Know Your Business or KYB due diligence is essential when onboarding and monitoring corporate customers and suppliers as part of compliance and risk management. The onboarding program and ongoing risk reviews include a number of KYB checks that form part of an anti-money laundering (AML) and counter-financing of terrorism (CFT) program.
Business onboarding processes help organizations meet regulatory requirements, AML compliance standards, and ensure business verification takes place to stop financial crime and build trust with third parties.
Regulated organizations are required to perform stringent due diligence on corporate customers and suppliers. This includes identifying who actually owns or controls the entity and who profits from its operations. Understanding the ownership structure of a counterparty enables organizations to make risk-based decisions about who they work with.
Managing corporate onboarding can be complicated and time-consuming. Due to the risks associated with money laundering, bribery and corruption, and counter-terrorist financing, many different checks and sources of data are needed to uncover an accurate picture of ownership and risk. Each organization will have its own risk appetite and will be subject to different laws and regulations based on the jurisdiction it operates in. This makes KYB nuanced, and the approach to due diligence and risk monitoring needs to be reliable, yet flexible and adaptable.
Digital compliance solutions can help resolve some of these challenges, providing access to KYB data, automating compliance workflows aligned with different regulations, and highlighting high-risk cases.
UBO stands for ultimate beneficial owner. It defines the legal entity or individual an organization will be doing business with. Identifying UBOs is a cornerstone of KYB and is essential to establishing the source of funds, what financial transactions are going where, and who is profiting from an organization.
KYB due diligence involves identity verification to help establish legitimacy and who owns/controls a business, i.e., who its UBOs are. Often there is more than one UBO in a business, which multiplies the complexity of KYB and the tasks to be undertaken during due diligence. Each UBO needs to be screened to establish whether they are a politically exposed person (PEP), sanctioned, or have been associated with negative news, and so on. This risk assessment establishes an essential risk profile that forms the basis for onboarding/off-boarding decision-making.
Working with corporate customers and third-party suppliers is more complicated than dealing with individuals. There is more investigation needed to uncover UBOs – including legitimate ones – and thoroughly vet them and the business entity.
KYB is an integral part of third-party risk management and a moral obligation. Failing to perform KYB can land an organization in legal hot water, but it can also lead to the perpetration of crimes like modern slavery and drug trafficking.
Changes to AML/CFT regulations, sanctions regimes, PEPs lists, and more mean finding ways to automate onboarding and adapt risk monitoring in an agile and scalable way are important to businesses. Digital transformation means organizations don't have to rely on manual effort to perform data checks and conduct screening. It removes reliance on shared databases to identify corporate ownership structures and match UBOs to a company. Automation, for example, can ensure unified access to real-time watchlists, government-issued business registries, as well as other leading datasets. When new regulations are introduced or renewed checks are needed on a corporate customer or third-party supplier, this is easier to implement and manage using a digital solution.
The reality for organizations that need to carry out KYB at pace and scale in a global, digital world is that automated compliance solutions are the only sensible option.
Compliance professionals help identify outliers, assess discrepancies, check bank records, and review other assets in a portfolio. The compliance professional cannot be replaced when it comes to the "sniff test" – i.e., does this organization feel right? An automated, AI-led solution can acquire and present KYB data quickly, but human analysis helps interpret that picture of risk.
Regulatory technology or regtech can untangle the complexity of UBO data and corporate ownership, perform KYB data checks and prompt workflows, then it can bring compliance people into the process to help make risk-based decisions. An automated KYB process will make use of global datasets and populate new records for corporate accounts. This saves the compliance professional valuable time and helps them create a reliable picture of risk related to corporate structures.
KYB is a vital part of risk management and of combating financial crime. The intensity of due diligence in corporate onboarding and risk monitoring relates to the complexity of corporate structures, access to data, the global nature of businesses and regulation, and the pace of change. A robust KYB process, supported by automation, and controlled by professionals, is a useful way to unpick this knotty compliance challenge.
If you are onboarding or monitoring corporate customers and screening suppliers, please get in touch with the Moody’s team. We would love to hear from you.