Each year, between $800 billion and $2 trillion is laundered, which reflects the severity of the issue. And the United States makes up a whopping 15-38% of that amount.

Institutions everywhere have implemented AML compliance policies and procedures to prevent money laundering and other forms of fraud via the financial ecosystem.

How exactly do businesses stop these questionable financial activities?

Know Your Customer (KYC) and Know Your Business (KYB) are two types of AML checks. Let’s talk about what KYC and KYB are, how they differ, and why they are each so important for maintaining the sanctity and security of the financial framework.

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Definitions and Overview

KYC (Know Your Customer)

KYC is a strategy that financial institutions and other companies use to verify the identities of individuals (private persons) who are their potential customers, and really get to “know” them. This thorough procedure is useful for making sure that all the money in circulation is 100% legitimate. It aids in avoiding theft, fraud, and other crimes of a similar nature.

KYC verification is vital for businesses and their clients. The primary objectives of the procedure are to

• Keep criminals from exploiting the financial system and damaging the economy.
• Always ask for proper identification from all your new customers as required by law.
• Figure out how much risk each client represents and whether or not they could hurt a business if taken on as a client.
• Boost the credibility of individual businesses as well as the financial system as a whole.

Individuals who want to utilize the services offered by banks and other institutions are required to show various forms of identification to prove that they are who they say they are. Furthermore, they’re asked questions that could help determine the likelihood of them committing fraud. In the sections that follow, we will explore in further detail how a KYC check is carried out.

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KYB (Know Your Business)

KYB is a process that organizations such as banks, crypto trading platforms, and other financial institutions use to verify all relevant information collected from businesses that want to be taken on as their clients, i.e., corporate customers. It is vital for the prevention of money laundering, fraud, terrorism financing, and other crimes, particularly those involving hiding or transferring money illegally.

The primary objectives of KYB verification are to

• Protect the financial system and the economy from criminal activities.
• Comply with local and international laws and regulations that require customer identification.
• Assess the risk level and suitability of each business for different financial products and services.
• Maintain a positive and trustworthy reputation for the financial institutions.

Companies often ask for specific documents like incorporation documents, tax records, financial statements, or other annual reports to ensure that the businesses that want to employ their services are who they claim to be. They also check who owns these businesses and monitor their money movements. If they spot anything fishy, like potential money laundering or fraud, they are obligated to immediately report it to the authorities.

KYB, like KYC, plays a pivotal role in ensuring the legitimacy of money within the financial system. KYB also fosters stronger relationships between businesses and their customers by enhancing the mutual understanding of needs and preferences.

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1. Purpose and Applications

KYC

KYC is crucial in the war against financial crime. By implementing robust KYC practices, organizations can

• Check customers’ identities: This includes requesting basic personal data, including name, photograph, place of residence, date of birth, and copies of relevant identification, and comparing them with legit sources that can verify the same.
• Evaluate the potential for crime: This requires learning about the client’s line of work and tolerance for risk.
• Keep a check on customers’ actions: This entails closely observing financial dealings and flagging any unusual behavior.
• Maintain documents: Organizations must maintain all necessary or legally required records of their KYC checks and other customer data.

Verifying its customers’ identities is one way businesses prevent money launderers and fraudsters from using their services. KYC can also help identify suspicious activities and help nip them in the bud. It is applied in a variety of scenarios, including

• Opening a bank account
• Applying for a loan
• Making a large or suspicious transaction
• Starting a business
• Buying property

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KYB

Keeping the financial system free of criminals is a top priority of all the entities that are a part of it, and KYB is crucial to that effort. Verifying a company’s legitimacy helps reduce the likelihood that criminals would use a phony or illegal enterprise to launder money or commit fraud. Additionally, KYB can assist in the detection of suspicious behavior and the prevention of financial crimes on a large scale.

The purpose of KYB is to

• Check the legitimacy of companies: Acquiring and checking documents like registration certificates, tax identification documents, and financial reports falls under this category.
• Learn who the UBOs (Ultimate Business Owners) are: It’s important to investigate the identities and risk profiles of a company’s beneficial owners and controlling shareholders.
• Calculate the potential for financial crime: The organization needs to gain familiarity with the companies’ day-to-day operations, financial dealings, and typical clientele.
• Keep an eye on business dealings: This involves monitoring financial dealings and looking for suspect activity by the company in question.
• Maintain proper records: Organizations should maintain records of their KYC processes and relevant business data.

KYB is applied in a variety of scenarios, such as

• A business applying to open an account, e.g., for Binance, Revolut, Wise, or any other bank or platform
• Onboarding customers, partners, investors, suppliers, or vendors in any part of the world
• Companies going public
• Dealing with a high-risk business, such as one located in a high-risk jurisdiction, i.e., a country or state with lenient anti money laundering regulations; operating in a high-risk industry, such as a cryptocurrency provider or NGO; or having a complex ownership structure, such as one involving a politically exposed person (PEP) or a sanctioned person.

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2. Procedures and Processes

KYC

Following are the steps through which KYC verification is typically carried out.

