Risk Intelligence
KYC and KYB checks are required by global AML and compliance regulations. They are a vital part of collective global efforts to mitigate fraud and other illicit activity across the financial ecosystem, but what do they entail and how do they differ?
- KYC vs KYB focus – KYC checks individuals; KYB checks business entities, both essential for AML compliance and fraud prevention.
- Risk-based approach – Screening and due diligence target high-risk cases, optimising resources while protecting relationships.
- Six risk categories – Identity, integrity, financial, operational, ESG, and cyber risks must be assessed to prevent illicit activity.
A risk-based approach to fighting fraud
As cross-border fraud and other forms of financial crime continue to rise, regulators across the globe are focussing on stricter anti-money laundering (AML) and KYC/KYB regulations designed to protect the broader financial ecosystem.
Compliance with these evolving regulations starts with carrying out robust due diligence checks, which are an essential tool to help you pinpoint potential risk in business relationships. These checks must be detailed and thorough – but at the same time they cannot negatively impact the client relationship.
This can leave you facing a balancing act – you must ensure rigour, but also minimise friction and deliver seamless experiences that do not slow the pace of business.
At the same time, limited resources mean that it is impossible to conduct enhanced due diligence (EDD) on every relationship. Screening is a valuable first step that can identify areas of higher risk, which can then be evaluated in line with a risk-based approach.
A risk-based approach adds value by ensuring that valuable resources are concentrated on areas of heightened risk. This is important because those individuals or entities that potentially pose a higher risk require more scrutiny.
Failing to detect potential risk early in relationships can lead to significant regulatory, financial and reputational damage. It is therefore essential that all regulated entities assess and understand the full range of potential risks introduced by any new or existing customer.
Why are KYC and KYB important?
KYC and KYB are key to remaining compliant and protecting your business and your customers from fraud and other forms of financial crime.
KYC refers to Know Your Customer processes, while KYB refers to Know Your Business processes. The essential difference is that KYC looks primarily at individuals, while KYB looks primarily at business entities.
Both can help you identify potential risk early in relationships, and both are important, because you need to understand exactly who you are transacting with – whether the other party is an individual or a business.
KYC and KYB involve cost, time and resources – but both are an essential and valuable part of holistic risk mitigation in line with a risk-based approach.
KYC and KYB are similar in that both involve:
- Conducting thorough checks into identity and background – including source of wealth for individuals and ownership structure for entities – and a identifying a range of potential risks associated with the individual or entity.
- Assessing the risks or potential risks identified by these checks.
- Making informed decisions about the customers or businesses you work with.
Six types of risk to consider
- Identity risk:
At the start of any new business relationship, you need to first verify that the customer actually exists and that their identity can be verified by official sources. For individuals, understanding the source of their funding or wealth is also essential. For entities, you must establish ultimate beneficial ownership (UBO) details.
- Integrity risk:
Integrity risk involves gauging the potential risk that an individual or entity will exploit your services to facilitate illicit financial activity, such as money laundering or terrorist financing. You should also verify that the customer is not subject, directly or indirectly, to any government sanctions that would completely or partially restrict a commercial relationship.
- Financial risk:
It is important to assess both the creditworthiness and the financial stability of any customer and this applies to both individuals and entities.
- Operational risk:
Operational risk requires an assessment to understand customer suitability by looking specifically at elements such as their business performance, operational footprint, affiliates, customer base and any other risk-related issues. Again, this is important for both individuals and entities.
- ESG-related risk:
ESG risks range from links to environmental crime, human rights violations and modern slavery to situations where executives and company directors in controlling positions have conflicts of interest or government connections.
- Cyber risk:
The growth of cyber risk and other forms of online financial crime mean that it is essential to conduct due diligence in the online space, verifying a customer’s identity both during onboarding and throughout the customer relationship.
This is a very broad overview of the types of risk you need to consider. It is important to remember that risk is dynamic and new types of risk can emerge at any time. This is why an agile and proactive approach to risk mitigation is essential.
From screening solutions to detailed background checks on any entity or individual, and from innovative identity and account verification to customer onboarding services – you can trust us to help you successfully manage your risk.
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