Building a Watertight Know Your Business Process (KYB): A Practical Guide

Know Your Business (KYB) is an extension of Know Your Customer (KYC) process. As an important part of Anti-Money Laundering (AML), Combating the Financing of Terrorism (CFT), and Counter-Proliferation Financing (CPF) compliance. This blog explores the meaning of KYB, how it is different from KYC, its key components, steps to establishing a watertight KYB process, and best practices for a regulated entity conducting KYB on its customers.

What is KYB?

KYB is the process of understanding a customer, which is a business, its key identifier information, nature, and operations, to be able to identify the associated Money Laundering (ML), Terrorism Financing (TF), and Proliferation Financing (PF) risks. It is applied to customers that are legal entities.

Differences Between Know Your Business and Know Your Customer

KYB and KYC are two essential compliance processes under the AML/CFT/CPF framework of a country. KYB and KYC focus on the same aspect of due diligence. While both aim to identify and mitigate potential ML/TF and PF risks, they target different entities – individual or natural person customers in the case of KYC and business or corporate entities in case of KYB. For entities regulated under AML regulatory regime of a country, both KYC and KYB are mandatory.

Differences Between Know Your Business and Know Your Customer
Distinguishing Attributes	Know Your Business (KYB)	Know Your Customer (KYC)
Focus Area	A legal entity or legal arrangement Customer who is not a natural person	A natural person: Individual customer Ultimate Beneficial Owners (UBOs) of legal entity or legal arrangement customer
Purpose	To identify, verify, and understand clients that are businesses and their operations	To identify, verify, and understand the identity of the natural person behind the proposed business relationship
Types of Documents Collected	Registered legal name of the business Business Address (Registered Address and/or operational address and branch address is applicable) Business License status (to ascertain if license or permission to conduct business activities is ongoing) Ownership structure, UBO details (to be verified through KYC) Documents to be collected: Certificate of Incorporation, Business/Trade License, Registration Details, Articles of Association, to name a few, for verification	Name Address Date of birth Documents to be collected: Government-issued ID documents for verification
Outcome	Legitimacy of the client’s business and its purpose or rationale behind the proposed business relationship is assessed	Customer identity details are collected and verified to confirm that they are the ones they claim to be

Here are the key differences between KYB and KYC:

• KYB process is carried out when the customer is a business or a legal person,whereas KYC is generally required for individual customers.
• KYB’s purpose is to identify, verify, and understand clients that are businesses and their operations. KYC process aims to identify and verify the identity of individual customers.
• In a KYB process, details such as nature of business, registered legal name of the business, its address (registered address and/or operational address and branch address is applicable), business license status (to ascertain if license or permission to conduct business activities is ongoing), ownership structure, etc., are gathered. On the other hand, under KYC process, personal details such as name, address, date of birth, government IDs, etc., are collected.
• KYB process assesses the legitimacy of business entities, associated business partners, identifies and verifies Beneficial Owners [also known as Ultimate Beneficial Owners (UBOs)] of the legal entity, and more. KYC process verifies customer identity to prevent identity theft and fraud.

Why KYB Checks Are Important

KYB checks play a significant role in fighting ML/TF and PF. These checks involve a thorough understanding of the nature, operations, ownership structure, and potential ML/TF and PF risks associated with customers that are business entities. Here is a detailed explanation of why KYB checks are important:

• Ensures AML Compliance: KYB procedure is a regulatory obligation for safeguarding the integrity of the economy. Through thorough identification and verification of business entities, entities regulated under AML laws can ensure their legitimacy and assess potential risks. This is essential for complying with AML regulations.
• Counters ML/TF and PF: By understanding the nature and operations of customers that are businesses, entities can detect and prevent illicit activities conducted through business accounts. KYB helps identify high-risk businesses, such as shell companies or those operating in high-risk jurisdictions, allowing entities to tailor their Customer Due Diligence measures.
• Helps Take a Risk-Based Approach: KYB identifies potential risks and enables adoption of a Risk-Based Approach allowing optimal allocation of resources based on level of risk associated with each business relationship. By assessing business industry, location, customer base, and volume of transactions, KYB allows entities to put more effort into high-risk businesses and enhance operational efficiency while complying with AML standards.

Understanding Know Your Business (KYB)

What Is KYB?

KYB is a vital component of the AML compliance requirements. It is aimed at thoroughly identifying and verifying business customers. This involves gathering detailed information about business entities. The primary aim is to check the legitimacy of business operations by ensuring they are not involved in illicit activities.

The process typically involves verifying the business’ registration details, legal status, and ownership structures by examining documents such as a certificate of incorporation, corporate filings, etc. This level of scrutiny helps detect and prevent the misuse of business accounts for committing financial crimes. Additionally, KYB involves checking type of industry and geographical location of business entities to ascertain how vulnerable they are to financial crimes.

