KYC/KYB Checks: Why They’re Critical for Compliance

In a world where financial crime is becoming more sophisticated, Know Your Customer (KYC) and Know Your Business (KYB) checks stand as the first line of defense—protecting institutions and preserving global financial integrity. They make up the backbone of Anti-Money Laundering (AML) and Combating the Financing of Terrorism (CFT) regulations and are practiced globally.

This is because they allow financial institutions as well as regulating bodies to identify and verify individuals (KYC) or legal entities (KYB) and properly assess the risk level they represent. Furthermore, they allow banks to stay compliant with different regional requirements, such as following sanctions lists or performing Enhanced Due Diligence (EDD).

In this article we’re going to cover a few topics surrounding KYC and KYB, including:

• Why KYC and KYB checks are important for compliance
• How KYC and KYB checks are performed
• Common issues when performing KYC/KYB
• How fintech has impacted KYC/KYB

Why KYC and KYB checks are important for compliance

Within the EU, the Anti-Money Laundering Directive (AMLD) has put a strong emphasis on transparency in finance. Specifically, it mandates that financial institutions must perform background checks whenever performing a transaction over a predefined threshold or doing business with a person or business, as well as monitor said person or business thereafter.

The same measures can be seen through different regulating bodies in different countries, such as the FCA in the UK or FinCEN in the US.

The main issues KYC and KYB checks set out to solve are anonymity and accountability. Namely, when looking at an individual, banks must ensure that they’re not dealing with a known criminal or someone against whom sanctions have been put in place, among other factors.

Likewise, they must also know whether a person needs to be monitored more closely, as is the case with Politically Exposed Persons (PEPs) or people coming from high-risk countries. This is because such individuals can present a higher risk for financial crimes such as money laundering or the financing of terrorism.

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How KYC and KYB checks are performed

While the specifics of how KYC and KYB checks are performed vary from country to country, they typically follow the same format. Namely, KYC checks require proof of identity and address, a background check, and insight into the person’s source of income.

KYB checks on the other hand typically require proof of the establishment of the business as well as the identification of beneficial owners. Furthermore, if the company in question does not hail from the country where the check is being performed, added steps are required.

And in both cases, the financial institution performing the check must assign the person or entity a risk profile and conduct the appropriate level of due diligence. Additionally, when a set amount of time has passed or specific requirements have been met, such as if the customer has updated their information or has made a suspicious transaction, the bank must reevaluate their risk profile to ensure that it’s still accurate.

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Example of the KYC process

As an example of the KYC process, let’s look at the needed documentation in Switzerland. To go through the KYC process, a person must provide proof of their identity and address. This can be done via documents such as a utility bill, a government issued ID, or a rent agreement, just to name a few.

To perform a risk assessment and due diligence, a bank in Switzerland must also have insight into the person’s source of wealth and business activities. 

Lastly, the bank must perform a series of watchlist screenings. This includes PEP checks, sanction checks, criminal database checks and in some cases, adverse media checks. Depending on the bank in question, third-party KYC lists may be used or the bank may perform the checks manually. In the case of the latter, warning lists such as the one maintained by FINMA are used to search for potential matches.

Example of the KYB process

As an example of KYB, we’ll look at the UK, since its regulation can cause a bit of confusion for non-UK companies. Namely, the KYB process in the UK requires a copy of the Certificate of Incorporation as well as access to the company’s register of People with Significant Control (PSC). The latter part may cause some confusion, as this register is typically referred to as a beneficial ownership register (or the K,A,S,T forms in Switzerland).

Additionally, if the company in question was not registered in the UK, they need to provide proof of a registered address as well as certified documents for the establishment, good standing and legal validity of the company. Lastly, they must provide access to their register of shareholders or members as well as the register of directors.

Lastly, all identified beneficial owners need to go through the KYC process to assess the risk of the legal entity. In the case that beneficial owner/s are found to be on a sanctions list and among them hold over 50% of the business, the legal entity itself will be considered as sanctioned. As with regular KYC, these checks can be performed via specialised KYC lists or by accessing public registers, such as the UK sanctions list. 

