KYB VS KYC: UNDERSTANDING THE DIFFERENCES OF BUSINESS AND CUSTOMER VERIFICATION
Disclaimer: This article aims to explain the main differences between KYB and KYC for educational purposes only.
As you might already know, the main difference between KYB and KYC is that one term refers to businesses and the other refers to individual customers.
If that’s all there was to it, we could finish this article right now, but of course, there are a handful of other significant differences between the two that we think you should be aware of.
We’re now going to tackle all of the main points of Know Your Business (KYB) and Know Your Customer (KYC) procedures.
In this article you will learn:
- The key differences between KYB (Know Your Business) and KYC (Know Your Customer) procedures, and how to conduct them.The importance of KYB and KYC in ensuring financial security and regulatory compliance.
- Challenges such as balancing compliance with customer experience and adapting to changing regulations.
What is KYB (Know Your Business)?
KYB, also known as “Know Your Business” is a critical step in the AML compliance process and is an extension of the Know Your Customer (KYC) process. Know Your Business (KYB) is a verification standard that confirms the legal status of a company and its compliance with Anti-Money Laundering and other regulations.
At its core, KYB involves a thorough examination of a business’s legal status, operational history, and the identities of its key stakeholders.
This process is designed to ensure that companies are not unwittingly entering into relationships with entities involved in unethical or illegal activities.
By verifying the authenticity of the businesses they deal with, companies can safeguard their operations, reputation, and other financial institutions’ interests.
KEY FEATURES OF KYB
Know Your Business (KYB) procedures often include several essential elements, such as:
Business Registration Verification: Confirming that the entity is officially registered and recognized by relevant authorities.
Ownership Structure Analysis: Understanding who owns and controls the business, including the identification of beneficial owners holding significant control or influence over the company.
Financial Health Assessment: Evaluating the financial stability of the business to identify potential risks related to insolvency or financial distress.
Compliance Checks: Ensuring that the business adheres to local and international regulatory requirements, including anti-money laundering (AML) and counter-terrorist financing (CTF) regulations.
Reputation Evaluation: Investigating the business’s history, including any past legal disputes, sanctions, or negative media coverage that could indicate risky or unethical behavior.
IMPORTANCE OF KYB
In the modern global economy, businesses engage with a wide array of international partners, vendors, and clients daily, and while this interconnectedness is beneficial, it also exposes companies to increased risks of fraud, financial crime, and regulatory penalties.
Implementing thorough KYB processes helps mitigate these risks by providing a clear understanding of who businesses are dealing with, ensuring compliance with legal obligations, and fostering trust in commercial relationships.
Moreover, advancements in digital technology and the rise of fintech solutions have streamlined the KYB process, making it faster and easier for companies to conduct these necessary business verifications.
As regulatory environments continue to evolve and the emphasis on corporate transparency and accountability grows, KYB remains a fundamental practice for secure and ethical business operations.
What is KYC (Know Your Customer)?
KYC, also known as “Know Your Customer” is a procedure in the financial industry that protects businesses from fraud, corruption, and financial crime when transacting with a client. KYC is a legal requirement necessary to comply with Anti-Money Laundering (AML) laws and other business regulations.
KEY FEATURES OF KYC
Know Your Customer (KYC) procedures typically involve three main steps:
Customer Identification Program (CIP):
This initial step requires the collection of basic personal information from customers, such as their name, address, date of birth, and identification number (e.g., Social Security number in the United States).
The aim is to establish the customer’s identity with reasonable certainty.
Customer Due Diligence (CDD):
Following identification, institutions perform due diligence to assess the risk a customer may pose.
This involves evaluating the nature of the customer’s activities to predict with whom they are doing business and the potential risks involved, including money laundering and terrorist financing.
Enhanced Due Diligence (EDD):
For higher-risk customers, a more detailed analysis is conducted. EDD involves deeper investigation into a customer’s background, monitoring of transactions, and understanding the sources of funds to mitigate associated risks effectively.
IMPORTANCE OF KYC
For businesses, KYC is crucial, as it serves as the first line of defense against illegal financial activities.
By ensuring that customers are who they claim to be, institutions can protect themselves and their other customers from fraud and illegal financial transactions.
Additionally, KYC compliance helps maintain the integrity of the financial system by deterring criminals from using it for illicit purposes.
ISSUES WITH KYC
While Know Your Customer (KYC) processes are indeed essential for security and compliance, they also present challenges, particularly in terms of operational efficiency and customer experience.
Unfortunately, the need for extensive documentation and verification can lead to longer onboarding times, which sometimes deters customers.
However, advancements in technology, such as digital identity verification, biometrics, and artificial intelligence, are helping to streamline KYC processes, making them quicker and less intrusive.
KYC and KYB Purposes
While both KYB and KYC processes share the common goal of ensuring the legitimacy of all financial statements, transactions, and business relationships, they each have distinct purposes and importance within the broader context of financial security and regulatory compliance.
PURPOSE OF KYB
KYB checks focus on the verification of business entities and their beneficial owners. The main purposes of KYB include:
Verifying the Legitimacy of Business Entities: KYB processes ensure that businesses are legally registered and operational, reducing the risk of engaging with shell companies or entities involved in illegal activities.
Understanding Business Relationships: By identifying the ultimate beneficial owners and understanding the nature of a business’s activities, institutions can assess the risk of potential business relationships and ensure compliance with regulatory requirements.
Preventing Business-Related Financial Crimes: KYB helps in detecting and preventing financial crimes that may be perpetrated through business entities, including money laundering, fraud, and tax evasion.
