Know Your Business (KYB) is more important than ever, given the rapid evolution of the financial sector and its constituent businesses.
Every startup is competing to gain customers and expand as quickly as possible. Fintech startups operate in a highly regulated environment where expanding too soon without the proper safeguards runs the risk of endangering their clients, company, or the entire financial system. New FinTech companies must understand the breadth of regulatory requirements that apply to them, including the need to get to know their clients skillfully from the beginning.
Given the frequently intricate structure of corporate entities, it can be difficult for B2B FinTech to comprehend and implement the proper onboarding checks for new customers. FinTech must ensure they only onboard businesses that comply with all applicable laws and fall within their risk appetite.
Complexity shouldn’t be a barrier to conducting thorough checks on a new customer. Strong KYB processes can help in this situation.
What is KYB?
Know Your Business, or KYB, is the process of identifying or verifying a company and the individuals connected to it, such as directors and people with significant control (PSCs). KYB evaluates the risk profile for FinTech to decide whether they want to onboard the company as a customer. Businesses use the KYB process to confirm the legitimacy and identity of their corporate or business clients. FinTech need to update customer risk profiles regularly should be after onboarding, and KYB should continue.
This process helps financial institutions reduce the risks of terrorist financing and money laundering by ensuring they deal with legitimate entities. KYB is critical to AML and CFT compliance.
Why is KYB important for FinTech?
KYB is critical for businesses because it assists in identifying potential risks related to transactions and business relationships. Financial institutions are increasingly under oversight scrutiny to implement adequate KYB techniques to prevent money laundering and terrorism financing. Businesses can protect their reputation and financial stability by using KYB to confirm that they transact with legitimate parties. In recent years, KYB has grown significantly for companies operating in high-risk sectors like FinTech, neobanking, and cryptocurrency. Regarding AML and CFT compliance, these sectors face particular difficulties. One of the most important measures they can take to decrease the risks involved in conducting business is implementing KYB.
Risks associated with not using the KYB process
The risks of not implementing a KYB process are significant. These can seriously affect businesses, especially those operating in high-risk sectors like FinTech and cryptocurrency. Lack of proper KYB implementation can lead to serious regulatory and reputational risks and financial losses from fraud and other illegal activity.
The potential for money laundering is one of the core risks of not implementing a KYB process. Businesses can serve as fronts for criminal activity, and if proper KYB safeguards aren’t in place, they might unwittingly assist illegal activity. Significant regulatory penalties, fines, and reputational harm may follow from this.
Financial losses for businesses may also result from fraud and other illegal activity. Companies might be unable to identify fraudulent activities, such as using stolen identities or forming phony companies, without the proper KYB measures. The company and its clients may suffer financial losses due to this.
Companies that don’t take the necessary precautions risk reputational harm. Businesses that don’t take adequate KYB measures could face legal repercussions. Businesses that have been accomplices in money laundering or other illegal activities may be held accountable for any harm resulting from these activities. Legal fees and significant financial losses may follow from this.
Essential KYB checks for FinTech
In most organizations, KYB, at the very least, includes KYC, customer risk assessment, and enhanced due diligence (EDD) when necessary. The operating jurisdiction and the type of business are two factors that will affect the amount of EDD that must be done.
Here are some illustrations of the fundamental KYB checks FinTech companies must conduct to guarantee regulatory compliance. FinTech might also be required to perform additional checks not included in this list.
Corporate identity confirmation
To ensure the business is legitimate and its owners are whom they claim to be, companies must confirm the identities of directors and PSCs with an impartial source. It is also necessary to check the identity documents of directors and PSCs against biometric databases.
Persons currently holding or recently held prominent political or public positions in the UK or abroad are politically exposed persons (PEPs). This also applies to PEPs’ relatives, close associates (RCAs), families, and friends. PEPs are more likely to receive bribes or corrupt funds because they hold significant decision-making positions that put them in that position. Furthermore, potential conflicts of interest are more likely to exist with them. The company must inform the regulatory authorities in its report if a director or PSC is a PEP. After weighing the risks, organizations might decide to onboard a PEP, but ongoing, enhanced due diligence and reporting are necessary.
Financial sanctions safeguard a nation’s fiscal security and integrity, and they are extremely serious offenses when violated. This is why a crucial regulatory requirement is to check company employees against potential matches on sanctions lists. Institutions compile and keep track of sanctions lists. These organizations also offer watchlists that can reduce the risk of doing business with people known to be more likely to involve in financial crime and those put on various governments’ “blocklists.”
This process, also called negative news screening, entails determining whether the business and the affiliated people have ever been implicated in controversial or blatantly illegal behavior, such as using forced labor, harming the environment, or engaging in bribery and corruption. The company, its directors, and PSCs are the subjects of this crucial check, which uses dynamic, open-source searches to protect reputation.
Fraud screening is a series of checks done on clients (both business and consumer) to find characteristics that criminal entities frequently or sporadically exhibit. These checks, for instance, will show whether the company, any of its directors, or PSCs have a history of fraud. Databases curated by organizations like Credit Industry Fraud Avoidance System (CIFAS) are used for this.
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FinTech must put controls in place with a KYB framework that is continuous and ongoing constantly to be one step ahead of these changes in risk profiles. Ultimately, KYB can only succeed if these checks are conducted promptly, transparently, and thoroughly.
For financial institutions and FinTech businesses, KYB compliance is crucial to adhere to AML and CFT regulations. Adequate KYB processes can assist companies with regulatory compliance, risk mitigation, reputation protection, financial stability, and customer experience enhancement.