Anti-Money Laundering regulations set out many ways that businesses (both financial and non-financial) should monitor for and protect against potential money laundering activities. Conducting checks and due diligence for new and existing customers is a vital part of this. Customers can be businesses as well as individuals, and this is where Know Your Business (KYB) regulations come in.
What is Know Your Business (KYB)
Know Your Business (KYB) refers to the due diligence review of a business that a company is dealing with. AML regulations require that checks are carried out on any potential business customer to establish its identity and authenticity. This is to help prevent money laundering or terrorist financing activities.
What is the difference between KYB and KYC?
Know Your Business (KYB) and Know Your Customer (KYC) procedures have much in common. They share the main objective of following AML regulations to make financial transactions safer and prevent money laundering activities. The difference between them is in the type of customers that a company is dealing with.
KYC regulations and procedures are appropriate when the customer or consumer is a named individual. KYB regulations have been developed additionally to deal with cases where the customer is any type of business or corporate entity. Any company offering B2B services will find itself using these KYB regulations.
KYB regulation
KYB requirements are described in national AML regulations. In Europe, this is the Anti-Money Laundering Directive (AMLD). This was first released in 1991 and has undergone several amendments, most recently with the sixth directive (6AMLD) in June 2020. Early regulations had many gaps, including with the identification of the ultimate owners of companies.
Treatment was significantly updated in the fourth and fifth directives (4AMLD and 5AMLD), released in 2017 and 2020. This followed similar KYB updates to US regulations in 2016. New regulations were introduced for establishing and making publicly available ultimate beneficial owner (UBO) information.
What are KYB procedures?
The main focus of KYB is to establish the identity and ownership of the company being dealt with. Is it a legitimate company or just a shell company? This will reveal who is benefitting from the financial activities of the business.
KYB checks should identify the ultimate owner of the company and any major shareholders. Details checked and reported should include business addresses, business licenses and registrations, and identification documents of the ultimate business owners. Businesses and individuals should be checked against sanction and Politically Exposed Persons (PEP) lists.
These KYB checks could include using the institution's own sources, government registries, publicly available sources and datasets, and information provided by the customer. Many of the KYB processes and checks these days are digital.
Initial checks when starting a new relationship are important, but so is ongoing monitoring as the relationship develops. Transactions should be monitored, just as under KYC, with unusual or high-volume transactions flagged.