Compliance and Due Diligence: KYB is essential for meeting regulatory obligations related to AML and CTF, helping institutions avoid penalties and reputational damage by ensuring they do not inadvertently facilitate illegal activities.
PURPOSE OF KYC
KYC is primarily focused on individual customers of financial institutions and other regulated businesses. The main purposes of KYC include:
Preventing Identity Theft and Fraud: By verifying the identities of their customers, institutions can prevent unauthorized access and fraudulent activities, protecting both the customer’s assets and the institution’s integrity.
Combating Money Laundering: KYC processes help detect and prevent money laundering and attempt to introduce illicit funds into the financial system, thereby playing a crucial role in global efforts against money laundering and the financing of terrorism.
Ensuring Compliance with Regulatory Requirements: KYC is a legal requirement in many jurisdictions, helping institutions comply with anti-money laundering (AML) and counter-terrorism financing (CTF) laws and regulations.
Risk Management: Through the assessment of customer risk profiles, institutions can manage their risk more effectively, tailoring their monitoring and control systems to the level of risk associated with each customer.
KYB and KYC Procedures and Processes
Now that we are quite familiar with what Know Your Business (KYB) and Know Your Customer (KYC) are designed for, let’s now take a closer look at the processes and procedures of each.
KYB PROCEDURES
Although KYB services can slightly vary depending on the service you’re offering and the industry you are in, the process tends to be pretty similar in general.
To give you an exact idea of how a KYB procedure works, here’s an example of how CryptoProcessing conducts KYB for a new business client:
Verification of Documentation:
In order to begin the process of verification, all required documentation should be sent in one batch in high-quality PDF format.
If the documents need to be translated, the translation should be dated, signed, and certified by an independent person of proven competence, confirming the documents to be faithful translations of the original documents.
After the required documentation from the prospective client is obtained, the main part of the verification process begins. It includes identifying the purpose of business relationships, understanding the business model and organizational structure of the client, verifying the identity of the client’s representatives, conducting sanction screening, etc.
Video Call:
As part of the KYB procedure, CryptoProcessing.com may conduct a brief 2-3 minute video interview with the Ultimate Beneficial Owner (UBO) or Director of Operations.
Determining the risk profile of the client
Risk assessment involves evaluating and calculating various factors associated with a customer or client to determine the level of risk they pose to the business. By analyzing these factors, businesses can identify potential risks related to money laundering, terrorist financing, fraud, or other illicit activities.
Risk calculation involves quantifying the level of risk identified during the assessment process. This typically involves assigning a risk rating or score to the customer based on the assessed risk factors.
Agreement Signature
Once the due diligence checks have been completed, an agreement is sent to the applicant for review and signature.
KYC PROCEDURES
Following are the steps through which KYC verification is typically carried out.
Customer identity verification:
Identification information needs to be acquired, including names, addresses, birth dates, and identity documents. For this, you can present a passport, driver’s license, or other form of official picture identification.
Following the validation of the ID documents, the photographs and other details submitted by the concerned party are contrasted with the authentic documents.
AML screening:
This entails running the individual’s name through a number of databases that house PEPs (Politically Exposed Persons) and sanctioned individuals. Those who hold or have held positions of considerable, influential power are listed as PEPs.
It sometimes entails looking into any unfavorable media coverage, or media stories that have cast the person in a bad light, as that may point to some sort of previous misconduct, such as financial crime or other illegal action.
AML questions:
People are given a number of questions about their financial habits and background in this step.
These questions are used to determine whether or not the individual is involved in any illicit financial activity, such as money laundering.
Risk assessment:
Choosing whether or not to do business with a customer is the ultimate step in this process.
High-risk customers are more likely to be involved in any illicit activity, including money laundering or fraud.
For individuals, this phase is typically simple and automated as it is not as complicated as it is for organizations.
KYB and KYC Regulation and Compliance
The origins of KYB (Know Your Business) and KYC (Know Your Customer) regulations can actually be traced back to the efforts to combat money laundering that intensified in the late 20th century.
The pivotal moment came with the establishment of the Financial Action Task Force (FATF) in 1989 by the G7 countries.
The FATF was created in response to growing concerns about money laundering and its impact on the global financial system.
Its mission was to set international standards for preventing financial crimes and to promote the effective implementation of legal, regulatory, and operational measures for combating money laundering, terrorist financing, and other related threats to the integrity of the international financial system.
The Challenges of KYB and KYC
While KYB and KYC are necessary parts of a well-oiled financial partnership, they do present a couple of challenges that can sometimes slow things down.
BALANCING COMPLIANCE AND CUSTOMER EXPERIENCE
One of the most pressing challenges is striking the right balance between rigorous compliance requirements and providing a smooth, user-friendly customer experience.
Since KYC and KYB compliance checks require customers and businesses to submit a wide range of documents and undergo detailed background checks, this can be time-consuming and invasive.
This rigorous process can lead to longer onboarding times, potentially frustrating customers and business partners.
ADAPTING TO CHANGING REGULATIONS
Keeping up with changing regulations requires significant resources and ongoing efforts from businesses.
They must continuously update their compliance programs, train staff, and implement new technologies to meet the latest standards.
This constant state of flux can be particularly challenging for smaller institutions and businesses with limited resources.
Conclusion
Both KYB (Know Your Business) and KYC (Know Your Customer) are crucial to ensuring security for your business and customers, and although they may seem like a hassle sometimes, they are usually completed in a short amount of time.
When beginning a new partnership, knowing that your partner is KYB or KYC certified is a peace of mind worth having.