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Common issues when performing KYC/KYB

KYC and KYB checks can often present significant strain on financial institutions as they can be very complicated to implement and carry hefty non-compliance fines if implemented incorrectly.

Broadly speaking, this is due to a few factors. Firstly, there are a lot of variables at play. Namely, KYC/KYB requirements differ from one country to another. Therefore, international banks have to take extra precautions and ensure they’re following compliance laws in all of the jurisdictions they are operating in.

On a similar note, regulations can and do change over time. This means that old systems need to be updated or even replaced, in case of larger changes. And if handled manually or through legacy systems, these changes require a substantial amount of resources.

Lastly, when looking at KYB checks specifically, a potential hurdle is going to be beneficial ownership. This is because as an AML check, beneficial ownership is among the newer initiatives. Therefore, it’s not as standardised as simple identity checks.

Furthermore, accessing beneficial ownership registers can be difficult, as many countries keep them private. And even in cases where these registers are public, said registers aren’t always maintained properly. After all, beneficial ownership is fluid, especially when considering company mergers or acquisitions, so the information must be updated regularly.

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How fintech has impacted KYC/KYB

Given that KYC and KYB are difficult to implement but also essential for compliance, many different fintechs have sought out to streamline the process. In doing so, many of the difficulties that were inherent to KYC and KYB checks have been lessened or eliminated altogether.

For example, if we look at our own Atfinity software, we can see that it streamlines a few key parts of KYC and KYB checks. 

Most notably, it expedites the entire process by automating all of the required steps. For example, via integrations with reputable Identity Verification (IDV) databases such as WorldCheck and IDNow, multiple background checks can be performed in quick succession. 

So, banks won’t have to manually check whether the client is on a sanctions or Politically Exposed Person (PEP) list, saving a lot of time. In fact, the entire onboarding process is about 80% faster thanks to these automations. 

Not to mention that Atfinity can also handle the monitoring of the account, which is another key part of KYC.

And in terms of KYB, Atfinity uses its rule-based engine to automatically adjust the required documentation based on variable factors, such as their residence. Admittedly, this does require some upfront work, especially if the needed documentation isn’t already in Atfinity’s system but it’s still a lot faster than a manual process.

Furthermore, automated systems like Atfinity are surprisingly malleable. Therefore, when regulations do change, Atfinity will quickly change with them. So, there won’t be significant delays or risks of non-compliance.

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The future of KYC/KYB and fintechs

New technologies and trends in fintech have undoubtedly transformed how KYC and KYB checks are conducted. However, while notable, these changes aren’t universally accepted nor are they “in their final stage”.

Namely, we predict that certain trends in fintech will have an even greater impact on KYC and KYB processes in the near future. For one, we expect the entire process to be fully automated across the board, as adoption rates are very significant even today.

Biometrics will also likely play a much larger role when it comes to identifying and verifying customers. Currently, over 50% of people in the US would switch banks if it didn’t offer biometric logins, showcasing a clear trend of trust in this technology.

Therefore, banks looking to make their onboarding both faster and more secure will likely adopt a biometric authentication approach.

Furthermore, an aspect of KYB specifically that we see changing significantly in the near future is beneficial ownership. As it currently stands, determining beneficial owners can be inconsistent, with opaque structures and private ownership registers making it difficult to acquire valid and up-to-date information. 

However, with beneficial ownership being directly addressed in more recent AML initiatives, we predict that both on a regulation level and in terms of the technology used, this key aspect of KYB will be made more concrete in the near future.

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Conclusion

In conclusion, KYC and KYB are complicated but essential checks that financial institutions must perform to stay compliant with AML regulations. 

And while the exact details of how KYC and KYB checks are performed will differ from one country to another, emerging fintechs such as Atfinity have been able to streamline the process so that it’s both faster and at a lesser risk of non-compliance. Therefore, if you’re looking to optimise your KYC/KYB process, contact us to learn more about what makes Atfinity a perfect choice for many.

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