Just as individual accounts require identification, due diligence and monitoring, corporate accounts require Know Your Customer (KYC) procedures as well. While the process for corporate entities does bear many similarities to that of KYC for individual customers, its requirements are undoubtedly different in a number of ways. Additionally, transaction volumes, transaction amounts and other risk factors are usually more pronounced in the corporate environment, and so the procedures are necessarily more involved. These procedures are often referred to as Know Your Business (KYB).

KYB is a process used by all companies dealing in financial matters to verify the identity of their customers and ensure that they are legitimate. It is an important part of any business’s risk management strategy, as it helps protect against fraud and money laundering. KYB involves collecting information about a customer’s background. This information can then be used to assess whether or not the customer poses a risk to the company.

The purpose of KYB is twofold: firstly, it helps businesses comply with anti-money laundering regulations; secondly, it allows them to better understand their customers so that they can provide more tailored services and products. By having access to accurate data on customers’ backgrounds and financial histories, financial services companies can make informed decisions about who they should do business with, reducing the chances of being exposed to fraudulent activities or bad debtors in the future.

In order for KYB processes to be effective there must be clear guidelines in place regarding what type of information needs to be collected from each customer before doing business with them. Companies should also have procedures in place for verifying this data regularly so that any changes are identified quickly and appropriate action taken if necessary. This is not a task that can be done just once and then simply left unattended.

Overall, KYB is an essential tool for financial services businesses looking to protect themselves from fraudsters while still providing excellent service levels for genuine customers. By taking steps such as implementing robust verification processes and keeping up-to-date records on all clients’ backgrounds, businesses will reduce their exposure risks significantly whilst ensuring compliance with applicable laws at all times.

Implementation

While each jurisdiction has its own KYB requirements, there are four general steps that will be needed to implement an effective program.

Retrieve company vitals

It is necessary to identify and verify an accurate record of each company. This will include, initially, information regarding register number, company name, address, status and key management personnel. This will make it clear who owns the company and how it operates. While the specific information gathered will depend on the jurisdiction and its particular fraud prevention standards, systematic gathering and appropriate storing of information will be a vital first step to developing an accurate picture of each business customer.

Analyse ownership structure and percentages

Once all the necessary information about the company’s vitals has been retrieved, it is necessary to determine the entities or natural-persons who have an ownership stake, either through direct ownership or through another party. This will provide an insight into which individuals or entities own majority stakes in the business and can influence decision making within it.

Identify Ultimate Beneficial Owners (UBOs)

After analysing ownership percentages within the target organisation, it’s important to identify UBOs. It is necessary to calculate the total ownership stake, or management control, of any natural-person and determine if it crosses the threshold for UBO reporting. This will identify the individuals or entities that ultimately control or benefit from owning shares in a given organisation. These individuals or entities can then be subject to further due diligence measures if needed for compliance purposes. Doing this effectively requires research into corporate structures such as trusts and holding companies that may be used by UBOs to hide their true identity behind layers of complexity when investing in businesses around them world.

Perform AML/KYC checks on individuals

For all individuals that are determined to be a UBO, AML/KYC checks must be performed before individuals are allowed access to any services offered. These checks involve verifying identity documents, conducting background searches, and assessing financial risk profiles, among others, depending upon each individual’s circumstances. By doing this organisations can ensure that they are not inadvertently facilitating money laundering activities through their services.

Delivering KYB compliance: The costs

It’s one issue to ensure KYC compliance, it’s an altogether far greater issue to deliver compliance in a manner that is cost-effective, scalable and doesn’t unduly burden the customer. A Thomson Reuters survey of 2016 reveals escalating costs and complexities bogging financial institutions down. There is a clear indication that a very large percentage of corporate customers have not had a good KYB experience, so much so that 13% have actually switched to another financial institution as a result.

Besides the poor customer experience, the actual cost of running a comprehensive compliance program continues to rise. Amongst the 800 financial institutions in the survey, the average cost was $60 million annually, while some firms were spending up to $500 million. In the UK, a Consult Hyperion report estimates KYC compliance costs cost banks £47 million a year, with each check running to up to as much as £100.

Compliance professionals will have no option but to bear the weight of these new requirements and expectations going forward. But having said that, it’s essential to know that these regulatory strictures serve a vital function in battling fraud, eliminating money laundering, terrorist financing, bribery, corruption, market abuse, and other financial misconduct. While the fight is complex and often costly, the value is vital, both in protecting consumers and the whole financial system from being manipulated by bad actors.