1. Customer identity verification: Identifying details such as names, addresses, dates of birth, and proofs of identity must be gathered. A passport, driver’s license, or other kind of government-issued photo identification is acceptable. The ID documents are validated, and the photos and other information provided by the individual in question are then compared against the verified documents.
2. AML screening: This involves searching the person’s name through various databases containing PEPs and people under sanctions. PEP listings include people currently or formerly in positions of significant, influential authority. It also includes investigating any adverse media coverage, i.e., media reports that have mentioned the individual in a negative light, because that could indicate some kind of past wrongdoing, such as financial crime or other illicit activity.
3. AML questions: In this step, individuals are asked a series of questions concerning the person’s financial history and habits. These inquiries are used to gauge the person’s potential involvement in illegal financial activities, including money laundering.
4. Risk assessment: This final step is about making a judgment on whether or not the customer is worth giving business to. Customers who are high risk are more likely to be engaged in any illegal activity such as fraud or money laundering. This step is usually straightforward and automated for individuals, not as complex as it is for businesses.

The individual’s circumstances may change if, for example, their passport expires or maybe they make a substantially unusual financial transaction. Thus, in certain situations, KYC verification may need an additional step, i.e., monitoring. Again, it’s not commonly seen in KYC, but here are three broad examples of cases where monitoring may be necessary.

• The individual is involved in high-risk activities, such as gambling or commodities trading.
• The individual is associated with a high-risk entity, such as a foreign government or an organization of questionable reputation.
• The individual is a PEP or RCA, or on a sanctions list.

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KYB

Now, let’s go over how the KYB process works.

• Business registration verification: Is the business registered, i.e., is it legit? Does it have all the necessary licenses or permits it needs to operate?
• Shareholder structure and UBO (Ultimate Beneficial Owner) identification: It’s also imperative to find out who the business owner is. Ultimate beneficial owners are the people who directly or indirectly own a significant chunk of the business or make important decisions in its operation.
• Business risk assessment: This includes figuring out how likely it is for the business to commit financial crime. This evaluation takes into account factors such as the type of business it is, what it does, where it’s located, what its financial health looks like, and its relationships with its customers.
• Ongoing monitoring: It’s important to regularly check in on every business to see if anything has changed that might alter the level of risk it poses to you. A company may need a fresh evaluation if its ownership structure changes, for example, or a KYB revisit if it begins to dip its toes into some new controversial activities.

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3. Regulatory Framework

The regulatory requirements and implementation rules for KYC vs KYB can differ in various ways.

KYC regulations, for example, tend to be more straightforward because they have been in place for a longer time and thus refined over the years. KYC regulations in many countries list all the acceptable and unacceptable practices, down to the type of software to be used in the process. The ID check industry itself is very developed, with set standards defining how the process should be carried out.

For example, in the EU, companies are required to have some form of video recording of the process; solely static passport scans are not sufficient. In some parts of the EU, e.g., Germany, KYC can only be performed with video interview verification. Other countries only allow businesses to hire a locally registered KYC provider.

KYB regulations, on the other hand, are not as well-defined, causing quite a bit of apprehension and vast differences between the processes followed by businesses and KYB providers. The development of a standard is still underway. The regulations vaguely outline the basic steps and instructions, such as

• Determining who the actual owners are
• Checking for sanctions
• Ensuring the use of at least two sources of reliable data
• Assessing the risk according to one’s risk appetite

However, there is no specific order for doing things or a given template that organizations could easily follow.

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For both KYB and KYC checks, the job of regulators and compliance teams is to make sure that businesses follow the rules to put a stop to money laundering and other financial crimes. Regulators can check for compliance by performing audits or inspections, but businesses are responsible for putting in place and keeping up with proper KYC and KYB procedures.

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4. Challenges and Solutions

KYC

Following are some challenges faced in the implementation of KYC, and possible solutions for these challenges.

• Identity theft: Taking on someone else’s identity in order to commit fraud or other crime. Identity theft can be difficult to spot and expensive for businesses to rectify.
  The solution: Digital ID verification – this can be used to quickly confirm the legitimacy of identity documents like passports and licenses, and that too without exhausting too many resources on fraud prevention.‍
• False documentation: The usage of forged or doctored identification documents.
  The solution: Biometric authentication – biometric systems often come with anti-spoofing filters built into them. They can also match data more accurately than a human agent possibly could.

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KYB

Here are some difficulties organizations face when performing KYB checks, along with potential solutions.

• Lack of standardization: No clear or universal way of conducting KYB verification or measuring its effectiveness exists.
  The solution: Using a KYB platform that can guide you along your journey by providing you with a template of sorts.
• Complexity: KYB compliance checks generally require the use of multiple tools and sources, such as commercial or government registries, AML checks, and KYC checks, to get a complete business picture. For example, we at Vespia have seen customers struggling with using 5-10 different solutions when they first reach out to us.
  The solution: Using KYB services that provide a holistic solution covering all aspects of the KYB process (such as one that grants you access to thousands of essential databases worldwide from within a single platform) and are also willing to modify their offering such that it covers those elements that might be absent in your current process.
• Risk assessment: KYB involves analyzing the risk level of each unique business based on a host of factors and criteria, which can be subjective and time-consuming, making decisions slow and inaccurate.
  The solution: Digital platforms simplify and streamline the KYB process, consequently lowering error rates and getting to decisions more quickly using advanced algorithms and AI.

