Why KYC and KYB are critical in Financial Industry

Due to the increasing money laundering and illegal activities, most businesses, banks and financial institution are becoming more aware of the dangers of lack of KYC/ KYB protocols. As businesses are evolving today in the age of technology where cyber crimes happen every second, they need to take steps to keep their customer’s data and money secure.

Gone are the days when customer’s money was the only concern and customers were the only risk to business. The risks can come from all stakeholders and proactive prevention against them is unavoidable. Now there are plenty of risks and that is the reason, businesses are creating strong KYC and KYB protocols to minimize those risks. Let us know more about the importance of KYC and KYB in the financial industry.

What is KYC and KYB?

KYC stands for know your customer and KYB is the abbreviation for Know your business. The difference between KYC and KYB lies in the intent and purpose of the process. KYC is the process of inquiring and knowing about the customer of a business and collect all this identity and address proofs for records. The potential users or clients are identified for registration in a company.

On the other hand KYB is identifying the companies and businesses and collecting their identity and registration details for record. The KYB shares all the process involved in the KYC with the only difference in relation to the end user that is a client or business in KYB. It involves identifying a legal representative or a person responsible for a business.

Need of KYC and KYB

Back before the introduction of KYC or KYB the levels of financial frauds was continuously increasing and there was no legit way to control these financial crimes. According to the reports of the United Nations Office of Drugs and Crime, they recorded a 2 to 5 percent global money laundering rate. The KYC was introduced in 2003 to minimize financial frauds and KYC guidelines were built to keep an eye on the transactions of individual customers of a business.

Also, customer onboarding is a lengthy and expensive process. Identifying the interest of legal entities is a dragging process that can take months of time to complete. Moreover, customer risk scores are also increasing. Considering all these risk factors made KYC and KYB the biggest challenges and mandatory process for banks and financial businesses.

The KYC and KYB compliance is implemented in many countries across the globe and all the financial businesses need to follow it. The verification industry is also evolving due to the remarkable significance of KYC and KYB.

KYB Procedure

Businesses develop a KYB process to comply with the regulations like anti money laundering and counter terrorist financing. The process is carried out to prevent such activities and minimize the risk of terrorist activities and complying with the international AML regulations.

Companies comply with KYB requirements by verifying diverse information and obtaining documents from reliable sources. These documents include the business registration of the company and the identities of beneficial ownership (UBO), as well as those of the shareholders who own 25% or more of the shares of the company.

After verifying identities, companies continually monitor the activities of the institution in question to ensure the risk profile of their partners. The primary aim of the process is to identify and assess any suspicious activity. The KYB process protects the money of businesses from being used for laundering or illegal activities and also helps prevent unwanted account fraud.

Why are Banks targeted for Money Laundering?

Banks were, are and will continue to be the object of money laundering. As you go deeper into the operation of a banking institution, banking products, and technologies evolve to become more convenient, flexible, and easily available to customers.

Risks are further increased by operating a portfolio of international clients, services that do not require customer interaction, transaction possibilities are readily available, and without a proper risk mitigation bank increase your susceptibility to illegal purposes. Another scenario would be a banking institution that wants to increase the appetite for risk and therefore requires a more stringent KYC / KYB.

For this reason, it is very important to invest in adequate controls and assess the vulnerability of new technologies and products under development, in order to satisfy customers’ banking needs, which in turn can be misused for illicit purposes. So yes, there is a possibility that a bank is inadvertently initiating money laundering.

Which businesses require KYB procedures?

All financial institutions that make money transfers, such as banks, need to check the KYB, such as: Companies need to analyze and verify the business and financial information of their partners around the world. In this way, companies protect themselves against document fraud and also guarantee the security of transactions.

In addition, KYB’s procedures must be fully implemented in order to comply with applicable money laundering regulations. Financial institutions that adhere to AML regulations protect themselves from fines and reputational damage.

Even the payment processing platforms that help users make online payments using their mobile devices also undergo a strict KYC process to collect the information of their customers. This helps keep track of all the transactions made by users on their platform and minimize the chances of fraudulent activities. Paypound offers payment processing solutions to businesses and make the transactions seamless for their clients. If you are in a business offering services to clients, you can consider Paypound for hassle free payment processing services.

Future of KYC/KYB

Due to the continuously changing regulatory environment, both KYB and KYC compliance is a rapidly evolving area. Also, technological innovations are transforming compliance solutions to a much extent. Trends like artificial intelligence, blockchain integration and biometrics are helping to ease the KYC and KYB challenges and minimizing the chances of fraudulent activities. 

The Digitization of KYC / KYB process

After the introduction of KYC and KYB, both of them went through multiple stages of experimentation. Banks and Financial institutions started implementing them and altered the process as per their needs, but still both KYC and KYB are labour intensive.

Therefore, in order to make it simple and improve the compliance, the KYC process was made completely digital. Digitization of the process lessened the labor and eliminated the chances of human errors.

The digitization of KYC and KYB compliance includes the use of advanced new features such as identity verification, virtual verification, online filing of verification records, online database, and AI-based due diligence. Undoubtedly, this scanning can prevent any slippage and improve the due diligence process.

Summing Up

As KYC and KYB are transforming the way individuals and businesses subscribe to financial services, the chances of money laundering and other fraudulent activities are minimizing. With the arrival of digitization of KYC and KYB procedures, the processes are getting simpler and businesses are getting to know their customers and clients better.

Disclaimer: The views, suggestions, and opinions expressed here are the sole responsibility of the experts. No  journalist was involved in the writing and production of this article.

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