An estimated $3.1 trillion in illicit funds flowed through the global financial system in 2023, according to Nasdaq’s Global Financial Crime Report. This shows just how much financial institutions are under threat from fraudsters, money launderers, and other criminals seeking to exploit vulnerabilities in the system. One of the most effective ways for financial firms to counter these threats is by employing robust Know Your Business (KYB) checks. KYB checks are not just regulatory requirements; they are essential tools for protecting financial institutions and their customers from the pervasive threat of financial crime.
What are KYB checks?
KYB checks involve a thorough verification process of a business’s legitimacy and the individuals behind it. This process includes examining the business’s registration documents, understanding its ownership structure, scrutinising financial records, and verifying its directors, people or entities with significant control and Ultimate Beneficial Owners (UBOs). The primary aim is to ensure that the business is legitimate and to identify any potential risks associated with it.
Mitigating financial crime
Criminals often use complex corporate structures and shell companies to hide their identities and move illicit funds. Without proper KYB procedures, financial institutions are vulnerable to these schemes, which can lead to significant financial losses and legal repercussions.
Thorough KYB checks can help uncover connections to criminal organisations, sanctioned individuals or identify suspicious financial activities that warrant further investigation. This proactive approach not only protects the financial institution but also contributes to the broader effort of combatting financial crime on a global scale.
Regulatory compliance
Regulatory bodies worldwide mandate KYB checks as part of their anti-money laundering (AML) and counter-terrorism financing (CTF) regulations. These regulations require financial institutions to have robust procedures in place to actively and diligently verify the identity of their business clients and monitor their activities for suspicious behaviour.
By implementing comprehensive KYB checks, financial businesses can ensure they meet these regulatory standards and avoid the consequences of non-compliance, which can include hefty fines and reputational damage – just ask NatWest, which was slapped with a whopping £264.8 million fine for serious AML failings back in 2021.
Enhancing customer trust
Trust is a cornerstone of any successful business relationship, especially in the financial sector. Customers need to feel confident that their financial institution is taking all necessary precautions to protect their interests and KYB checks play a crucial role in building and maintaining this trust.
By demonstrating a proactive approach to risk management, financial businesses can foster stronger, more trust-based relationships with their clients. In a competitive market, this trust can be a significant differentiator, attracting customers who value security and compliance.
Operational efficiency
While KYB checks may seem like a cumbersome process, especially when done manually, they can actually enhance operational efficiency and profitability in the long run. By identifying and mitigating risks early, financial institutions can avoid the costly and time-consuming consequences of dealing with financial crime after the fact.
Advances in technology have also made KYB processes more streamlined and efficient. Automated solutions can more quickly and accurately verify business information, reducing the burden on compliance teams and allowing them to focus on more strategic tasks.
As financial crime continues to evolve, so too must the diligence and rigour with which we look to combat it. KYB checks are a critical component of any comprehensive risk management strategy, helping financial firms protect themselves and their customers from incidents of financial crime, safeguarding their reputations, enhancing customer confidence and avoiding hefty fines in the process.
By Andrew Doyle, CEO, NorthRow