Know your business: Dealing with Money Laundering Risks in the Digital Age

   05 Jul 2022, Tuesday      93       Technology
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Know your business: Dealing with Money Laundering Risks in the Digital Age

The B2B sector is increasingly vulnerable to money laundering and fraud. In 2021, 98% of B2B manufacturers, marketplaces, and retailers faced financial losses because of fraud attacks. Businesses that collaborate must know one another in order to stay safe. This includes identifying the company, verifying the information of other business partners, beneficial owners, and so on. For this purpose, globally and nationally, AML regulations like Know your Business checks have been required. Most jurisdictions have similar KYB requirements. However, for most businesses, properly implementing them is a challenge. KYB checks put a strain on their resources.


Know your business verification

KYB (Know Your Business) verification is described as a due diligence process that determines the ownership, structure, and activities of a business. This procedure enables firms to verify that their partner company is not involved in any kind of illegal activity. KYB checks are critical components of CTF (counter-terrorism financing) and AML (anti-money laundering) regulations. A regulated firm must conduct customer due diligence processes according to AML regulations when making a deal with any corporate business. This includes the following steps:

  • Obtaining information that can be used to identify the company
  • Gathering company documents
  • Recognizing the nature and goal of the proposed business relationship
  • Using a risk-based strategy to identify high-risk corporate clients
  • Performing AML screening to recognize high-risk situations when working with corporate clients
  • Monitoring ongoing business relationships with corporate clients
  • Record keeping


Know your business (KYB) vs. Know your client (KYC)

KYB and KYC are the regulations used for verifying companies or individuals and confirming that they are who they claim to be. These procedures ensure that a firm is protecting its interests while doing business with another company.

Both checks are employed to stop drug trafficking, money laundering, and other financial frauds. The key difference between them is that KYC checks are applied at the start of the verification process of a company. However, in KYB, this monitoring continues until the business partnership ends. 


Why KYB is essential

The KYB verification is important for two reasons. The first is conforming to regulations, and the second is preventing fraud. These reasons are discussed in detail below:


Regulatory compliance

KYB assists AML-regulated businesses in determining whether their suppliers, corporate customers, or partners are:

  • engaged in financial fraud.
  • posing risks for terrorist funding, corruption, and money laundering.
  • sanctioned or subject to other negative regulatory action.

The different regulatory watchdogs, like the Financial Action Task Force and European Banking Authority, have guidelines to verify and identify firms.


Fraud prevention

Businesses can find and eradicate criminals with the help of KYB. This aids in reducing the reputational and monetary risks linked to money laundering, drug trafficking, and financing of terrorism. Fraud can swiftly enter a business. A fraudster could come across information about a company that hasn't been active in several years, for instance. They change the name of that company and begin placing orders with suppliers with the intention of not paying them. Before anyone realizes what is happening, the fraudster has vanished with millions of dollars. Consequently, it's critical to pay attention to fraud indicators. These indications consist of:

  • The shipping address and the business's office location are incorrect.
  • The business does not have any notable credit history.
  • The officially displayed documents of the firm contain errors.
  • The ownership of the business has undergone a major change.


Manual and Automated KYB

The Know Your Business process is complicated and requires firms to gather, examine, and manage a large amount of data. Manually performing this task is usually time-consuming and more complex, as it necessitates:

  • establishing an in-house compliance framework with the help of compliance officers and IT professionals.
  • screenings against an infinite number of sanction lists, PEP lists, and watchlists, with no guarantee of success.

Automated workflows validate individuals and firms in real-time, ensuring a smooth onboarding process and regulatory compliance. Simultaneously, there is room for human invasion where customized solutions are required.  These hybrid methods take into account the complexities of specific firm structures as well as industry specifics.


Conclusion

Know Your Business verification ensures that a company is real or not when doing business with another company. These checks monitor a company's income so that it won’t be used for money laundering, terrorist funding, or human trafficking. The main difference between KYC and KYB is that KYC checks are established at the start of a business. But in KYB, this surveillance continues to the end of the partnership. Mostly, automated KYB is used because it is quicker, more authentic, and less expensive. On the other hand, manual KYB is time-consuming as well as fails to handle the massive amount of data.

Jonathan Smith

My name is Jonathan Smith, I am a technical content writer and a creative thinker. I love to write about Tech, Fintech, and business. I have written many blogs and articles for various Technology and other websites.


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