Know Your Customer (KYC) means exactly what it says on the tin, to know your customer. The same goes for Know Your Business (KYB). However, the process of “knowing” can be quite complex and cumbersome when it comes to managing information from different sources and discerning the credibility and completeness of information relating to the customer or the business.
What makes KYC important?
KYC checks ensure that the risks behind onboarding a customer are known by identifying whether or not that customer was involved with money laundering, fraud or terrorist financing. This becomes particularly important when onboarding a Politically Exposed Person (PEP) i.e. someone holding public office who could be targeted for bribery or corruption, sanctioned individuals and other high profile customers.
Why KYB is required
Regulated companies do not only engage with human beings but legal persons as well, which includes business where this “knowing” process is more complex.
KYC was initially introduced in 2001 with the advent of the US Patriot Act which addressed and facilitated the detection and prevention of terrorist financing activities in the country. However, it may not have fully mapped out the abilities of a legal person, also known as business entities.
While the Patriot Act may have included Anti-Money Laundering (AML) and Countering the Financing of Terrorism (CFT) checks on customers, it did not apply the same level of checks to businesses which led to bigger modern day scandals like the Panama Papers exposing how large companies enabled greed, treachery and corruption. More recently, the HSBC scandal, more extensively documented in the book “Too Big To Jail” by Chris Blackhurst, shows how regulated institutions such as banks can also be involved in noncompliance and money laundering practices.
These events made the importance of KYB clearer to the relevant authorities and they realized that more information is required to help compliance officers verify the legal existence of a business and assess the risks associated with the company, its industry, and country of origin. Not a lot of information regarding a business is readily available in the public domain, so new measures were needed because the Patriot Act was failing to address it. This is where cutting-edge technology like the Gatenox Hub can help because while it is very easy to check a business is registered, it is harder to determine their legitimacy.
How easy is it to open a business under the current regulations?
It costs £12 to open and set up a private limited Company in the UK with the whole process taking 24 hours. While the setting up of a business is fairly easy, identifying later on, whether or not they have ended up on a sanctions list or a Suspicious Activity Report (SARS report) is difficult. In order to be compliant, it is important for regulated organizations such as the below
- Commodities brokers
- Mutual funds
- Securities brokers or dealers
- Commodities brokers
- Futures commission merchants
- Crypto businesses
- Fiat on-ramp companies (read more on https://gatenox.com/why-fiat-on-ramp-companies-need-kyb-and-aml/)
- Other financial institutions
to do KYB in order to determine if their clients (the businesses) are legitimate or simply shell companies.
The importance of KYB
To cover for the loophole in the Patriot Act, KYB requirements were introduced by the Financial Crimes Enforcement Network (FinCEN) in the Final Rule of Customer Due Diligence. Other global regulators like the EU undertook similar measures with the 5th Anti-Money Laundering Directive. These requirements were implemented as the world began to realize that unlike KYC, KYB needs a separate layer of security which screens both the business and the ultimate beneficial owner of that business.
Proper application of KYB has the potential to exclude shell companies from being the customers of regulated industries and reduces the risk of financial institutions being exploited by these fake businesses.
Whilst KYC checks are easier to carry out, it’s important to understand that KYB checks can take compliance teams months to carry out. Therefore, it is imperative that a rigorous screening framework is in place to vet these entities, otherwise it can lead to major scandals like the Panama papers.
Why is identifying the Ultimate Beneficial Owner (UBO) so important?
Ultimate Beneficial Owner (UBO) is defined as the natural person ultimately benefiting from the business’ activities and on behalf of whom all business transactions are made.
Identifying UBOs is an important aspect of KYB as this factor determines the connection between the funds presented and the person who is ultimately benefiting from the movement of those funds. Proper KYB measures will be able to immediately spot suspicious activity and label the business as suspect, criminal or high-risk legal person. UBOs may also be subjected to sanctions or be related to illicit activities in jurisdictions which have more relaxed AML laws. Proper KYB therefore ensures that such offshore shell companies with noncompliant UBOs are not onboarded by the regulated industry.
What does Gatenox provide?
The Gatenox Hub simplifies the KYC and KYB process for regulated entities, customers and business by streamlining the data collection and analysis process. Core competencies include:
- Due diligence – as was introduced by the CDD Final Rule, due diligence is an essential part of KYB.
- Blockchain analytics – if your clients are exposed to cryptocurrency then Gatenox can verify wallet ownership as well as provide extensive on-chain analytical risk-reporting.
- Sanctions screening – Gatenox goes through all sanctions lists from over 220 jurisdictions.
- PEP screening – Gatenox helps monitor the political status of a director or UBO in a business and how much they are exposed to political corruption and money laundering.
- Adverse media monitoring – Gatenox helps monitor media for any negative information in relation to the businesses you are screening.
- Document AI – de-code, verify, ask questions and create summaries of submitted documents in other languages to English without the need for human translation.
What does Gatenox determine when conducting KYB?
In order to effectively corroborate beneficial ownership, KYB regulations require information such as company address, registration documents, licensing documentation and identities of directors and owners. A layer of KYC is done as part of the KYB process before a business can be considered legitimate and good to deal with. The most cumbersome part about KYB is that it is an ongoing check and needs to be conducted regularly in order to ensure that the business that was once good is still good and did not end up on a SARS report. To mitigate this problem, the Gatenox Hub offers regular screening through automated KYB solutions necessary to carry out thorough KYB checks.
Gatenox Hub for Web3
For the growing world of cryptocurrency, Gatenox provides enhanced security measures such as the Web3 native risk assessment which runs blockchain analytics for customer wallet verification and transaction monitoring.
Customer wallet verification enables users to know whether or not the wallet is the customer’s own and can be traced back to their details and funds. In addition to this, a risk-based scoring is done for each wallet associated with a business based on their entire transaction or interaction history. Customer wallet verification is as important as transaction monitoring because it helps with immediately spotting suspicious activity on their wallets to be able to report to relevant bodies.
Gatenox also appreciates that some compliance concerns relating to customers and businesses can be solved by asking the right follow-up questions. Therefore, Gatenox offers a direct customer communications tool which facilitates communication between the regulated organization and the business or customer. Gatenox’s audit trail feature shows all the changes made to the business or customer’s data record, making it easy to check the history.
Offering a seamless user experience
Gatenox understands that a cumbersome amount of data and document requests can discourage onboarding of customers or businesses. With machine learning tools and smart technology, Gatenox developed 1-click onboarding for subsequent submissions to other companies and an onboarding wizard which helps pre-fill publicly available company information for first-time submissions.
Through Gatenox’s extensive database integrations, the onboarding wizard is able to pre-fill approximately 75% of the information that regulated companies need from their clients. This decreases customer onboarding drop-off rates while increasing customer onboarding satisfaction. All the information collected is safe and compliant with the General Data Protection Regulation (GDPR), Service Organisation Control Type 2 (SOC2), and ISO27001.