14 August 2021
Money laundering is a worldwide scourge that is said to amount to between 2% and 5% of global GDP every year. This is equivalent to between €1.7 and 4 trillion. With such huge amounts of money from criminal activity floating through the financial sector, you must be alert to the risks involved every time you establish a business to business (B2B) relationship. This is where you need to implement your Know Your Business (KYB) screening procedures. And, most often, this is not a matter of choice. It’s mandatory.
Obliged entities in the EU that deal with financial transactions are required to screen customers and companies that they enter relationships with for money laundering and terrorist financing risks. And, if they don’t, there are consequences. Swedish bank SEB was fined SEK 1 billion in June 2020 for deficiencies in its anti-money laundering (AML) screening procedures. Failing to properly understand the AML requirements in the EU, or elsewhere, and research the businesses you work with opens the door to criminals using your institution for illegal activity.
Know Your Business means the process of customer due diligence a financial institution takes on when it enters into a B2B relationship with another business that is part of the supply chain, a service provider, a beneficiary or another type of stakeholder. Sometimes, you may see KYB referred to as Business Know Your Customer (BKYC).
In the same way that Know Your Customer (KYC) procedures identify and verify new clients, KYB screening helps you understand the ownership structure of a business and the risk it poses in relation to money laundering and terrorist funding. To complete KYB processes, you might need to screen multiple decision-makers and you might need to investigate legal entities such as holding companies who might act as owners of the company you are working with.
Typical KYB procedures include the steps below.
You should ask for company documents to establish the particulars of the business and verify them. This should include details of the company name and address, the company number, the date of its incorporation and a certificate of registration. The more information you can acquire, the easier it is to verify that you are not dealing with a legitimate concern.
Many countries’ financial authorities and governments compile sanctions lists of businesses (as well as individuals and even entire nations) that they know or suspect are indulging in illegal activity. An example of a country-specific list is the AMF’s warnings and blacklists of unauthorised companies. Then, there are the international resources such as the EU list of high-risk third countries and the FATF blacklist.
To uncover whether a potential B2B partner is included on a list involves analysing a large amount of data, cross-referencing company names, aliases and even the identities of individuals within those businesses with the various sanctions lists from around the world.
Adverse media coverage can also indicate that there is something amiss with a business. This step involves scanning reports from across the territories in which a business works for references to the organisation in relation to criminal activities or other practices that would make them an unsuitable or high-risk customer.
The ultimate beneficial owner (UBO) of a company is usually, in the EU, a person who owns 25% or more of the shares, has 25% or more of the voting rights or who otherwise has control over decisions and strategy at the business. Sometimes these people are open about their status, sometimes they exert this influence through complicated corporate structures that make it difficult to identify them.
It is essential to know who the UBO of an organisation is in order to minimise the risk of the company being a cover for illegal activity. The European Union’s fifth anti-money laundering directive (AMLD 5), set in place the requirement for each member state to hold a publicly available list of UBOs. Although this has yet to be taken up across the whole union, it is one major step towards transparency when it comes to who pulls the strings in businesses around the EU.
PEPs are politically exposed persons, meaning that they hold a high profile position that makes them vulnerable to corruption, fraud, blackmail and bribery. If someone significant in a business is a PEP, whether they are the UBO or simply hold another major role, this increases the risk of working with that business.
KYB compliance around the world is generally based on the Financial Action Task Force (FATF) recommendations on AML and counter-terrorist funding (CFT). There are some differences, though. Here are details on how it works in three jurisdictions:
|Jurisdiction||Compliance and Regulations|
|EU||All member states should provide a public registry of UBOs. According to AMLD 5, these should be interconnected so that companies in different nations can access information in other EU nations.
Obliged entities (generally those who deal with large financial transactions, such as banks, investment firms and gambling companies) in the EU are required to seek out additional information regarding UBOs that may be missing from public registries.
They should take a risk-based approach to dealing with new business relationships. This dictates the level of customer due diligence they perform to carry out their obligations. The three levels of due diligence are:
Monitoring should be ongoing for the lifecycle of the relationship. They should also keep records in a secure and GDPR-compliant manner.
|UK||The UK maintains a list of ultimate beneficial owners, called the Persons with Significant Control register. The government has also announced plans for a register of overseas entities with interests in real estate in the UK.
The UK’s anti-money laundering legislation is called the Money Laundering and Terrorist Financing (Amendment) Regulations 2019 (MLR 2019), and is largely similar to the EU’s AMLD 5, which the UK transposed into its law after Brexit.
|USA||KYB regulations form part of the United States’ CDD Final Rule, as created by the Financial Crimes Enforcement Network (FinCEN). As in the UK and the EU, financial institutions are required to perform due diligence on businesses with whom they enter B2B relationships.|
KYB is not a one-time task that only happens at onboarding. With the nature of complex corporate structures and shareholdings, situations change regularly. This means that certain figures may move in and out of the UBO category, some could become PEPs or the business might move its location to a high-risk country, for example. If any of these occur, the nature of the risk in your business relationship will change and you will have to adjust your monitoring regime. You are required to stay on top of risks and threats throughout the lifecycle of the relationship and real-time monitoring is key to that.
The screening process can make onboarding new businesses complicated and time-consuming. Automating some of the work with digital tools helps to simplify and speed up customer onboarding so you can keep your customers happy.
For example, you may decide to use ID Proof to verify a new customer’s identity and Signhost to let them sign the documents with a legally-valid electronic signature. Considering that, currently, it takes between 90 and 120 days to onboard a corporate banking customer, anything that reduces that period of time helps to prevent abandonment.
KYC refers to dealing with customers, whether legal entities or individuals. KYB refers to dealing with another business in any kind of relationship, whether they are a customer, a contractor, a service provider, part of the supply chain or are any other kind of stakeholder.
To identify the details of a business that you are looking to enter into a B2B relationship with, you can create a manual KYB screening process or use an automation approach. With so much data to trawl through and analyse, an automated or semi-automated KYB solution may end up being more cost-effective. It will help you scan sanctions lists, PEP lists, UBO registries, media reports around the world and more to help you assess the risk of the relationship.
The risk of money laundering is ever-present, and the fines you can receive from not carrying out your Know Your Business obligations are prohibitive. To remain compliant and to prevent your business from being used as a vehicle for criminal activities, make sure your KYB checks and business processes are always up to date. If electronic identification is on your list of things to automate (or improve), feel free to reach out to us to learn more about our solution ID Proof.