The vast space provided by cyber technologies to the world has, on the one hand, offered a plethora of opportunities. However, at the same time, it has led to inevitable negative consequences that have long-term impacts on the global security structure. Security breaches, identity theft, and impersonation, as well as financial crimes like money laundering and terrorism sponsorship, are a few examples of misusing technology. Therefore, taking timely measures and putting a stringent regulatory plan in order has become the need of the hour. For this purpose, organizations conduct their clients’ identity verification through KYC and KYB. This article highlights the similarities and fundamental differences between KYB and KYC.
Know-Your-Customer: The Primary Identity Verification Process
As mentioned, fraud, identity theft, and money laundering have become commonplace due to the proliferation of digitization in every sector. Therefore, financial and non-financial institutions authenticate their clients’ identities while taking them on board. KYC, or know-your-customer, is the primary identity verification process carried out in multi-sectoral organizations. It is conducted as part of the initial registration of customers. The organizations ensure they interact with legitimate people when they intend to begin their official business-to-customer relationships.
KYC consists of a set of indispensable measures that are taken to filter out criminal entities before onboarding them. The individuals’ documents are acquired and validated. They include government-issued ID proofs, such as national ID cards, passports, and driver’s licenses. Likewise, the customers’ tax records and financial statements are collected to scrutinize their transparency or, in other cases, any possible linkages to money laundering. Organizations, specifically financial such as banks, vigilantly monitor past transactional activity given by their customers. Document verification is conducted in rigid accordance with financial regulations, such as anti-money laundering and countering terrorism funding laws. It is a prominent component of KYC and AML compliance. The following discussion sheds light on the difference between KYB and KYC, as the former is examined separately.
Know-Your-Business: Verifying Companies for AML/CFT Compliance
As the name indicates, KYB is all about authenticating business firms when they join hands with another organization, vendor, or service provider. Simply put, the KYB process is performed while initiating business partnerships, mutual agreements, or signing memorandums of understanding (MOUs), among other business-to-business alliances. It is the foremost step before entering any collaborative initiatives. The most fundamental difference between KYB and KYC is that the former entirely focuses on checking the legitimacy of corporations and firms. Contrarily, organizations perform KYC measures to verify individual customers. For example, banks take multiple firms on board and ensure that every business holds a legitimate status. Similarly, they confirm that companies are not involved in suspicious activities such as laundering illicit funds, hiding assets, off-shore accounts, or affiliation with shell corporations.
Due Diligence Checks in KYB
In the finance sector, due diligence is the analysis of every financial record before entering into a proposed transaction with another party. It is an essential element of KYB because businesses become cautious before entering B2B collaborations. They perform an in-depth calculation of the risk factors and threats associated with their ally. Enhanced due diligence is implementing the KYB checks throughout the B2B relations, also referred to as ongoing or perpetual KYB.
EDD allows businesses to stay conscious of their collaborator’s financial activities after taking it on board initially. EDD allows checking the names of partner companies and their owners in numerous international watchlists, including politically exposed persons (PEPs) and FATF’s databases of sanctioned entities. Adverse media reporting is another significant standard to ensure the security of working relationships. Businesses must verify their partners by checking if they are mentioned in news reporting negatively. This criterion lets organizations know of their business partner’s association with money laundering or financing of banned criminal networks, such as terrorist groups.
What Documents Should Your Organization Require From Your Business Partner?
As hinted above, document verification is a significant process of KYB/KYC procedures. Organizations must collect all the essential legal records and statements from another company during business verification. The ultimate beneficial owner (UBO) is the legitimate entity that owns and manages a company and benefits from its profits. The identity of UBO must be verified as a crucial step before entering B2B relationships. Likewise, the beneficial owners are the persons owning a minimum of 25% shares in an organization. Their identity verification is equally crucial as that of a UBO.
Other than that, the company’s official registration and legal proofs must be acquired and checked carefully. Every collected document should be dissected with the help of artificial intelligence-powered software and tools. For instance, a fake document checker scans them and immediately detects edited details or any other anomalies, like a false signature. Moreover, it allows organizations to identify forged or entirely fake documents produced by impersonators. AI and machine learning-backed KYB solutions prevent errors that would otherwise occur in manual processes.
Concluding Points
In all, the only significant difference between KYB and KYC lies in the type of target client, i.e., individuals in KYC and companies in KYB. Other than that, both identity verification processes are similar, as they aim to achieve AML compliance.
