Know Your Business (known as KYB) refers to a financial institution's duty to verify a company’s and company owner’s identity before doing business with them. The goal of identity verification is to avoid working with any companies involved in money laundering, fraud, or other financial crimes. KYB regulations are similar to Know Your Customer (KYC) regulations, but instead ask financial institutions to verify the legitimacy of both businesses and their Ultimate Beneficial Owners (UBOs), rather than a named, single person.
In this guide to KYB, we’ll look at the history of KYB legislation – and where we’ve arrived today, who has a duty to comply, and how KYB requirements can be met.
KYB requirements are rooted in U.S. anti-money laundering laws, which have been evolving since established in 1970 via the Bank Secrecy Act, the first anti-money laundering law in the U.S. The Bank Secrecy Act set the foundation for financial institutions’ duties to help the government find and stop money laundering.
In response to a major money laundering scheme involving an international bank, Congress enacted the Annunzio-Wylie Anti-Money Laundering Act (the “Act”) in 1992, which, among other things, established customer verification and recordkeeping requirements specific to wire transfers and authorized the U.S. Treasury to require financial institutions to file suspicious activity reports (“SARs”). Over the next half dozen years, Congress and regulators passed a number of laws and rules to further strengthen U.S. anti-money laundering rules.
In 2001, in response to the 9/11 attacks, the government passed the Patriot Act, which established modern KYC compliance rules, and assists in helping businesses avoid terrorist financing.
In 2016, further Know Your Business rules were established, in part a response to the Panama Papers to make it harder for criminals to hide criminal activities in shell companies. FinCEN established the Customer Due Diligence (CDD) Rule in 2016 to identify a customer’s ultimate beneficial owner or owners and not their nominees or ‘‘straw men.” The Rule now mandates that financial institutions doing business with other businesses must verify the identity of these businesses and anyone with ultimate beneficial ownership (e.g. more than a 25% stake in the business) and at least one executive officer (CEO, CFO, managing director, etc.).
As such, foundational KYB legislation is relatively new and continued legislation has been changing the KYB landscape – even as recently as the past few years. In 2022, FinCEN established a registry requiring certain domestic and foreign corporations, limited liability companies (LLCs), and similar entities to file a report with the federal government identifying the entity’s ultimate beneficial owner, to come into effect January 2024.
The obligations to know your customer expand beyond financial institutions. For instance, the INFORM Consumers Act, passed this year, requires online e-commerce platforms to engage in identity verification of high third party businesses on their platform.
The rapid evolution of legislation can make it difficult for financial institutions to keep up with their compliance requirements.
In addition to rapidly changing legislation, there are numerous other challenges that can make KYB compliance difficult. If you choose to do KYB in house you’ll face challenges like:
If you choose to work with traditional KYB vendors, difficulties could include:
Wondering if you have to comply amid this changing legislation and challenging environment? If you’re a financial institution, the short answer is yes.
Institutions that have to comply with KYB regulations include:
There is good news, however. Know Your Business compliance can provide a competitive advantage to institutions willing to invest in business verification data. You need to know information about a business’s industry, legitimacy, revenues, and owners so you can onboard with confidence, tailor marketing to clients that matter, and retain customers’ business more easily.
If you’re a financial institution working with other businesses it’s critical to meet the CDD Rule’s mandate to verify a business, verify that business’s managers and owners, and monitor and track risk of that business over time. The first step in meeting KYB requirements is collecting data on a business, including:
Simultaneously you must collect data to help you understand the legitimacy of the business’s owners – anyone with a greater than 25% stake in the business– and one executive officer. You’re looking for:
Know Your Business – the process of confirming the identity and legitimacy of a business and its owners – has many challenges, from constantly changing legislation to the high financial and time costs of verifying businesses in-house.
Enigma KYB can help you jump-start or streamline your current identity verification or know your business process – while better understanding the businesses you’re onboarding. Enigma verifies business instantly: our state-of-the-art matching algorithm helps us match and verify more businesses, enabling 1.5x higher auto-approval rates than other leading providers.