With the digitalisation of human activity, and in particular everything related to banking and payments, we’re seeing the acronyms KYC and KYB pop up more and more. To find out what they mean, how they can affect you, and how to make sure you comply with them, continue reading!
Do you really know who is behind each new user account on your platform? How can you be sure a company reaching out for a new partnership is operating a legitimate business?
With millions of transactions taking place online on a daily basis, the digital age has unlocked a world of possibilities for businesses, and just as many opportunities for scammers to engage in malicious activities.
For businesses, financial crimes can have devastating consequences:
- critical data and security breaches
- financial loss
- legal implications
- loss of customer and market trust
Knowing your customers and the businesses you have commercial dealings with is crucial to reducing the likelihood of your company becoming a victim of or complicit to financial crime.
This is why the implementation of formal identification verifications before onboarding new customers and businesses has become part of mandatory compliance procedures in many sectors.
These due diligence processes are known as KYC and KYB and consist in identifying and screening customers or businesses, to investigate malicious activity and monitor associated risk factors.
Financial institutions and intermediaries, such as marketplaces, crowdfunding platforms, and PSPs, are legally obligated to comply with KYC and KYB to ensure transparency and oversight.
KYC or “Know your customer”
Before opening any new account, banks and other financial institutions are legally obligated to identify the prospective client and verify their identity. This is what is known as KYC or “Know Your Customer”. KYC also includes understanding the client’s business, source of funds and origin of wealth, and monitoring transactions.
To complete the authentication process, a physical person will have to provide specific documents - such as an ID card, a valid passport, a residence permit, a driver’s licence - proving they are who they say they are.
Legislation has evolved to make this due diligence mandatory for all online platforms that collect and redistribute funds, such as fintechs, PSPs, marketplaces and crowdfunding platforms.
KYC due diligence is a crucial part of the onboarding process for platforms, however requesting, collecting and verifying documents can prove time consuming for staff, especially when conducted at scale : companies can optimize their KYC due diligence by automating the process.
To accompany marketplaces in their regulatory hurdles, platforms can count on Mangopay’s technology to manage document collection and user verification for both individuals and businesses.
KYB or “Know your business”
KYB, or “Know your business”, is the term commonly used to refer to KYC due diligence applied to businesses. In this case, financial institutions verify the veracity of businesses, companies, organizations and monitor their financial transactions over time.
In addition to verifying business registration credentials and jurisdiction, KYB due diligence includes scrutinizing legal representatives, stakeholders and ultimate beneficial owners (UBOs). To ensure they are not involved in any sort of criminal activity, including money laundering, terrorist financing, or corruption for example, entities are also screened against blacklists and sanctions lists.
KYB compliance is due diligence for most companies seeking to enter a commercial relationship with a new business.
The bigger picture: combating money laundering and terrorism financing
KYC and KYB guidelines fit into the larger scope of anti-money laundering /combating the financing of terrorism (AML/CFT) policies that are implemented around the world, under the supervision of national and sometimes supranational authorities.
These regulations are designed to promote global security, integrity of the financial system and sustainable growth by preventing the financial market from being misused for criminal purposes. They were initially only imposed on traditional financial institutions. However, lawmakers have made them mandatory for certain industries and activities that represent a higher risk in terms of money laundering or financing terrorism.
In July 2021, the European Commission presented an ambitious package of legislative proposals to strengthen the EU’s anti-money laundering and countering the financing of terrorism (AML/CFT) rules. The package harmonizes AML/CFT rules across the EU and also proposes the creation of a new EU authority to fight money laundering.