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5. Pricing

KYC

When running checks on individuals, there is rarely any need to employ manual complex, extensive mechanisms. Using 1-2 verification solutions generally suffices. The decision-making process mostly includes yes-no questions, and can thus be easily automated to a great extent. Therefore, the price per KYC check is relatively low, varying from 30 cents to a few dollars.

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KYB

KYB checks, on the other hand, can be much more expensive, costing anywhere between $5 to a few thousand dollars per check. That’s because the process is much more exhaustive than a KYC check. It can involve employing 5 to 20 different KYB solutions, along with compliance officers to manually validate and thoroughly analyze all the available information before the big decision can be made.

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6. Technological Advancements and Innovations

Artificial intelligence (AI) – leveraging machine learning (ML) and natural language processing (NLP) – and blockchain are two key examples of how technology is changing the AML landscape.

AI automates processes like checking, screening, and figuring out how risky an individual or corporate entity is. Consider OCR for data extraction, for example, or matching live selfies to ID documents.

Another notable innovation, particularly in the KYB context, is seen in AI-driven big data analytics, allowing large amounts of data gathered from various legitimate sources to be analyzed quickly and thoroughly yet accurately. One example is Vespia’s AI-powered KYB compliance officer, Julia AI. The virtual agent is capable of making intelligent decisions based on its in-depth analysis of massive KYB datasets.

Making complex decisions has now been automated to a great extent, allowing organizations to give swift judgments. AI has thus improved the accuracy and efficiency of verification processes while lowering costs.

Blockchain makes transactional records more secure and easy to retrieve and read. This fosters trust and privacy while making verification easier.

New technologies like biometrics, digital ID verification, and big data analytics incorporate modern technologies to offer easy and reliable ways to verify and keep track of customers and businesses for both KYC and KYB.

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7. Real-World Impacts and Cases

Here are a few cases – some old and others fairly recent – where bad AML practices led to disastrous consequences.

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Robinhood’s noncompliance

The trading and investment firm Robinhood was found guilty of AML non-compliance and cybersecurity lapse, and consequently fined $30 million in 2022. The company failed to allocate adequate resources towards combating money laundering via its cryptocurrency unit. Insufficient suspicious activity reports (SARs), lack of automated transaction monitoring across the organization, and other red flags prompted the in-depth investigation.

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The Danske Bank scandal

Danske Bank is a Danish bank that was found to have laundered billions of euros through its Estonian branch by lying about its AML policies and high-risk clientele, among other alarming fraudulent practices.

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The Liberty Reserve case

Liberty Reserve was a virtual currency service that was shut down by the US government in 2013. The company was found to have been used to launder billions of dollars for criminals, failing to comply with KYC and KYB regulations. The owner was sentenced to 20 years in prison, along with a massive penalty of $500,000.

A decade-long violation by Merrill Lynch

Brokerage company Merrill Lynch (known simply as Merrill since its acquisition by Bank of America in 2009) was recently fined a total of $12 million by the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) for AML noncompliance. Due to incorrect reporting thresholds, the firm failed to file over 1,500 SARs between 2009 and 2019. The long-running violation ended up ignoring suspicious activities such as internet scams, fake checks, and unauthorized debit card transactions.

Such cases right out of the real world highlight the critical importance of rigorous KYB and KYC procedures and the severe ramifications of noncompliance. Effective implementation of these measures safeguards against financial crimes and ensures the integrity and security of the entire financial system, protecting businesses and individuals alike.

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Conclusion – KYC vs KYB

The fight against crimes like money laundering, fraud, identity theft, corruption, and terrorist financing relies heavily on KYC and KYB procedures. While KYC policies focus on individual persons’ verification, KYB policies are aimed at entire organizations.

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Despite the constant improvement in these AML processes thanks to better regulations, we must give credit where credit’s due. Technology such as AI, ML, NLP, and blockchain, along with the rapid adoption of digital KYC and KYB solutions, has been consistently modernizing AML procedures. These cutting-edge technologies are revolutionizing the ways we verify customer identities, assess threats and risks, and track financial transactions and the people involved in them.

Businesses and institutions must stay constantly aware and vigilant and make an active effort to adopt modern solutions that make it easier to comply with governing frameworks. Play your part in keeping the financial ecosystem safe and take proactive measures to improve your KYC or KYB processes at the same time. With Vespia, you’ll get an automated rule-based or AI-powered risk assessment and analysis, along with a super helpful template to guide you through the KYB process. Sign up and get a free 10-day trial for Vespia’s all-in-one solution at https://my.vespia.io/sign-up

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