Core Elements of KYB

The core elements of the KYB process typically include:

• Business Verification
  • Verification of registration details
  • Verification of business address
  • Verification of operational status

• Business Structure
  • Understanding business’ organisational structure, including parent companies, subsidiaries, and affiliates
  • Identification of control and management personnel

• Beneficial Ownership
  • Identification of Beneficial Owners
  • Identity verification of the Beneficial Owners through government-issued IDs and personal documents

• Financial Information
  • Examination of financial records such as financial statements and tax filing documents.
  • Verification of business bank accounts

• Business Activity
  • Understanding the nature of business operations
  • Identification of Source of Funds
  • Identification of Source of Wealth

• AML Compliance
  • Ensuring compliance with local, national, and international AML/CFT/CPF standards
  • Screening against local and international sanctions lists and other watchlists

• Documentation
  • Prepare comprehensive due diligence reports documenting findings of the KYB process.

The Role of KYB in Verifying the Legitimacy of Business Entities

The KYB process plays a significant role in verifying the legitimacy of business entities by conducting comprehensive due diligence on various aspects of their identity and operations.

This process involves authenticating important business details, such as registration information, location, and operational status to ensure that the business is legally established and actively operating. This level of due diligence allows to prevent businesses from facilitating illicit activities. Compliance with AML regulatory standards is critical aspect of KYB that ensures that businesses have appropriate policies to prevent financial crimes.

Financial transparency is another critical aspect of KYB. This is ensured by reviewing audited financial statements and verifying the Source of Funds of the business. For businesses deemed high-risk, Enhanced Due Diligence (EDD) measures are implemented involving more in-depth checks, along with continuous monitoring to detect and respond to changes in their risk profile.

Regulatory Frameworks for Know Your Business

KYB process is a significant part of AML/CFT/CPF regulatory framework. The Financial Action Task Force (FATF) in its Recommendation 10 details Customer Due Diligence (CDD) requirements, which include customer identification and verification procedures.

This process must be conducted for customers that are legal entities as well. For example, FATF recommends identifying the Beneficial Owner, the ownership and control structure, etc., of customers that are legal persons.

Countries such as the following set detailed provisions for KYB as part of their CDD requirements:

 

• Australia: Under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006, and its Anti‑Money Laundering and Counter‑Terrorism Financing Rules Instrument 2007, conducting CDD is compulsory for Reporting Entities. The Rules provide a detailed procedure with respect to customer identification of legal entities such as companies, trustees, co-operatives, etc. The CDD process has been significantly amended under the Anti-Money Laundering and Counter-Terrorism Financing Amendment Bill 2024, which is expected to come into force in 2026.
• India: The Prevention of Money Laundering Act 2002 and Prevention of Money-Laundering (Maintenance of Records) Rules, 2005 make it mandatory for Reporting Entities to follow KYC procedures, including those for clients that are legal persons.
• Nigeria: Under the Money Laundering (Prevention and Prohibition) Act, 2022, Financial Institutions and Designated Non-Financial Businesses and Professions (DNFBPs), are required to identify a customer and verify their identity, including those customers that are legal persons or have any form of legal arrangements.
• Singapore: Financial Institutions and DNFBPs are regulated under their respective AML/CFT/CPF regulations. These regulations prescribe the implementation of CDD procedures, which include conducting customer identification and verifying clients who are legal entities.
• United Arab Emirates (UAE): In UAE, Cabinet Decision No. (10) of 2019 Concerning the Implementing Regulation of Decree Law No. (20) of 2018 on Anti-Money Laundering and Combating the Financing of Terrorism and Illegal Organisations sets out the procedure for identification of customers that are legal entities, such as understanding the Ultimate Beneficial Owner (UBO), understanding the business structure, etc.
• United Kingdom: Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 makes conducting CDD for customers mandatory. For customers that are legal entities, it is compulsory to collect information such as Beneficial Owner, understanding the ownership and business structure, etc.

Key Components of a Watertight KYB Process

The key components of a watertight KYB process are as follows:

• Business Identification and Verification: This involves collecting and verifying key documents such as the Certificate of Incorporation, shareholder agreements, board resolutions, etc., to verify the legal status of the business through its official documents.
• Understanding Business Structure and Ownership: Understanding the ownership structure of the business is important to identify the Beneficial Owner. This generally involves tracing ownership through layers of business entities to find out the individuals who ultimately own or control the company.
• Customer Risk Assessment and Customer Due Diligence: Through KYB process, assessment of risk profile of the business is done based on factors such as industry/sector, geographical location, transaction volume, and nature of the business. After assessing the risk, the high-risk businesses are put under additional scrutiny, which includes in-depth investigations, more frequent reviews, etc.
• Ongoing Monitoring and Compliance: Continuous monitoring is performed to identify suspicious activities. Periodic reviews and updates of KYB information ensure that the business profile is always current and accurate. This also includes periodic re-verification of businesses and owners.

