specifically designed to understand corporate, institutional or other business customers.
Like individuals, businesses also present compliance and fraud risks to service providers, in particular those that provide financial services.
Some businesses may be sanctioned entities, others may be in sanctioned jurisdictions, and others may have opaque ownership structures that try to hide the true controller of the company for a wide range of purposes – which can include attempts to mask criminal behavior.
KYB verification is a cornerstone of Anti-Money Laundering (AML) and Combating the Financing of Terrorism (CFT) regulations, and is enshrined in global financial directives issued by the Financial Action Task Force (FATF). These then inform regional regulatory regimes such as the EU’s 5AML and 6AML Directives, as well as the financial regulations of national jurisdictions across the world.
Financial service providers such as fund/wealth managers have a critical need to understand who their customers are in order to comply with regulations and to reduce their exposure to fraud and other financial crimes.
The problem is, more than a third of wealth management firms have yet to adopt a digital KYC/KYB onboarding capability, according to recently-published research from global data and analytics provider LexisNexis® Risk Solutions.
The research also revealed that nearly 30% of wealth managers are not even using digital solutions to carry out Politically Exposed Person (PEP) and sanctions screening on potential clients, even though ignoring such checks can result in steep regulatory fines or even criminal charges if serious breaches are detected.
The list of other checks wealth managers opt to carry out through laborious and expensive manual processes goes on. According to the report, in the UK alone, financial service firms can spend up to 70% of their budgets on human compliance teams, when carrying out the same processes through digital technology could be achieved for a fraction of the price – and in a fraction of the time.
Wealth Management: High Risk Business
As fund/wealth managers are in the business of investing funds – with the aim of generating new revenue streams – they represent a highly desirable target for criminals seeking to launder money from illegally-acquired gains into legitimate funds. In parallel, the companies that fund/wealth managers choose to invest in need to also be vetted to ensure they are who they say they are.
Fund/wealth managers who do not carry out the requisite KYC/KYB and other Customer Due Diligence (CDD) checks on their customers run the risk of being unwitting accessories to serious financial crimes. And if such an unfortunate situation does indeed arise, authorities will most definitely require proof that adequate KYC/KYB and CDD has been carried out.
As well as carrying out KYC/KYB in order to ensure compliance with AML regulations and safeguards, fund/wealth managers need to verify the identities of potential investment targets in order to protect themselves against fraud.
Every year, thousands of businesses around the world are defrauded by criminals who use opaque or fraudulent corporate identities to acquire products and services – or money to supply them – without following through on their contractual responsibilities.
KYB Challenges for Wealth Managers
As the world economy continues to digitalize, wealth management firms are facing an assortment of evolving challenges. These include rapidly-changing customer demands for fast and seamless digital services, as well as new threats presented by online fraudsters.
The Covid-19 pandemic has only accelerated what was an already rapidly-changing digital financial ecosystem. The challenge for fund/wealth managers is therefore how to balance new customer demands for remote, fast and efficient onboarding with improving security and maintaining compliance.
An effective KYC/KYB onboarding strategy therefore needs to be:
- Secure and compliant
- As frictionless as possible
What does KYB involve?
Like KYC, KYB checks are designed to gather and verify key information regarding a customer.
KYB processes carry out checks to obtain information that includes:
- Where a company is a registered
- When it was registered
- The nature of its business
- Its regulatory status
- Its Ultimate Beneficial Owners (UBOs)
- Its senior management, directors and shareholders
- Whether it is on any international or local sanctions or other watch lists
- Its financial health (and/or insolvency status)
- Adverse media checks
Fund/wealth managers who take on significant numbers of clients from various jurisdictions around the world can face significant challenges in carrying out these types of checks using in-house compliance teams – an approach that can be termed ‘Manual KYB’.
This process usually involves a combination of internet-based desk research, contracting locally-based due diligence professionals to gain access to often-restricted corporate registries, analyses of financial and/or insolvency records, and trawling through media records in order to search for adverse media.
In other words, the process can use up a lot of time and resources that many smaller wealth managers and other financial service firms cannot afford.
According to Thomson Reuters, financial institutions spend on average about US$48 million per year on carrying out manual CDD and KYC/KYB.
The biggest issue faced by companies is actually acquiring verifiable UBO data on the companies they deal with. This can place a huge drain on resources and can end up significantly dragging-out onboarding times, leading to high levels of abandonment.
For Fund/wealth managers who only deal with small amounts of high-net worth investors and have in-house teams to vet their investment targets, manual KYB can often suffice.
But for the firms that want to engage with higher volumes of clients and need to verify the identities of larger volumes of corporate entities, automated KYC/KYB is a far more efficient solution.
Automated KYC/KYB refers to a range of different technologies that allow companies to automatically check and authenticate submitted KYC/KYB information against multiple sources.
With the most professional solutions, the process is fast, efficient and far-reaching, checking information against hundreds of national and international databases.
KYC-Chain’s Automated KYB
Global penalties for non-compliance with Anti-Money Laundering (AML) and Know your Customer (KYC) processes have hit an all time high for financial institutions. Regulatory pressure combined with cost cutting means asset, fund and wealth managers are required to reduce financial crime, improve customer onboarding while simultaneously reducing overheads and increasing efficiency across teams.
KYC-Chain has deep domain expertise in working with asset, fund and wealth management firms to provide cloud-based solutions that align with their risk policy and reduce the burden of manual, laborious and inefficient processes.
Backed by unparalleled global data sources, we provide the tools to help you automate and accelerate your human compliance activity in supply chain due diligence, customer and vendor onboarding, allowing companies to monitor adverse media and mitigate reputational and AML risks.
For Fund and Wealth Managers seeking fast and reliable information on a company’s credentials and activities, KYC-Chain’s KYB solution is able to build detailed risk profiles using data such as an entity’s place and nature of business, its UBO data, their presence on international watchlists, sanctions lists and Politically Exposed Person (PEP) lists.
KYC-Chain’s solution also offers ongoing/continuous monitoring for corporate customers that have already been onboarded.
This allows firms to have a clear view of changes in shareholder ownership, company structure and legal status after they have been taken on as customers, ensuring internal compliance teams are aware of any important changes that can affect a corporate customer’s risk profile.
By implementing automated KYB in your onboarding process, fund/wealth managers and other financial service providers can effectively manage their compliance responsibilities and mitigate their risk of falling victim to fraud – all with a fraction of the time and resources that would be required to do so manually.
Looking to implement automated KYB in your onboarding process? Get in touch and we can tell you more about how KYC-Chain can make it happen.