The Know Your Customer (KYC) and Know Your Business (KYB) processes are quite similar to one another. The main distinction between them is that the Know Your Business process puts businesses and suppliers first before turning its attention to consumers or clients. Any financial institution that handles money transactions is required to verify the organizations it does business with, similar to how it conducts checks on its customers. This ensures that the financial institution or company in question is safe from danger on both the supply and demand sides of matters.
What is Know Your Customer (KYC)?
Institutions that provide financial services must follow a control system known as “Know Your Customer” (KYC) or “Know Your Client” to detect and minimize risks. The danger of money laundering, terrorist funding, corruption, fraud, bribery, and other unlawful financial activities can significantly be reduced thanks to this method of keeping checks. The control procedures used in the know your customer due diligence method help to ensure that the company has sufficient enough knowledge about the customer and is able to assess their risk level to the company before they open an account with them.
All financial service providers, including banks, payment processors, lenders, investment firms, remittance firms, cryptocurrency exchanges, and insurance organizations, are subject to KYC Know Your Customer rules. To reduce risks from organized crime, regulators require at-risk firms to adopt a risk-based strategy when it comes to dealing with clients. Using KYC norms, financial institutions are able to identify potential hazards with the control measures they use before creating a new client account. By confirming the customer’s identity, the Know Your Client check, which is the initial step in anti-money laundering procedures, also reduces possible dangers.
What is Know Your Business (KYB)?
Before conducting business with another company, businesses must safeguard their own interests, which is where the Know Your Business (KYB) process comes in. It serves as part of their Anti-Money Laundering (AML) compliance program. Companies need to know if their revenue is being misappropriated by dishonest shareholders, business owners, and money launderers. Both the corporate information and the personal information of the senior management in charge of the company’s activities are verified using Know Your Business (KYB). Hence, the Know Your Business procedure aids companies in preventing themselves from unknowingly dealing with shell companies or companies with shady motives.
The businesses gather documentation from reputable sources and check all related documents in order to satisfy Know Your Business (KYB) requirements. The documents must pertain to important company documents like the accounts and business register and the identities of all individuals holding Ultimate Beneficial Ownership (UBO) and shareholders who own 25% or more of the company’s shares. After confirming their identities, businesses continuously monitor the relevant institutions’ activity to ensure their partners’ risk profiles do not cross into red flag territory. The Know Your Business (KYB) procedure ultimately guards companies against being unintentionally exploited for money laundering or terrorist operations.
Taking it one step further: What is Know Your Customer’s Customer (KYCC)?
KYCC can be considered as one level above the KYC process. It is a method that is used as part of the due diligence process to figure out every aspect of the customer. The identification method is centered around determining the degree of risk involved and examining customer-related behaviors that include the behavior of clients with their own clients. KYCC process monitors their transaction processing methods, products they invest in, projects worked on, and other activities to determine the nature of the client company in depth.
KYCC simply helps identify any risks stemming from second-tier business activities that the client company may be undertaking to conceal their fraudulent intent. Hence, it helps companies determine if their clients really are as genuine as they show or are working with them based on any hidden agendas.
One crucial outcome of deploying KYCC procedures is to determine who benefits the most from the customers’ actions. This information is crucial for managing risk in any financial organization and guarding against the infiltration of illegal money. Each involved party could be the origin or final destination of shady funds, whether it’s a different organization, an owner, a partner, a client, a supplier, or another connection. To achieve the best risk profiling results, companies must use the same processes that they use to know their customers on their customer’s complete network of contacts.
Is it compulsory to act in accordance with KYC and KYB norms?
Companies need to comply with different Know Your Business (KYB), Know Your Customer (KYC), and AML rules and regulations depending on which country they are operating in. Depending on the individual business model and regional presence, here are some important regulations to keep in mind:
- The Patriot Act of 2001 and the Customer Due Diligence (CDD) Final Rule in the United States of America
- The Money Laundering Directive (5th AMLD) in the European Union
- The Money Laundering Regulations 2017 in the United Kingdom
- The FINTRAC regulations in Canada
- The AUSTRAC regulations in Australia
All companies must always keep themselves on top of any changes made to these rules and regulations and how they might affect their AML programs. They must make sure that all of their processes are up-to-date depending on their area of operations.
Important details used in KYC, KYB, and KYCC processes
Now that you know the importance of these processes, how should you go about conducting them? Here are a few of the details that must be cross-checked against various lists and sanctions when dealing with a new client company or individual-
- The first name and last name of all senior management and majority stakeholders
- Their date of birth
- Phone numbers and email addresses
- Area of operation
- Their Social Security number or any other identification number such as a driver’s license number
- Their current credit status and tax compliance
Conclusion
Know Your Customer, Know Your Business, and Know Your Customer’s Customer norms are all quite similar- they help financial institutions or businesses to understand their clients and their motives. In doing so, they are effectively able to determine if the client poses any risk to them and proceed to associate with them or not based on that evaluation. Know Your Business (KYB), KYC and KYCC norms may differ form country to country, but the general consensus is that all businesses must deploy these messages to protect themselves from being unintentionally exploited by fraudulent or shady entities.