Steps to Build a Watertight KYB Process

1. AML/CFT/CPF Program: An AML/CFT/CPF program is the key to a secure and strong KYB process. Establishing a comprehensive AML/CFT/CPF program protects organisations against financial crimes by complying with regulatory requirements. As part of the AML program, it is crucial to establish and implement detailed AML policies that outline measures to identify, assess, and mitigate risks; involve collection and validation of official documents; and require reporting of suspicious activities.
2. Clear KYB Policies and Procedures: Clarity regarding KYB policies and procedures is important for maintaining consistency with compliance standards. Creating extensive KYB policies that define the scope and objectives for conducting business verification, helps maintain coordination and efficiency while carrying out the KYB process. These policies should cover steps for collecting and verifying business entities, conducting Customer Risk Assessments, and maintaining records. Moreover, these policies should be regularly reviewed and updated.
3. KYB Questionnaire: A well-designed questionnaire is necessary for gathering information essential for verifying a business entity. A comprehensive questionnaire captures all necessary information regarding the business and its operations. It is also important to customise the questionnaire based on the risk level of the business. Periodically make changes to the questionnaire to help it stay relevant to emerging threats.
4. KYB Software Implementation: Leveraging technology results in enhanced efficiency and accuracy of the KYB process. Selecting appropriate software that automates data collection, identity verification, and ongoing monitoring is important. Automation reduces the risk of human errors and speeds up the KYB process.
5. Training and Awareness: Providing continuous training and awareness to employees is important to ensure that they remain updated and vigilant towards emerging threats of ML/TF and PF. Entities should conduct regular training sessions, covering topics such as AML/CFT/CPF regulations, KYB procedures, how to use KYB software, etc. It would be prudent to use real-world illustrations to simplify understanding. Training ensures that all staff are aware of their role in the KYB process, improving coordination and efficiency, and reducing delays.

Challenges in Building a Watertight KYB Process

The task of building a watertight KYB process poses many challenges that can complicate the process. Each element presents unique obstacle and must be managed carefully to ensure effective compliance. The key challenges organizations face in building a watertight KYB process are:

• Shell Companies: Shell Companies are legal entities with no significant assets and are often used to hide the true nature of financial activities. Such nature of business makes it difficult to identify illicit activities being conducted in concealed manner. This increases the risk of engaging with the business involved in fraudulent activities.
• Disguised Beneficial Owners: Uncovering Beneficial Owners is a complex task, as the ultimate beneficiaries are often hidden behind the layers of corporate structure. Beneficial Owners may use intermediary companies and nominee directors to hide their identity. This makes it difficult for organisations to accurately assess the risk.
• Customer Experience: KYB process is extensive as it involves conducting checks for businesses. Moreover, high-risk clients demand more in-depth and rigorous checks such as frequent reviews and documentation. This can be time-consuming and intrusive, which could lead to negative customer experience.
• Evolving ML/TF and PF Typologies: Techniques for conducting financial crimes are evolving day by day and becoming increasingly sophisticated. Therefore, it becomes crucial to keep up with changing typologies, as well as the updates in regulatory changes to combat to address such emerging threats and maintain the stability of financial system.
• Data Privacy: Data Privacy is every client’s right. Protecting personal and sensitive information is critical and must be done in a manner that complies with data privacy laws. This can be complex and resource intensive.
• Data Security: Ensuring the security of data collected during the KYB process is of utmost importance. It requires high monitoring to prevent breaches and unauthorised access. Maintaining a high level of data security demands heavy investment in technology, expertise, and infrastructure.

Best Practices for a Successful KYB Process

Building a successful KYB process is crucial for organisations to ensure effective AML/CFT/CPF compliance. This helps in ensuring long-term success and integrity in business operations. Here are some key factors that make up for best practices for conducting KYB process successfully:

1. Implementing Effective AML/CFT/CPF Program and Governance Structure: Organisations need to implement an effective AML/CFT/CPF program that extensively outlines policies, procedures, and controls to prevent financial crimes. Moreover, they also need to establish transparent governance structure with dedicated compliance officers to maintain accountability and oversight.
2. Establishing Strong Internal Controls: A successful KYB process involves implementing stringent internal controls to assess business entities. This includes conducting regular reviews and performing continuous monitoring to ensure compliance with regulatory standards.
3. KYB Software Implementation: Utilising advanced KYB software to automate data collection and verification processes helps organisations enhance operational accuracy and reduces the time required for conducting due diligence.
4. Collaboration with Regulatory Authorities: Maintaining open communication with regulatory authorities helps ensure that the KYB process meets all regulatory requirements, and that any compliance issues are promptly addressed.
5. Collaboration with Industry Peers: Engaging with industry peers and developing a network for easy information sharing and facilitating legal requirements ensures effective prevention of financial crimes. Moreover, it gives room for comparing existing compliance frameworks and identifying areas of improvement for adopting the best practices.
6. Continuous Improvement and Adaptability: A best practice is one that is open to improvement and flexible to adapt changes. Therefore, organisations should establish mechanisms to stay agile and adapt to evolving regulatory landscape and emerging risks. Staying updated and informed enables organisation to regularly update policies and maintain a cutting-edge KYB process.

Conclusion

Implementing a watertight KYB process is a strategic imperative. Thoroughly understanding the businesses before engaging with them significantly reduces the risk of financial crimes, ensures compliance, and maintains a secured financial environment. The dynamic nature of financial threats and regulatory frameworks demands a proactive and dynamic approach, ensuring that the KYB process remains efficient and adaptable throughout. By embracing best practices, entities can safeguard their operations and contribute to a safer financial ecosystem.