What is KYB verification, and why does it matter?

As they seek to fight against the ever-evolving fraud landscape, most companies are familiar with KYC (Know Your Customer) requirements and how they fit into anti-money laundering (AML) regulations.

But there’s another important verification process called Know Your Business — also called corporate KYC or simply KYB. Appropriate KYB procedures can help your company comply with standards, reduce fraud, and increase trust and safety. 

So, what is KYB? Let’s dig into KYB compliance, why it matters, and how to conduct this process to meet both national and international regulations.

What is Know Your Business (KYB)?

Know Your Business (KYB) is the process of verifying the legitimacy of any business your organization works with. This could be any business you have a relationship with, from suppliers to customers, consultants, and more.

By having thorough KYB procedures in place, you can be confident that:

1. The business you’re working with is real — not an illegitimate entity that only exists on paper — and is safe to engage with.

2. The individuals running the business are real people who aren’t involved in any wrongdoing or crimes such as money laundering or financial terrorism.

KYB vs. KYC: Key differences

So, what’s the difference between KYC and KYB? As you might imagine, they’re very similar. Both are verification processes you can put in place to better follow regulations, avoid AML fines, prevent fraud, and protect your business.

The main difference is the subject of the verification. In a traditional KYC process, you assess individuals. For Know Your Business verification, you look at the business itself as well as the people behind the business. With this in mind, KYB often involves many of the same tactics and strategies leveraged in KYC, including identity verification, document verification, risk reports, and more.

Learn more: KYB vs. KYC: What's the difference?

Why does KYB verification matter?

KYB verification is relatively new in the world of fraud detection and mitigation. While KYC regulations have been standard since 2002, business relationships weren’t subject to the same scrutiny.

This left a loophole that criminals could exploit — setting up shell companies to defraud businesses or, more commonly, use legitimate businesses to hide their identities. Since business records were often only briefly assessed, fraudsters could use shell companies to launder money, commit fraud, or fund terrorism without being personally screened or creating a paper trail for investigators to follow.

In 2016, the US Financial Crimes Enforcement Network (FINCEN) addressed this problem by launching new Know Your Business regulations under the Customer Due Diligence Rule. Now, any financial institution working with another business has a standardized method to verify that the company is legitimate.

Since then, more governments have extended international KYB requirements beyond financial institutions to include industries like online marketplaces and gaming platforms.

Benefits of implementing Know Your Business verifications 

Implementing Know Your Business verifications can offer several benefits, including:

Compliance with regulations

The first and most obvious benefit of implementing KYB is the fact that it will help you get and stay compliant if your business is subject to laws or regulations that require you to perform KYB prior to engaging with a new business. 

While this is most true for financial institutions and many businesses that work with them, it also applies to online gaming platforms, online marketplaces, and other businesses in some jurisdictions. 

Mitigated risk of fraud

Even if Know Your Business requirements aren’t legally mandated, it’s still a smart move. That’s because KYB can help you catch fraudsters or bad actors. 

By forcing you to pause and really evaluate potential business partners, you increase the odds that you will identify fraudsters or unscrupulous businesses that your organization shouldn’t be engaging with — for example, businesses engaged in fraudulent misrepresentation or business impersonation. 

Improved trust and safety

Depending on the type of business you run, an effective KYB program might help you build trust and safety, creating a more pleasant experience for users on your platform.

Imagine that you operate an online marketplace connecting buyers and sellers, for example. If you implement a KYB program that makes it harder for fraudulent sellers to conduct marketplace fraud, that means that buyers on the platform will have a better time discovering and buying merchandise. And that means:

• Fewer customer complaints

• Fewer refunds

• More word-of-mouth referrals

• An easier time retaining your customer base 

Who needs to conduct KYB?

While Know Your Business verification is not as widespread as KYC, it is becoming more and more important for businesses that wish to remain compliant and prevent fraud.

Banks, financial institutions, and businesses that work with them (such as fintech or crypto companies) are required by law to complete KYB verification. Likewise, a number of recent laws — such as the INFORM Consumers Act in the US and the DAC7 in the EU — require online marketplaces to verify their sellers. 

That said, any business can benefit from KYB procedures to reduce fraud and increase trust and safety. When you take advantage of KYB, you can be confident that all of your business partners are legitimate.

How to conduct KYB checks

At the end of the day, your KYB program should reflect your industry, compliance requirements, and goals. Depending on these factors, you may decide that a certain tactic or strategy makes more or less sense for you to include in your toolkit. That said, KYB checks can typically be broken into two key phases.  

1. Verify the business

The first step of Know Your Business is ensuring that the business exists in the real world and that its financial activities are legal and legitimate. This process will give you confidence that you’re not working with a business whose income funds illegal activities.

One method for achieving this is performing business document verification. This involves collecting documents like tax forms (Form W-9, Form W-8 ECI, etc.), ownership documents (ownership agreements, partnership agreements, shareholder agreements, etc.), and other corporate documents (articles of incorporation, business registration certificates, operating agreements, business licenses, etc.) and:

• Verifying they are real

• Cross-referencing the information contained in the documents with information found in official government databases (such as a Secretary of State filing) 

If you need more insight into the different risks posed by a business you are considering engaging with, you may choose to run additional reports such as watchlist screenings, sanctions list screenings, adverse media reports, and more.

2. Verify the people behind the business

Once you’re confident that the business itself is legitimate and one you’d feel comfortable working with, you need to take a peek behind the scenes. Minimize your risk by investigating whether the principals involved in the business are law-abiding citizens.

You’ll need to identify each of the key stakeholders in the business, also known as the Ultimate Beneficial Owners (UBOs), and then verify their identities. UBOs include anyone who controls the company or has a 25% or greater ownership stake. Verification can be accomplished through a variety of methods, including:

• Government ID verification 

• Issuing database verifications

• Selfie verification

Pending identity verification, you should also confirm that the company’s UBOs do not pose other risks to your business. Like with business verification, you may also wish to complete watchlist screenings, sanctions list screenings, PEP screenings, and more. 

KYB automation: Simplifying Know Your Business

KYB verification is an essential practice for any company that works with other businesses. But it can also be complex, costly, and time-consuming for organizations. Common challenges include:

• KYB requirements call for collecting many different documents and types of information

• There are multiple databases and information sources to verify against

• It’s difficult to compile and understand multiple KYB processes into one result

For these reasons, it’s typically much more efficient to use automated Know Your Business solutions that can streamline the process by allowing you to collect the information you need, run automated verifications on businesses and beneficial owners alike, and conduct manual investigations as necessary in one place.

Get started on KYB verification with Persona

You don’t need to be a fintech business to benefit from KYB procedures. In fact, it’s crucial for any organization that works with other companies in any capacity.

There’s no silver bullet to identity verification, and KYB isn’t a catch-all solution that can eliminate fraud. It’s simply another tool that can help you comply with legal requirements and protect your business from bad actors.

While KYB verification used to be time-consuming, you can make the information collection process as frictionless as possible by using Persona to build seamless verification flows that handle KYB and KYC with a single integration.

Persona’s system streamlines KYB by helping you automatically collect a wide range of information, look up and screen businesses, run KYC checks on beneficial owners, and more. Access everything you need from one convenient platform with themes and integrations customized to meet your unique needs.

Ready to unlock KYB and protect your business? Contact us to get started with Persona today.

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