Most B2B (Business-to-Business) companies need to carry out due diligence to identify the businesses they work with. The ‘Know Your Business’ (KYB) process is not so different from the most widely known and standardized ‘Know Your Customer’ (KYC) process. The KYB process shares all the features we have seen in defining KYC processes. The difference lies in the purpose and intentionality of the process. In KYB, the focus is on identifying companies and suppliers in the first case. In the standard process, potential clients or users are identified to register them in a company. The KYB process involves identifying the person responsible or legal representative of a business.
Know Your Business (KYB) is a unique method for verifying business identity. This is done by retrieving official data using APIs. The business’ registration number and jurisdiction code are crucial data for the process. An efficient digital KYB service can authenticate data on the business (known as UBO).
The Customer Due Diligence (CDD) requirements for financial institutions lays the ground for KYB checks. It can be taken as an improvement of KYC. It verifies the name of the person to whom the business is registered.
Copies of articles of association, certificate of incorporation, professional bank account identification document in the name of the company, a valid identity document for each ultimate beneficial owner (national identity card or passport) and valid identification document of the legal representative serves the verification for KYB. Again the document required may vary from country to country.
Need for KYB in Business
KYB checks are most relevant in the context of AML compliance currently. In India, the major reason for introducing KYB is to prevent fraud. Despite advancements in KYC, frauds at organizational level continue to occur in India. KYB proves helpful in fighting money laundering and other tax crimes. It also ensures that businesses work with organizations with security and guarantees.
Money Laundering Through Shell Companies
A common method of money laundering is through the establishment of fake companies. These are also called shell companies. Most of these appear compliant with the Government of India. However these companies do not really exist. Shell companies sell no goods or services. They exist only on paper, not in reality.
In a recent crackdown on Chinese companies in India, the Income Tax Department conducted a series of search operations. A scant number of Chinese individuals and their Indian counterparts were found. They were engaged in money laundering and hawala transactions through shell entities. Above 40 bank accounts were created in various dummy entities. These were used in the transactions of over Rs 1,000 crore. With KYB, these shell companies could have been easily investigated and identified faster.
Chit Fund Scams
In India, chit fund scams go back to several decades. In such cases a registered organization looks authentic. But it mainly just cheats people with lucrative offers. The customers end up providing money. Then the company disappears without a trace. With KYB, such scams could be easily prevented as the UBO information would have appeared as bogus or fraud.
Bank Loan Frauds
These kinds of frauds involve a bogus organization. It registers as a genuine service company. The objective is to scheme people into providing payments by cash or through fraud accounts.
The Anti-Bank Fraud Wing of the Central Crime Branch on 6th Feb, 2020 arrested six persons. The accused were running a call centre in Pazhavanthangal (Chennai). They cheated several persons who sought loans online. In a similar incident this year, 4 fraudsters were arrested in connection to fraud of Rs 2 crore from more than five banks. This was done by pledging forged land documents. With KYB, the business information could have been traced early on.
Challenges associated with manual business verification
Businesses are required to verify customers, corporate clients, and other critical information under the KYB guidelines. Some of the major challenges for this process are are:
Time taking manual onboarding process
Normally, KYB verification for customer onboarding can be a hectic manual process. This is because it requires extensive efforts. In a 2019 Survey Report by Thomson Reuters on AML Insights, 47% of respondents used manual document scanning during client onboarding. This ensured a robust digital identity verification at the expense of laborious effort. The report further states that 4/10 companies employ no digital verification at account opening.
The conventional method leads to a frustrating customer experience. Customers are able to abandon the account creation process. Moreover, the chances of errors and mistakes when done manually are higher.
High compliance cost
In the Thomson Reuters report, 95 % of respondents reported that data accuracy was very important. 93% cited both well-structured data and company reputation/credibility were also crucial. High costs are required for manually retrieving UBO information. These other factors also drive up the cost for manual KYB verification.
Complex ownership structure
KYC/KYB regulatory directives such as AMLD5 and PSD2 CDD rules make it necessary to verify and identify the business entities. This becomes a mandatory regulatory requirement. Financial institutions rely on gathering business details from clients. This is done with a manual process of filling in forms and verifying the information manually. There exists a high probability of data discrepancies to occur in this process.
Data inconsistencies
Companies can afford manual data retrieval. But the problem of data verification remains. There are multiple sources for collecting companies’ data. Sometimes the information can be defunct or invalid.
Technology To The Rescue – Areas To Address For Automating KYB
AI-powered verification opens an opportunity to increase the efficiency of the onboarding process. It also reduces the cost and speeds up the process.
The manual method for retrieving UBO information can be achieved in a fashion similar to the KYC process. What used to take 24-30 days for manual KYC has been reduced to 2-3 minutes by leveraging solutions like Video KYC.
Companies must have access to the properly updated business registries. This is valuable and will make business compliance an easy task.
API integrated KYB solutions
Advanced API integrated solutions can be designed to aggregate data from various sources. Businesses only need to enter the required details to retrieve data. For ex, business registration number and the jurisdiction code where the business is operating.
Virtual Identification Using VideoKYC
Businesses are now turning towards automated software. This is due to increasing compliance costs. Software helps conduct checks for everything. This includes from basic forgery attempts to advanced negative checks. The data is cross-referenced against sanction lists across the world. With VideoKYC, the entire process can be completed in a matter of 2-3 minutes. Video KYC allows officials to interact and verify the credibility of the data. This is done while maintaining KYB compliance as well as data accuracy.
The global business markets are growing at a rapid pace, which translates into a higher need of effective and swift KYB Process. The market for KYB includes multiple services like business verification, beneficial ownership identification, and risk assessment and so on. This market is projected to grow to $11.8 billion by 2022.
Companies must tighten customer due diligence for clients. The KYB processes and checks defined above can take hours to days without a platform with automation capabilities. However, cutting corners to achieve faster onboarding without proper controls increases the risk. It exposes the business to fraudulent actors and their illicit activities. Therefore while complete automation remains a challenge, care must be taken to improve KYB to match the levels of KYC automation that has already been achieved.
About the author: Ankit Ratan is the co-founder of Signzy, a no-code AI platform for banking and financial organizations
